UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 5 , 2008
Rub A Dub Soap, Inc.
(Exact name of registrant as specified in its charter)
Nevada 000-52142 84-1609495
(State or Other Jurisdiction (Commission File (I.R.S.Employer
of Incorporation) Number) Identification Number)
No, 177 Chengyang Section
308 National Highway
Danshan Industrial Area
Qingdao, China
266109
(Address of principal executive offices) (zip code)
86 532 87798766
(Registrant's telephone number, including area code)
2591 Dallas Parkway, Suite 102, Frisco, Texas75034
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b)
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
FORWARD LOOKING STATEMENTS
Some of the statements contained in this Form 8-K that are not historical
facts are "forward-looking statements" which can be identified by the use of
terminology such as "estimates," "projects," "plans," "believes," "expects,"
"anticipates," "intends," or the negative or other variations, or by discussions
of strategy that involve risks and uncertainties. We urge you to be cautious of
the forward-looking statements, that such statements, which are contained in
this Form 8-K, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can be
given regarding the achievement of future results, as actual results may differ
materially as a result of the risks we face, and actual events may differ from
the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation:
o Our ability to attract and retain management, and to integrate and
maintain technical information and management information systems;
o Our ability to raise capital when needed and on acceptable terms and
conditions;
o The intensity of competition; and
o General economic conditions.
All written and oral forward-looking statements made in connection with
this Form 8-K that are attributable to us or persons acting on our behalf are
expressly qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On October 26, 2007, Rub A Dub Soap, Inc. ("Rubd"), entered into a Stock
Purchase Agreement with Zhongsen International Company Group Limited, a
corporation formed under the laws of the Special Administrative Region of Hong
Kong ("Hong Kong") of the People's Republic of China ("China") ("Zhongsen" or
the "Company"), and each of Zhongsen's shareholders (the "Purchase Agreement").
Pursuant to the Agreement, at the closing on February 5, 2008, Rubd acquired all
of the issued and outstanding capital stock of Zhongsen from the Zhongsen
shareholders in exchange for 25,090,000 shares of Rubd common stock.
In connection with the acquisition of Zhongsen on February 5, 2008, Kevin
Halter, Jr. and Pam Halter resigned as officers and directors of Rubd and the
following executive officers of Zhongsen were appointed as directors and
executive officers of Rubd:
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Name Position and Office to be Held with the Company
Qin Long Chairman of the Board of Directors and
Chief Executive Officer
Liang Junfeng Vice President and Director
Jeff Chen Vice President and Director
Ji Gongsheng Vice President and Director
Liang Junbao Chief Financial Officer and Director
DESCRIPTION OF ZHONGSEN
Zhongsen was incorporated under the laws of Hong Kong on July 19th, 2007
and is headquartered in Qingdao, China in Shandong Province. Zhongsen primarily
engages in the global marketing and distribution of tires and rubber without any
tire manufacturing operations date.
INDUSTRY OVERVIEW
Global Rubber & Tires Market Overview
As an integrated marketer in the worldwide rubber and tire industries, we
operate within the scope of the global market, which represents a market with
more than US$ 100 billion of annual turnover in 2006.
On the raw material supply side, rubber, which accounts for around 52% of
the raw material value/cost of the tire, has been a strategic material since the
late nineteenth century. Currently the annual production and consumption of
natural rubber in the world is close to 10 million tons per annum. Driven by
solid growth in motor vehicle production and a stronger global economy, the
world's rubber production and consumption has grown at an average rate of 3.8%
annually over the last five (5) years, while the total world rubber consumption
is forecasted to increase at an average of 4.7% during 2007-2009. China is the
leading natural rubber consumption country, importing and consuming over 20% of
the global natural rubber production in the last five (5) years, mainly for
tires in support of their booming auto trade. In 2006, China imported 1.61
million tons of natural rubber, while producing 163,700 tons of natural rubber
and over 1.85 million tons of synthetic rubber, which represents a 7% and 11%
increase respectively on a year-to-year basis. According to the projection of
the China Rubber Industrial Association, China will import 175 million tons of
natural rubber in 2007, which represents an 8.7% increase from 2006. China's
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market demand for natural rubber is expected to increase at around 10% annually
over the next three (3) years.
Global Tire Market. The world tire market is dominated by the large tire
manufacturers. On the production side, the top 75 world tire producers generate
over USD$ 100 billion of revenues annually. Among them, Michelin, Bridgestone
and Goodyear represent over half of the world's tire production. Moreover, the
market has expanded at an annual rate of 2.6% through 2006 to 1.3 billion units
annually. With steady rising demand in both the OEM and replacement markets,
annual demand in the world tire market will exceed 1.44 billion units by 2010.
China's Emerging Role in the World Rubber and Tire Market. According to the
World Bank, China's nominal gross domestic product, or GDP, grew from RMB 9.9
trillion (USD1.3 trillion) in 2000 to RMB 18.3 trillion (USD2.3 trillion) in
2005, the fourth largest in the world, Moreover, the Chinese economy grew at a
compound annual growth rate of 13.0% over that period, nearly double the world
average of 6.9%. This rapid economic growth in China has increased the global
demand for all the major commodities, including natural and synthetic rubber.
China has become the second largest auto market. The rapid growth of the
Chinese economy and export market has caused the auto industry to develop
dramatically as China now produces more vehicles than Japan. According to the
Chinese Automobile Association, motor vehicle sales in China increased by 25% to
7.2 million in 2006, while production rose by 27% to 7.28 million units of
vehicles. In addition, according to the government's Development Plan for Road,
Automotive and Transportation, it is estimated that by 2010, the length of
highways will reach 55,000 km, the annual output of cars will exceed 10 million
units per annum and the total number of motor vehicles in use will increase to
62 million.
China has become a major rubber consumption and tire production country.
The remarkable progress of China's automotive industry has culminated in
significant development of the tire industry and boosted the overall prosperity
of the tire industry. In 2006, China imported 1.6 million tons of natural
rubber. Along with domestic production, China consumes over 20% of the world's
rubber output. Data from the China National Bureau of Statistics reveals that
the year 2005 witnessed a sustainable and steady growth in the domestic tire
industry with output reaching 283 million units, up 18.7% over 2004; sales
revenue also achieved more than RMB 80 billion (equivalent to USD10.6 billion ).
Data released on China Tire Business Network also showed that China's tire
industry has achieved 15% annual growth in 2006 and been expected to keep the
same growth pace in 2007.
China has become a major tire exporting country. Low labor costs, sound
manufacturing processes and overall capacity have made China one of the largest
tire manufacturing and exporting countries in the world. According to the
statistics provided by the China Rubber Industry Association, China's tire
exports have been increasing at over 25% average annual growth rate in the last
6 years. In 2006, China exported over USD4.28 billion worth of tires, which
account for 42% of the country's annual production. Over 75% of tires exported
from China are in the semi-steel radial and all-steel radial category. In terms
of the quality and price, China-made tires also range from the low to high-end
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products. High quality China-made tires have been widely accepted in the world
market. Besides truck and special industrial tires, China's brand tires for
passenger and light truck vehicles have also entered the major replacement tire
market. The top Chinese brands, such as, Triangle, Wanli, Zhongce, Linglong,
have all developed their own PCR, LTR and UHP line.
Competitive landscape: Although the tire market is fiercely competitive, it
is a relatively concentrated industry. According to tirebusiness.com , the three
global tire maker giants Michelin, Goodyear and Bridgestone, account for 61% of
worldwide sales. The next four midsized players including Sumitomo, Yokohama,
Continental and Pirelle account for 16% while all other local and niche players
accounting for the remaining 23% in the market. In the replacement tire market,
the big manufacturer's brands also represent larger market share in each segment
of the replacement tire market. For example, in the US replacement tire market,
the big manufacturer brands represent 63% market share in both passenger car and
light truck tire replacement market; and 83.8% of middle truck tire replacement
market, while associate brands and private label brands take the rest of the
market share .
Fragmented retail market: Unlike the situation on the production side or
OEM market, tire sales and distribution in almost all the countries in the world
is fragmented. As seen in the US tire distribution market in 2005, over 69% of
replacement P-series tires (passenger car tire) were sold by thousands of
independent tire dealers, while 17% were sold through mass merchants and only
10% were sold through tire-maker owned shops. In China, there is currently no
manufacturer or mass merchant owned or backed by any of the major tire
distributors. The replacement tire market is dominated by thousands of
independent tire dealers. Most of them are small and locally based, and only a
few have annual sales exceeding RMB 200 million.
Growth Opportunities:
Growing demand of rubber in China's market. Growing manufacturing and
industrial production, inclusive of tire output, has stimulated the strong
demand for raw materials in China, especially rubber. As China continues to
expand its tire production capacity in order to meet the surging domestic
demand, China's consumption of rubber will outpace the world market growth
average. According to data released by China Custom, in 2006, China imported
1.61 million tons of natural rubber and 1.30 million ton of synthetic rubber,
which represents an annual growth of 14.6% and 19.2% over that in 2005
respectively. As the world largest rubber consumption country, the China rubber
market's reliance on imports has been kept at a 70% level consecutively for 5
years. We expect this pattern will stay, given the strong market demand and
limited natural resources in China.
Increasing International Demand. According to the research conducted by LMC
International UK , an international research institution, the average growth
rate of the global tire market will be around 3.6% through 2008. In the new
global competitive landscape, Chinese tire makers will demonstrate their
competitive advantages in cost and quality control, and will seek to win market
shares in the global arena. In recent years, the rapid increase of China-made
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tires in the international market has shown that Chinese tire makers, with
well-trained workers and advanced equipment, could make high-quality tires at
the lowest cost. Therefore, we expect the demand for China-made tires will
increase at a higher rate than the global market average.
Increasing Domestic Demand in Replacement Tires Market. In the next five
years, both production and demand will continue to grow for replacement tires.
Moreover, rough road conditions and overloading is a common practice in China,
shortening tire replacement cycles significantly, indicating that China's
replacement tire market will outpace other major markets in the world.
MARKETING
By operating in the global rubber and tire market as an integrated
marketer, we believe that our business growth depends on our ability to build up
our distribution network and brand recognition for both product and services.
Distribution Network: The tire industry, especially the replacement tire
market in which the Company operates, is highly competitive and fragmented. The
profitability of a marketer like us is largely related to the quantity and
quality of the products we can deliver. An extensive distribution network will
not only give us the ability to reach more end-users, both rubber buyers and
tire buyers, but also help us to lower our purchasing cost and operating fixed
costs, thus improving our operating efficiency. So far, the Company has
established a business distribution network that directly links rubber suppliers
in Southeast Asia to Chinese tire manufacturers, and it connects brand tire
makers or their central warehouse to hundreds of our sales agents and dealers.
Those relationships and associated distribution agreements extend the Company a
great power in price and payment term negotiation.
Brand Recognition: Brand recognition is also crucial to a Company's success
in the tire market, as the global tire market is essentially driven by a few
well-established tire giants such as Michelin and Goodyear. In such an industry,
brand represents the quality of a Company's products and services. The Company
has not only affiliated its name with the world's top tire brands; such as,
Michelin and Yokohoma through General Agent Agreements in the assigned
territory, but also developed its own brands with support from its strategic
partners. So far, the Company has jointly developed its proprietary brand tire
series: Sentaida(R), Delinte(R), Gold Stone(R) and Landsail(R). The sales of
tires under those private-label brands accounted for roughly 20% of the
Company's total exports in 2006, while helping to improve market recognition and
foster customer loyalty to the Company's products. Shandong Linglong Rubber Co.,
Ltd. and Shandong Yongtai Chemical Group Co., Ltd. are our main suppliers in
private-label brands business.
Furthermore, the Company is also working to build its service brand in the
tire replacement and automotive aftermarket service industry. Since 2006, the
Company has started to promote and develop its "Energy Station(R)" franchise
with the aim of becoming the most valuable aftermarket auto service brand in the
region. Our first year's successful trial operation has proven that the retail
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and service chain under the Energy Station(R) brand could effectively bind our
products to the end users and to increase sales and gross margins. The further
expansion and promotion of this service brand will pave the way for the Company
to become a front runner in China's automotive aftermarket industry, which
represents a multi-billion dollar market, as in other developed countries.
SUPPLIERS
In the field of Rubber Business, the Company's rubber supplier network
covers all main natural rubber producing regions, including Thailand, Malaysia,
Indonesia, Philippines and Vietnam. The Company maintains steady and long-term
business cooperation with many the world's top rubber suppliers in these
regions. Its strategic partners include Glenmore Chemical Ltd (Russia),
PT.Sampit JL.Ketapang Hilir Sampit (Indonesia), Binh Phuoc General Import Export
Co (Vietnam), Von Bundit Co. Ltd, Thai Hua Rubber Public Co. Ltd (Thailand),
Fusheng Rubber Pte Ltd, Regional Rubber Trading Co. Pte Ltd, and Eastland
Produce Pte Ltd (Singapore), and Chip Lam Seng Berhad (Malaysia), among others.
All of these companies are regional leading companies in rubber production. For
instance, Thai Hua Rubber Public Co. Ltd is one of the largest rubber producers
and exporters in Thailand, with a total export volume of about 250,000 tons per
annum, and sales revenue of approximately USD160 million.
The strategic relationships with those major rubber suppliers provides the
Company with a steady supply and competitive price for its rubber import and
also allows the Company to closely cooperate with the tire manufactures to
ensure them a steady and consistent supply of raw materials, affording the
Company the position of the "supplier of choice". The Company believes that this
not only enables efficient distribution of its imported rubber, but also
nurtures its tire business alliance with major tire manufacturers.
In the field of tire export business, the Company has reached long-term
export agent agreements with almost all the top Chinese tire manufacturers, such
as Wanli Tire, Triangle Tire and Linglong Tyre. The Company is the exclusive
agent for the two famous brands, Wanli(R) UHP and Linglong(R) UHP in the U.S.
market. Wanli Tire (South China Tire Rubber Co. Ltd), the largest radial truck
tire manufacturer in southeast China, produces quality performance tires widely
accepted in the U.S. market. Triangle Tire is the most well known trademark in
China's tire industry. Linglong Tyre, the 12th largest tire manufacturer in the
world, has authorized us to sell its Linglong(R) and other associate brands,
such as, Sanling(R) and LiAo(R), in the overseas markets. The Company has also
established distribution contracts with other major Chinese brand tires, such as
Hangzhou Zhongce, Doublestar, Taishan, Chengshan (Cooper), Double Happiness,
Yongtai, and Xiongying to name a few. The strategic alliance with those Chinese
tire manufacturers and close affiliation with those quality brands has enabled
us to take advantage of the growth opportunities in the international tire
market and achieve rapid sales growth.
In the Domestic Tire Distribution Market, the Company is the general
distribution agent for several of the world's most famous brands in the tire
industry such as Michelin(R) and Yokohama(R), for whom the Company is the
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exclusive distribution partner in Shandong Province, one of the most developed
provinces in China. We are also a general distributor for most of the most
well-known Chinese brands such as Linglong(R), Wanli(R), Weishi(R), Qianjin(R)
and Jinglun(R) in Shandong and Jiangsu Province. Furthermore, Michelin(R), the
world's largest tire manufacturer, has maintained an ongoing and mutually
beneficial relationship with the Company for six (6) years and has publicly
recognized the Company as its largest distribution agent in China. Yokohama
Rubber Co. Ltd., the seventh largest tire manufacturer in the world, with
several subsidiaries in Jiangsu and Zhejiang Provinces, signed sales and agent
distribution agreements with us in 2007. By strengthening cooperation with
Yokohama, the Company will further enhance it product offering and sales
capabilities.
With the understanding that it takes a long time to develop and nurture a
good business relationship, the Company has cultivated such relationships by
prioritizing quality, efficiency and accountability over a long period of time.
In addition, the Company is negotiating with several other major global players
to form business alliances to distribute their products in the Chinese domestic
market through the Company's existing distribution channels.
In September 2007, the Company signed an exclusive agent distribution
agreement with Continental Corp, one of the world leading tire manufacturers in
Germany, to distribute the Company's products in Shandong Province and Jiangsu
Province through our distribution network. This agreement gives us an
opportunity to generate at least RMB 42 million of additional revenue in 2008
and RMB 85 million in 2009. The gross profit margin is expected to exceed 6.0%
from this line of products.
INTELLECTUAL PROPERTY
The Company currently has no registered intellectual property.
RESEARCH AND DEVELOPMENT
Zhongsen has not had any material research and development expenses over
the past two years. Due to the characteristic of the housing and land
development industry, "R&D" consists of marketing research. The funding of all
marketing research is expected to come from operating cash flow.
EMPLOYEES
As of September 30, 2007, Zhongsen employed a total of 114 employees in the
following capacities: 15 management, 4 administrative, 36 operational, 7 buyer,
31 sales, 6 planning and 15 finance. Zhongsen believes that it has a good
working relationship with its employees. The Company is not a party to any
collective bargaining agreements. At present, no significant change in the
Company's staffing is expected over the next 12 months. All employees are
eligible for incentive-based compensation.
Benefits: The Company provides full-time employees with salary, expense
allowance, and bonus. The Company does not supply insurance for its employees.
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Employees are entitled to time off for all national holidays.
Incentives: Each salesperson receives a base salary plus a commission which
increases if actual sales exceed sales objectives. Once a salesperson generates
US $25,000 in prepaid sales, the Company provides an automobile to facilitate
their sales activity. Once established sales targets are met, the auto is given
to the employee as a bonus at the end of the fiscal year.
No employees are represented by a labor union. We believe we have good relations
with our employees.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
To date, Zhongsen has been compliant with all registrations and
requirements for the issuance and maintenance of all licenses required by the
applicable governing authorities in China. These include an Approval Certificate
of Foreign Investment Corporation issued by Qingdao Foreign Trade and Economic
Cooperation Bureau, Business License issued by Commercial and Industrial Bureau.
COMPETITION
The market and all its segments in which the Company operates are highly
competitive. As the nation's leading integrated marketer and distributor in the
tire and rubber business, we do not have competitors with the same integrated
business model or scale as us in all the three market segments. However, in each
individual business segment, we face many strong competitors and different kinds
of challenges.
In the field of Rubber Import/Distribution Business, some of the Company's
competitors have greater financial resources than the Company. For example,
Sinochem International Corporation, a publicly listed company on the Shanghai
Stock Exchange, has mainly engaged in the business of rubber, plastics, and
chemical products & logistics operations. It is the major competitor of the
Company in the field of rubber trading. Sinochem Int'l imported and sold roughly
80,000 tons of natural rubber in 2006 in addition to its own production of
synthetic rubber. Sinochem has customers in over 100 countries and regions in
the world, and its overall sales revenue from a variety of business lines has
reached US$ 1.9 billion in 2006. Our Company differentiates from Sinochem with
our business focus and concentration on tire and rubber distribution.
In the tire export business field, the Company also faces many competitors
that are large international trading companies either affiliated with or in
alliance with one or two Chinese tire manufacturers, and sell China-made tires
in overseas markets. Major competitors in this category include Fullrun Tire
Corp. Ltd, Best Choice Int'l Trade Co. Ltd, Karo Int'l Trade Co. Ltd, Toptip
Industrial Co.,Ltd, and Tianjin Free Trade Zone Angel Int'l Trade Co.,Ltd.,
among others. To the Company's knowledge, there are no comprehensive statistics
or research information papers about those Chinese tire exporters. We
differentiate ourselves from them by our complete product selection and
integrated business operation model, which consists of rubber supply, tire
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import and export, domestic distribution of tires and aftermarket automotive
services.
Some Chinese tire manufacturers, including our suppliers, also export their
own products directly to foreign buyers. In that case, they are also competing
against the Company in the international market. They have the experience and
capacity to export their products, but they may not have as large of a selection
of products as an integrated marketer like the Company. To avoid potential
overlapping and conflict of interest, the Company usually requests specific
terms in its selling agreements with tire manufacturers. Such terms will give
the Company protection in certain lines of products or in certain market
territories. The Company's competitors in this category include Shandong
Linglong Tyre Co. Ltd., Shandong Taishan Tire Co. Ltd., Hangzhou Zhongce Rubber
Co. Ltd, Qingdao Doublestar Tire Co. Ltd. and others. So far, the working
relationship we have forged with the manufacturers has created a win-win
situation for both parties because it allows both parties the ability to
leverage each other's strength and resources to increase sales.
A major competitor in this category is Shanghai Tire & Rubber Co. Ltd. This
company has established its exporting subsidiary in the United States by the
name of China Manufacturers Alliance (CMA). This company is a large state-owned
tire and rubber company with almost 70 years of history. Shanghai Tire & Rubber
has two well-known brands DoubleCoin(R) and Warrior(R), which enjoy great
popularity. The company is specialized in light truck and medium truck tire
series, such as, all-steel radial heavy duty truck tires, radial light truck
tires, bias light truck tires, bias truck tires, agricultural tires.
In China's domestic tire market, the Company faces competition from other
brand tire distributors and dealers, such as the dealers for Goodyear(R),
Hankook(R), and Bridgestone(R) among others. Unlike the situation in other
countries, China's domestic tire market is dominated by thousands of independent
tire dealers, most of them being small and locally based operations. Since the
large tire-makers do not have their own sales outlets in China, and they only
grant their general sales agent or dealership to Chinese local dealers or agents
on a provincial basis and renew it annually, there are no cross-region dealers
or marketers in China. In such a fragmented marketplace, the Company, with its
integrated business models as both rubber import to supply the manufacturers and
tire import/export, has become the top distributor in its assigned territories
and is ready to expand its business to other provinces or territory through
aggressive acquisition.
COMPARATIVE ADVANTAGE OF THE COMPANY
Integrated Business Model and Leading Market Position . In the light of the
prevailing domestic and international market situation, the Company has
established itself as a market leader in distributing tires in both China and
overseas replacement tire market. In its home province, the Company's market
share exceeds 10%. The Company believes that the key benefits of its scale
include: the ability to efficiently carry an extensive inventory; the ability to
invest in sales and technology support; and operating efficiencies from its
scalable infrastructure. The Company believes its leading market position,
combined with its new retail/service franchise enhances its ability to increase
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sales to existing customers, attract new customers and enter into new markets.
Advanced Technology Support. The Company has deployed the most advanced ERP
management system to its business operation, which enables the informed
management of the Company's daily operations and ensures the Company will be
able to execute all the business transactions accurately and efficiently. By
utilizing this system, the order entry, invoicing, inventory control, accounts
receivable and warehouse management and all other related transactions can be
entered into the system and managed more effectively. The business process is
much more straightforward, with information regarding inventory and orders being
shared by multiple users within the Company, enabling a more efficient and
effective business operations process. Currently, we believe the Company is one
of the few Chinese general distributors who are able to get the right tires
delivered to the right dealer or customer within the required time frame.
Extensive Distribution Network: Through years of development and expansion,
the Company has not only established a stable supply of rubber from the world's
top rubber suppliers in Southeast Asia, but also secured its distribution
relationship with the world's top tire companies, such as Michelin, Continental
and Yokohama, as well as with all the top tire manufacturers in China.
Currently, the Company has four (4) distribution centers with warehousing
capacity and web-based information management systems. By utilizing its
sophisticated inventory management and logistics technology, the Company is able
to deliver 95.0% of its orders from the manufacturers or the warehouse directly
to the local Chinese customer on an either same or next day basis. As a result,
this helped the Company build an excellent reputation in the market with prompt
delivery capacity.
Oversea Sales Agent: The Company has established its own sales agent/office
in the U.S., which is one of the Company's major tire export target markets. The
establishment of an overseas sales agent has turned out to be very successful as
it significantly contributed to the Company's fast expansion in the U.S market.
The Company is one of the few Chinese tire distributors who own a sales agent in
the U.S market. Located in Los Angeles, Sentaida International (USA) Inc. was
established in early 2007. To further expand the Company's business in the North
American market, Sentaida International (USA) is expected to execute its first
major acquisition in the fourth Quarter of 2007. The Company is expecting to
double its sales in North America this year and continue penetrating the US
domestic wholesale market by distributing both brand tires and China-made tires
to the local American end users.
Strong Financial Profile and Excellent Credit Record. The Company has bank
credit facilities with four (4) top Chinese Banks, which allows the Company to
effectively use the financial leverage in conducting its business. The Company
has received "Triple Star", highest credit rating by banks recognition from its
top lender, China Agricultural Bank continuously in the last three years, which
means the Company has excellent credit record in the bank.
Experienced Management Team. The Company's executive team led by our Chief
Executive Officer, Mr. Qin Long, combines substantial managerial, industrial and
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marketing experience with extensive government and business contacts in China.
Broad Product Offering. The Company offers a comprehensive selection of
tires in its market areas. In the China domestic market, we carry the most
famous international brand series, such as, Michelin(R), Yokohama(R), and
well-known Chinese brands, such as, Wanli, Linglong, Triangle, to name a few. In
the overseas market, the Company offers most of the high quality China-made
tires, plus its own private label lines, including "Sentaida(R)", "Delinte(R)",
"Gold Stone(R)" and "Landsail(R)". In terms of tire type, the Company's product
range covers almost all types of tires including TBR, OTR LTR, UHP, PCR, bias
tires, and radial heavy duty tires. Due to our breadth and depth of product
offering, the Company believes that it is well positioned to benefit from any
increased demand in any particular tire type as well as offering a diversified
strategy to offset any reduction in demand for a particular type of tire. The
broad product offering has been a significant factor in attracting and retaining
many of the Company's customers.
Diversified Customer Base. The Company sells its products to a diversified
and wide range of customers, including both national and regional tire dealer
chains, car dealerships and other independent tire outlets. In addition to the
Company's extensive inventory and same or next day distribution capabilities, it
also provides its customers with sales and product support services, including
logistics support and tire demonstration training to maximize their ability to
sell tires. These valuable services, as well as the deep level of commitment the
Company has to the business operations of its customers have resulted in a
strong and stable position for the Company within the industry.
Compelling Growth Strategy. The Company anticipates continued growth
through: (1) building on the expanding global demand for rubber and tires
through capacity expansion in target markets; (2) enhancing its horizontal
integration through the expansion of its wholesale distribution network to
neighbor provinces; (3) penetrating into automotive aftermarket service business
by promoting and developing its retail/service franchise "Energy Station(R)" in
the emerging and fragmented domestic market; (4) Increasing operation leverage
by acquiring the majority equity interest in a productive tire manufacturer in
the near future.
Market Position of the Company
The Company has positioned itself as a leading integrated rubber and tire
marketer and distributor in China. With years of development, it has effectively
captured the growth opportunities in all the three market segments, rubber
import and distribution, tire import/export and domestic tire distribution. It
has established itself as a market leader in distributing tires in both the
Chinese and overseas replacement tire market by providing a critical link
between tire manufacturers and the highly fragmented retail tire market.
As a leading rubber and tire marketer, the Company will further demonstrate
its competitive advantages to gain more shares in our target market, including
the North American replacement tire market and China tire market.
12
In China's domestic tire market, our marketing strategy is to let our
wholesale expansion lead our retail/service penetration. By following this
strategy, we will first expand our wholesale business coverage, then to build
Energy Station(R) in selected cities within our wholesale covered area. We
intend to position ourselves as the first and largest cross-region tire
distributor and aftermarket service provider in China.
13
DESCRIPTION OF PROPERTY
The Company currently does not own any real estate. So far, it uses about
16,000 square meters of office space and about 17,800 square meters of warehouse
for free. These office space and warehouse are owned by Sentaida Rubber Co.,
Ltd, which is a subsidiary of Sentaida Group Ltd. , an affiliate of the Company.
LEGAL PROCEEDINGS
From time to time, the Company may become involved in various lawsuits and
legal proceedings, which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these
or other matters may arise from time to time that may harm business. Except as
disclosed below, the Company is currently not aware of any such legal
proceedings or claims that will have, individually or in the aggregate, a
material adverse affect on business, financial condition or operating results.
RISK FACTORS
The investment in our company has a high degree of risk. You should carefully
consider the risks and uncertainties described below and the other related
information. If any of the following risks actually occurs, our business,
operating results and financial condition could be harmed and the value of our
stock could go down.
RISKS RELATED TO OUR BUSINESS
Our sales and operating revenues could decline due to macro-economic and
other factors outside of its control, such as changes in consumer confidence and
declines in employment levels.
Changes in national and regional economic conditions, as well as local
economic conditions where the Company conducts its operations, may result in
more caution on the part of customers and consequently fewer sales of our
products. These economic uncertainties involve, among other things, conditions
of supply and demand in local markets and changes in consumer confidence and
income, employment levels, and government regulations. These risks and
uncertainties could periodically have an adverse effect on customer demand for
and the pricing of our products, which could cause its operating revenues to
decline. In addition, we are subject to various risks, many of them outside of
our control, including availability and cost of materials and labor, changes in
government regulations, and increases in taxes and other local government fees.
A reduction in its revenues could in turn negatively affect the market price of
its securities.
We are subject to extensive government regulation which could cause us to
incur significant liabilities or restrict our business activities.
Regulatory requirements could cause us to incur significant liabilities and
operating expenses and could restrict our business activities. We are subject to
statutes and rules regulating distribution, sales, safety matters, products and
others. Our operating expenses may be increased by governmental regulations and
other fees and taxes, which may be imposed. Any delay or refusal from government
14
agencies to grant us necessary licenses, permits and approvals could have an
adverse effect on our operations
We may require additional capital in the future, which may not be available
on favorable terms or at all.
Our future capital requirements will depend on many factors, including
industry and market conditions, our ability to successfully implement our
branding and marketing initiative and expansion of our business. We anticipate
that we may need to raise additional funds in order to grow our business and
implement our business strategy. We anticipate that any such additional funds
would be raised through equity or debt financings. In addition, we may enter
into a revolving credit facility or a term loan facility with one or more
syndicates of lenders. Any equity or debt financing, if available at all, may be
on terms that are not favorable to us. Even if we are able to raise capital
through equity or debt financings, as to which there can be no assurance, the
interest of existing shareholders in our company may be diluted, and the
securities we issue may have rights, preferences and privileges that are senior
to those of our common stock or may otherwise materially and adversely effect
the holdings or rights of our existing shareholders. If we cannot obtain
adequate capital, we may not be able to fully implement our business strategy,
and our business, results of operations and financial condition would be
adversely affected. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." In
addition, we have and will continue to raise additional capital through private
placements or registered offerings, in which broker-dealers will be engaged. The
activities of such broker-dealers are highly regulated and we cannot assure that
the activities of such broker-dealers will not violate relevant regulations and
generate liabilities despite our expectation otherwise.
We depend on the availability of additional human resources for future
growth.
We are currently experiencing a period of significant growth in our sales
volume. We believe that continued expansion is essential for us to remain
competitive and to capitalize on the growth potential of our business. Such
expansion may place a significant strain on our management and operations and
financial resources. As our operations continue to grow, we will have to
continually improve our management, operational and financial systems,
procedures and controls, and other resources infrastructure, and expand our
workforce. There can be no assurance that our existing or future management,
operating and financial systems, procedures and controls will be adequate to
support our operations, or that we will be able to recruit, retain and motivate
our personnel. Further, there can be no assurance that we will be able to
establish, develop or maintain the business relationships beneficial to our
operations, or to do so or to implement any of the above activities in a timely
manner. Failure to manage our growth effectively could have a material adverse
effect on our business and the results of our operations and financial
condition.
We may be adversely affected by the fluctuation in raw material prices and
selling prices of our products.
15
The raw materials and the products we trade and distribute have experienced
significant price fluctuations in the past. There is no assurance that they will
not be subject to future price fluctuations or pricing control. These price
changes may ultimately result in increases in the selling prices of our
products, in turn, adversely affect our sales volume, revenue and operating
profit.
We could be adversely affected by the occurrence of natural disasters. From
time to time, our developed sites may experience strong winds, storms, flooding
and earth quakes. Natural disasters could impede operations, damage
infrastructure necessary to our constructions and operations. The occurrence of
natural disasters could adversely affect our business, the results of our
operations, prospects and financial condition, even though we currently have
insurance against damages caused by natural disasters, including typhoons,
accidents or similar events.
Intense competition from existing and new entities may adversely affect our
revenues and profitability.
In general, the tire distribution industry is intensely competitive and
highly fragmented. We compete with various companies. Many of our competitors
are more established than we are and have significantly greater financial,
technical, marketing and other resources than we presently possess. Some of our
competitors have greater name recognition and a larger customer base. These
competitors may be able to respond more quickly to new or changing opportunities
and customer requirements and may be able to undertake more extensive
promotional activities, offer more attractive terms to customers, and adopt more
aggressive pricing policies. We intend to create greater awareness for our
brands so that we can successfully compete with our competitors. We cannot
assure you that we will be able to compete effectively or successfully with
current or future competitors or that the competitive pressures we face will not
harm our business.
Our operating subsidiary must comply with environmental protection laws
that could adversely affect our profitability.
We are generally required to comply with the environmental protection laws
and regulations promulgated by the national and local governments of the PRC.
Some of these regulations govern the level of fees payable to government
entities providing environmental protection services. If we fail to comply with
any of these environmental laws and regulations in the PRC, depending on the
types and seriousness of the violation, we may be subject to, among other
things, warning from relevant authorities, imposition of fines, specific
performance and/or criminal liability, forfeiture of profits made, being ordered
to close down our business operations and suspension of relevant permits.
There may be a conflict of interest which may hurt our shareholders' interest
due to related parties transactions.
Currently, we use and share resources of our affiliated and related
parties, including office sapce and warehouse space. There are risks involved in
such an arrangement in which the Company's interest may be harmed due to such
related party transactions.
16
Our success depends on our management team and other key personnel, the
loss of any of whom could disrupt its business operations.
Our future success will depend in substantial part on the continued service
of our senior management. The loss of the services of one or more of our key
personnel could impede implementation of our business plan and result in reduced
profitability. We do not carry life or other insurance covering officers or key
personnel. Our future success will also depend on the continued ability to
attract, retain and motivate highly qualified technical sales and marketing
customer support. Because of the rapid growth of the economy in the People's
Republic of China, competition for qualified personnel is intense. We cannot
guarantee that we will be able to retain our key personnel or that we will be
able to attract, assimilate or retain qualified personnel in the future.
We may be subject to product liabilities.
Although we distribute and export products made by others, we may be still
subject to potential product related liabilities. We may not have sufficient
insurance coverage for such claims if we fail to defend against them.
Risks Related To the People's Republic of China
The People's Republic of China's Economic Policies could affect our Business.
Substantially all of our assets are located in the People's Republic of
China and substantially all of our revenue is derived from our operations in The
People's Republic of China. Accordingly, our results of operations and prospects
are subject, to a significant extent, to the economic, political and legal
developments in the People's Republic of China.
While the People's Republic of China's economy has experienced significant
growth in the past twenty years, such growth has been disparate, both
geographically and among various sectors of the economy. The Chinese government
has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures benefit the overall economy of
the People's Republic of China, but they may also have a negative effect on us.
For example, operating results and financial condition may be adversely affected
by the government control over capital investments or changes in tax
regulations.
The economy of the People's Republic of China has been changing from a
planned economy to a more market-oriented economy. In recent years the Chinese
government has implemented measures emphasizing the utilization of market forces
for economic reform and the reduction of state ownership of productive assets,
and the establishment of corporate governance in business enterprises; however,
a substantial portion of productive assets in the People's Republic of China are
still owned by the Chinese government. In addition, the Chinese government
continues to play a significant role in regulating industry development by
imposing industrial policies. It also exercises significant control over the
People's Republic of China's economic growth through the allocation of
17
resources, the control of payment of foreign currency- denominated obligations,
the setting of monetary policy and the provision of preferential treatment to
particular industries or companies.
Capital outflow policies in the People's Republic of China may hamper our
ability to remit income to the United States.
The People's Republic of China has adopted currency and capital transfer
regulations. These regulations may require us to comply with complex regulations
for the movement of capital. Although our directors believe that it is currently
in compliance with these regulations, should these regulations or the
interpretation of them by courts or regulatory agencies change; we may not be
able to remit all income earned and proceeds received in connection with our
operations or from the sale of our operating subsidiary to our stockholders.
The fluctuation of the Renminbi may materially and adversely affect your
investment.
The value of the Renminbi against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in the PRC's political
and economic conditions. Any significant revaluation of the Renminbi may
materially and adversely affect our cash flows, revenues and financial
condition. For example, to the extent that we need to convert U.S. dollars into
Renminbi for our operations, appreciation of the Renminbi against the U.S.
dollar could have a material adverse effect on our business, financial condition
and results of operations.
Conversely, if we decide to convert our Renminbi into U.S. dollars for the
purpose of making payments for dividends on our common shares or for other
business purposes and the U.S. dollar appreciates against the Renminbi, the U.S.
dollar equivalent of the Renminbi we convert would be reduced. Any significant
devaluation of Renminbi may reduce our operation costs in U.S. dollars but may
also reduce our earnings in U.S. dollars. In addition, the depreciation of
significant U.S. dollar denominated assets could result in a charge to our
income statement and a reduction in the value of these assets.
Since 1994 the PRC has pegged the value of the Renminbi to the U.S. dollar.
We do not believe that this policy has had a material effect on our business.
There can be no assurance that Renminbi will not be subject to devaluation. We
may not be able to hedge effectively against Renminbi devaluation, so there can
be no assurance that future movements in the exchange rate of Renminbi and other
currencies will not have an adverse effect on our financial condition.
In addition, there can be no assurance that we will be able to obtain
sufficient foreign exchange to pay dividends or satisfy other foreign exchange
requirements in the future.
It may be difficult to effect service of process and enforcement of legal
judgments upon our company and our officers and directors because some of them
reside outside the United States.
18
As our operations are presently based in China and some of our key
directors and officers reside outside the United States, service of process on
our key directors and officers may be difficult to effect within the United
States. Also, substantially all of our assets are located outside the United
States and any judgment obtained in the United States against us may not be
enforceable outside the United States.
If relations between the United States and China worsen, our stock price
may decrease and we may have difficulty accessing the U.S. capital markets.
At various times during recent years, the United States and China have had
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 China could adversely affect the market price of our
common stock and our ability to access U.S. capital markets.
We may face obstacles from the system in the People's Republic of China.
Foreign companies conducting operations in the People's Republic of China
face significant political, economic and legal risks. The Communist regime in
the People's Republic of China, including a cumbersome bureaucracy, may hinder
Western investment.
We may have difficulty establishing adequate management, legal and
financial controls in the People's Republic of China.
The People's Republic of China historically has not adopted a Western style
of management and financial reporting concepts and practices, modern banking,
computer or other control systems. We may have difficulty in hiring and
retaining a sufficient number of qualified employees to work in the People's
Republic of China. As a result of these factors, we may experience difficulty in
establishing management, legal and financial controls, collecting financial data
and preparing financial statements, books of account and corporate records and
instituting business practices that meet Western standards.
It will be extremely difficult to acquire jurisdiction and enforce
liabilities against our officers, directors and assets based in the People's
Republic of China.
Because the Company's executive officers and directors, including, the
chairman of its board of directors, are Chinese citizens, it may be difficult,
if not impossible, to acquire jurisdiction over these persons in the event a
lawsuit is initiated against us and/or its officers and directors by a
stockholder or group of stockholders in the United States. Also, because the
majority of our assets are located in the People's Republic of China it would
also be extremely difficult to access those assets to satisfy an award entered
against it in a United States court.
We are subject to the risks related to the evolving legal systems in China.
19
China's legal system is still evolving with many uncertainties,
particularly in the promulgation and implementation and interpretation of rules
and laws that are changing, being adopted and being interpreted and applied on
an uneven basis, sometimes arbitrarily. Our Company, its structure and
organization are subject to those risks. If such laws and rules are applied or
interpreted against the Company in an unfavorable way, we may be subject to
penalties or even lose our business license and you may lose your investment in
us.
We may face judicial corruption in the People's Republic of China.
Another obstacle to foreign investment in the People's Republic of China is
corruption. There is no assurance that we will be able to obtain recourse, if
desired, through the People's Republic of China's poorly developed and sometimes
corrupt judicial systems.
Risks Related To Our Shares
There is no assurance of an established public trading market, which would
adversely affect the ability of investors in our company to sell their
securities in the public markets.
Although our common stock trades on the Over-the-Counter Bulleting Board
(the "OTCBB"), a regular trading market for the securities may not be sustained
in the future. The NASD has enacted recent changes that limit quotations on the
OTCBB to securities of issuers that are current in their reports filed with the
Securities and Exchange Commission. The effect on the OTCBB of these rule
changes and other proposed changes cannot be determined at this time. The OTCBB
is an inter-dealer, Over-The-Counter market that provides significantly less
liquidity than the NASD's automated quotation system (the "NASDAQ Stock
Market"). Quotes for stocks included on the OTCBB are not listed in the
financial sections of newspapers as are those for The NASDAQ Stock Market.
Therefore, prices for securities traded solely on the OTCBB may be difficult to
obtain and holders of common stock may be unable to resell their securities at
or near their original offering price or at any price. Market prices for our
common stock will be influenced by a number of factors, including:
o the issuance of new equity securities;
o changes in interest rates;
o competitive developments, including announcements by competitors of new
products or services or significant contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
o variations in quarterly operating results;
o change in financial estimates by securities analysts;
o the depth and liquidity of the market for our common stock;
o investor perceptions of our company and the technologies industries
generally; and
20
o general economic and other national conditions.
The limited prior public market and trading market may cause volatility in the
market price of our common stock.
Our common stock is currently traded on a limited basis on the OTCBB under
the symbol "RUBD." The quotation of our common stock on the OTCBB does not
assure that a meaningful, consistent and liquid trading market currently exists,
and in recent years such market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of many smaller
companies like us. Our common stock is thus subject to volatility. In the
absence of an active trading market:
o investors may have difficulty buying and selling or obtaining market
quotations;
o market visibility for our common stock may be limited; and
o a lack of visibility for our common stock may have a depressive effect on
the market for our common stock.
Our principal stockholders, current executive officers and directors own a
significant percentage of our company and will be able to exercise significant
influence over our company.
Our executive officers and directors and principal stockholders together
will beneficially own a majority of the total voting power of our outstanding
voting capital stock. These stockholders will be able to determine the
composition of our Board of Directors, will retain the voting power to approve
all matters requiring stockholder approval and will continue to have significant
influence over our affairs. This concentration of ownership could have the
effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which
in turn could have a material and adverse effect on the market price of the
common stock or prevent our stockholders from realizing a premium over the
market prices for their shares of common stock. See "Principal Stockholders" for
information about the ownership of common by our executive officers, directors
and principal stockholders.
We do not anticipate paying dividends on the Common Stock.
We have never paid dividends on our common stock and do not anticipate
paying dividends in the foreseeable future. Our directors intend to follow a
policy of retaining all of our earnings, if any, to finance the development and
expansion of our business.
Our common stock could be considered to be a "penny stock."
Our common stock could be considered to be a "penny stock" if it meets one
or more of the definitions in Rules 15g-2 through 15g-6 promulgated under
Section 15(g) of the Securities Exchange Act of 1934, as amended. These include
but are not limited to the following: (i) the stock trades at a price less than
$5.00 per share; (ii) it is NOT traded on a "recognized" national exchange;
(iii) it is NOT quoted on The NASDAQ Stock Market, or even if so, has a price
less than $5.00 per share; or (iv) is issued by a company with net tangible
21
assets less than $2.0 million, if in business more than a continuous three
years, or with average revenues of less than $6.0 million for the past three
years. The principal result or effect of being designated a "penny stock" is
that securities broker-dealers cannot recommend the stock but must trade in it
on an unsolicited basis.
Broker-dealer requirements may affect trading and liquidity.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule
15g-2 promulgated thereunder by the SEC require broker-dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of
penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account.
Potential investors in our common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stock." Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve
the account of any investor for transactions in such stocks before selling any
penny stock to that investor. This procedure requires the broker-dealer to (i)
obtain from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
Shares eligible for future sale may adversely affect the market price of
our common stock, as the future sale of a substantial amount of our restricted
stock in the public marketplace could reduce the price of our common stock.
From time to time, certain of our stockholders may be eligible to sell all
or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the
Securities Act ("Rule 144"), subject to certain limitations. In general,
pursuant to Rule 144, a stockholder (or stockholders whose shares are
aggregated) who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the class during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of securities, without any limitations, by a non-affiliate of our company that
has satisfied a two-year holding period. Any substantial sale of common stock
pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse
22
effect on the market price of our securities.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for Fiscal Year 2004, 2005 and 2006
In the section below, the terms "Company", "we", "us", "our" and similar
terms refer to Zhongsen Holding Co. Ltd, Qingdao Free-Trading Zone Sentaida
International Trade Co. Ltd (FTZ Sentaida) and Qingdao Sentaida Tires
Co.(Sentaida Tires) in relevant context unless the context indicates otherwise.
The following discussion and analysis of results of operations, financial
condition and liquidity should be read in conjunction with our combined
financial statements of the three companies and the related notes and
information included elsewhere in this prospectus.
Our fiscal year is ended December 31 each year so that the financial
statements of each year will be comparable with each other. However, because the
business of domestic tire distribution was established in December 2004, the
consolidated financial statement for 2004 will not be exactly comparable to the
fiscal year 2005 and 2006.
Overview
Zhongsen Holdings Co., Ltd.'s business originated in January 2000 under the name
of Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd. (FTZ
Sentaida), which involved in the rubber import and domestic distribution as well
as tires export. In December 2004, Qingdao Sentaida Tires Co., Ltd. (Sentaida
Tires) was established and expanded the company's business to tires distribution
in China's domestic market. In January 2005, Zhongsen Trading Co., Ltd was
incorporated in British Virgin Island; and also involves in rubber import and
distribution and tires export, and changed its name to Zhongsen Holdings Co.,
Ltd in June 2007. In July 2007, Zhongsen International Co. Group Ltd. in Hong
Kong reached agreement with the shareholders of both FTZ Sentaida and Qingdao
Sentaida Tires Co. to acquire 100% of the equity interest through a cash
purchase. In August 2007, such acquisitions were approved by the appropriate
Chinese authorities. Consequently, both the companies changed their status from
China domestic companies into a wholly-owned foreign invested enterprise
respectively. In September 2007, Zhongsen International Co. Group Ltd. in Hong
Kong has acquired 100% of equity interest of Zhongsen Holdings Co., Ltd.
Our company is the largest integrated independent distributor of tires and
rubber in China in terms of overall sales and market coverage. We intend to
maintain our leading position in the industry by further diversifying our
product/service selection and by expanding our operation geographically through
strategic acquisitions.
In the fiscal year ended in 2006, the three companies' combined sales about
$333 million, which represented 35.7% growth over 2005's figure. We realized net
profit of about $ 4.7 million, increased by 11% compared with year 2005. With
23
strong logistics and distribution capability, the Company has established its
leading position both as an effective intermediary between international rubber
producers and Chinese tire manufacturers, and as the top distribution partner of
major tire manufacturers in China.
The company's Rubber Import and Distribution Division, operating under FTZ
Sentaida has imported and sold over 117,494 metric tons of natural rubber,
accounted for 5.6% of China's overall rubber import volume in 2006. The sales
have generated over $ 219million of revenue, which represented 66% of the
Company's total net sales and up 67% from Year 2005. Backed by the world top
natural rubber suppliers in Southeast Asia, our Rubber Import and Distribution
Division's client base has covered majority of the top Chinese and
foreign-invested tire manufacturers in China.
Our Company's Tires Export Division, operating under FTZ Sentaida,
contributed 20% of the company's total net sales by exporting $ 69 million worth
tires in 2006. It has made the company as one of the top independent tires
exporters in China. The Tire Export Division has established a long-term export
agent relationship with all major Chinese tire manufacturers and carrying
selected Chinese brand tires in overseas market. Those brand tires include
Wanli(R), Linglong(R), Doublestar(R), Yellowsea(R) and Triangle(R) etc. In
addition, the company has also worked with its strategic manufacturing partners
and jointly developed its proprietary brand tire series: Sentaida(R),
Delinte(R), Goldstone(R) and Landsail(R), the sales of which accounted for
roughly 20% of the company's total export in 2006.
The Company's Domestic Sales and Distribution division, operating under
Sentaida Tires, provides a critical link between major tire manufactures and the
highly fragmented replacement tire market in China. In 2006, it has generated
approximately $43 million of revenue, which represented 13% of the Company's
totaled net sales and over 51% of annual growth against the division's annual
sales in 2005. We serve as the exclusive distributor for the world largest tire
manufacturers: Michelin(R) and Yokohama(R) in Shandong Province P.R.C. We also
carry the top ten leading Chinese brand tires as well as a number of high
quality private labeled product lines. We believe that we have the most complete
lines in the replacement tire market and our broad product offering has been a
significant factor in attracting and retaining many of our customers. Now, our
Domestic Sales and Distribution Division operate 4 regional distribution centers
and sells to over one thousand of tire dealers, retailers and institutional
clients.
We believe that our size and worldwide footprint give us a substantial
advantage over our competitors since all of them are regionally focused. Our
established business relationship with world top rubber suppliers and major tire
manufacturers and our well-established distribution network have paved the way
24
for our future expansion and growth.
Results of Operations:
Due to the operation expansion, Sentaida Tires' business started in
December 2004, therefore, FTZ Sentaida, Sentaida Tires and Zhongsen Holdings Co.
Ltd's combined results of operation is only comparable for the fiscal year 2005
and 2006 based on the table below.
Table 1: FTZ Sentaida, Sentaida Tires and Zhongsen Holdings Co., Ltd's results
of operation for the period of 2005 and 2006, each item as a percentage of total
sales, and year to year change of each item:
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Audited Audited
2006 2005 % of change
US$ % of sales US$ % of sales based on 2005
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Sales 332,535,270 100.0% 245,086,065 100.0% 35.7%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Cost of goods sold 315,093,435 94.8% 230,577,464 94.1% 36.7%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Gross profit 17,441,835 5.2% 14,508,601 5.9% 20.2%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Operating expenses
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Freight charges 5,847,439 1.8% 3,205,514 1.3% 82.4%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Commissions and rebates 145,621 0.0% 1,951,499 0.8% (92.5%)
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Insurance 270,079 0.1% 268,125 0.1% 0.7%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Selling expenses 2,319,384 0.7% 1,747,178 0.7% 32.8%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
General & Administrative
expenses 482,299 0.1% 398,315 0.2% 21.1%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Total expenses 9,064,822 2.7% 7,570,631 3.1% 19.7%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Income/loss from operations 8,377,013 2.5% 6,937,970 2.8% 20.7%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Other income and expenses
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Miscellaneous income 265,535 0.1% -189,880 -0.1% 2.4 times
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Interest expenses -3,474,729 -1.0% -2,299,172 -0.9% 51.1%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Other net -3,209,194 -1.0% -2,489,052 -1.0% 28.9%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Income/loss from operation
before income tax 5,167,819 1.6% 4,448,918 1.8% 16.2%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
25
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Provision (benefit) for 572,682 0.2% 205,158 0.1% 1.8 times
income taxes
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Foreign currency translation 96,322 -15,820
gain/loss
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Net income/ loss 4,691,459 1.4% 4,227,940 1.7% 11.0%
- ------------------------------- ----------------- ----------- ------------------ ----------- ---------------
Sales
Sentaida Tires, FTZ Sentaida, and Zhongsen Holding Co., Ltd's combined net
sales increased by about $87.4 million in 2006, which is about 35.7% higher than
fiscal year 2005's figure.
On one hand, the FTZ Sentaida contributed to the increase of group revenue
by $66.2 million, primarily due to the increase of 16,363 tons of sales of
rubber in 2006.
On the other hand, Domestic Tire Distribution of Sentaida Tire contributed
about $14.5 million to the increase of the totaled net sales. This was mainly
attributable to increasingly stable distribution network, enhanced capability of
expanding client base and market coverage, new exclusive distribution right
received from Yokohama(R) and Pirelli(R) for the market territory of Shandong
Province.
The rest of sales increase came from the three newly-established full
function aftermarket service centers in Qingdao.
Gross Profit:
In terms of the absolute amount, the Company's gross profit has increased
about $2.9million in 2006, 20.2 % up compared with fiscal year 2005. The
increase in sales revenue was offset by the higher increase in cost of good
sold; therefore the company's gross profit margin dropped by 0.7%.
Operating expenses
The total operating expenses increased to about $9 million dollars in
fiscal 2006 from about $ 7.6 million in fiscal 2005. The increased expense of
about $1.4 million was approximately 19.7% over fiscal 2005. The percentage of
the increase in operating expenses was less than the percentage of increase in
revenue.
Included in operating expenses, however, freight charges were increased
significantly, about 82.4 % over the 2005's figure. That was partially caused by
the shipping and delivery fee increase and shipping volume increase,
corresponding to our growing rubber import business. Increase in fuel price in
2006 has more or less added transportation cost. In addition, sales price was
CIF price, which caused obvious increase in freight charges as well.
26
The Selling Expenses in absolute amount has increased by 32.8%, $572,206,
comparing with fiscal 2005. Salary and wages, depreciation, traveling expenses,
auto & fuel expenses account for most of the selling expenses. The increase was
partially due to our fast growing retailing business. We opened three large
aftermarket service centers in Qingdao city, which caused the increases of
selling expenses. Salary and wages rose by about $0.19 million. Meanwhile,
additional depreciation of $0.27 million for tires mold that were reclassified
as fixed assets in fiscal 2006 also contributed to the rise of selling expenses.
In terms of the ratio of selling expenses to sales, there was no obvious change,
accounted for 0.7% of sales in 2006 and 2005 respectively.
Overall increase in operating expenses offset the increase in sales
revenue; we realized 20.7% increase (approximate $1.5 million) in income from
Operations of fiscal year 2006 compared with fiscal year 2005.
Interest expenses:
We experienced an increase of about $1.18 million in interest expenses from
$2,299,172 in fiscal 2005 to $3,474,729 in fiscal 2006. In order to finance our
business expansion, we increased our debt level by about $ 17 million in 2006,
mainly in the way of trade financing and normal commercial short-term loan, all
of which lead to the proportional increase in interest expenses. In addition,
due to the increase in sales, working capital turnover also was fast than
before, which lead to other financial expenses associated with opening and
accepting bill of exchange, discounting note and other commercial paper were
also increased.
Net Income
We achieved net income about $ 4,691,459 in fiscal 2006, which increased by
$0.46 million (approximately 11.0%), compared to US$ 4,227,940 in fiscal 2005,
which was primarily due to obvious increase in sales revenue and income from
operations.
Liquidity and Capital Resources
The following table summarizes the cash flow for fiscal years 2005 and 2006:
-------------- --------------
2006 2005
-------------- --------------
US$ US$
----------------------------------------------- -------------- --------------
Cash provided by (used in) operating (8,720,251) 10,920,436
activities
----------------------------------------------- -------------- --------------
Cash provided by (used in) investment (4,421,209) (5,663,135)
activities
----------------------------------------------- -------------- --------------
27
----------------------------------------------- -------------- --------------
Cash provided by (used in) financing 13,240,320 (2,299,667)
activities
----------------------------------------------- -------------- --------------
Effect of exchange rate change on cash 51,192 186,470
----------------------------------------------- -------------- --------------
Net increase in cash and cash equivalents 150,052 3,144,104
----------------------------------------------- -------------- --------------
Cash and cash equivalents beginning of the 4,161,335 1,017,232
year
----------------------------------------------- -------------- --------------
Cash and cash equivalents ending of the year 4,311,387 4,161,335
----------------------------------------------- -------------- --------------
Operating activities
Total net cash used in operating activities for fiscal 2006 increased by
$19,640,687 to $8,720,251 compared to net cash provided by operating activities
of $10,920,436 in fiscal 2005. The increase in cash used in operating activities
was, on one hand, due to an increase in our related party receivable, notes
receivable and accounts receivable (totaled about $26.3 million).
Investing Activities
Total net cash used in investing activities decreased by $1.24 million to
$4,421,209 in the aggregate twelve-month period of 2006 compared to $5,663,135
in fiscal 2005. The relatively higher investment amount in 2005 was mainly made
for starting a new line of business, i.e., domestic tires distribution under
Sentaida Tires in 2005. As result, we incurred about $2,880,222 in fixed assets,
such as office space, service centers, and equipments and so on. The cash used
in 2006 was mainly invested on newly-established full function aftermarket
service centers in Qingdao with corresponding increase in fixed assets such as
buildings and equipment etc. In addition, the increase of restricted cash as of
December 31, 2006 was approximately $0.6million less than the corresponding
amount as of December 31, 2005, which contributed to the decrease of cash used
in investing activities as well.
Financing Activities
Total net cash provided by financing activities in fiscal 2006 increased
about $ 15.5 million from $ 2,299,667 of cash used in 2005 to $13,240,320 of net
cash provided by financing activities in 2006. The increase in cash provided by
financing activities was primarily due to the increase of our debt level in
connection with business expansion and increase in capital demand. The level of
our short-term debt increased significantly by about $17 million, mainly in the
28
form of trade financing facility. The increase was partially offset by the
repayment of loan from previous year.
The Company has no long-term debt.
29
Revolving Credit Facility
In 2006, FTZ Sentaida had about $2.2 million short term debt for working
capital turnover from two banks at an average annual interest rate of about 6%.
Among the borrowings, about $1 million was collateralized on the land of one of
the company's strategic business partner and was repaid in June 2007. Another
outstanding of $1.2 million was renewed in Nov. 2007, which was collateralized
on a property of Sentaida Tire. The property is worth about $1.36 million valued
at cost.
FTZ Sentaida has increased the credit facility to support business
expansion. The credit facility was mainly in the form of trade financing. The
outstanding import bill advance, export bill purchase, consignment of
collection, document against payment and document against acceptance was about
$37 million in total. Corresponding financial charge was based on the interest
rate defined in individual transaction contract between FTZ Sentaida and banks.
In general, the interest rate for import bill advance and export bill purchase
was based on average of three month LIBOR plus 1%; the financial charge of
establishment of letter of credit was about 0.1%; financial charge for document
against payment and document against acceptance was at the rate fluctuated
around 0.1%, the letter of credit's negotiation charge was at 0.125%.
The obligations of credit were secured by a pledge of substantial land,
building and fixed assets of Sentaida Group LLC and also personally guaranteed
by one stockholder of Sentaida Group. The contractual agreements with banks
contain covenants which restrict the company's ability to incur additional debt;
enter into guarantees; make loan and investment; and modify certain material
agreements; as well as other customary covenants. Through out the year, there
was no violation of the covenants by FTZ Sentaida.
The majority of the Company's revenues and expenses were denominated
primarily in Renminbi ("RMB"), the currency of the People's Republic of China.
There is no assurance that exchange rates between the RMB and the U.S.
Dollar will remain stable. The Company does not engage in currency hedging.
Inflation has not had a material impact on the Company's business.
30
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the nine months ended September 30, 2007 and 2006
Overview:
Zhongsen International Company Group Ltd itself has no significant assets
and operations other than holds equity interest in F.T.Z. Sentaida, Sentaida
Tires and Zhongsen Holdings.
The Company's Rubber Import/Distribution Division, operating under
F.T.Z.Sentaida and Zhongsen Holdings, generated about $146.9 million of revenue,
which accounted for 55.9% of the Company's consolidated net sales for the nine
months ended September 30, 2007. It decreased by 11% comparing with the
division's revenue for the same period in 2006. The decrease was primarily due
to the change of sales recognition method for styrene-butadiene rubber (SBR
rubber). In the previous fiscal years, the Company's SBR rubber business was
conducted with both purchasing contracts and sale contracts, and the whole
contract value of sale contract was recognized as sales revenue, while the
purchasing cost was recorded as the corresponding cost of good sold (COGS).
According to the new sales agent agreement with SBR rubber supplier, the Company
would serve as a sales agent for SBR rubber starting in 2007 and receive 1.0% of
the sales commission from its sales. For the first nine (9) months of 2007, the
Company recognized around $0.17 million of sales commission from its $16.6
million of SBR rubber sales, which would make up the segment's revenue by 11.3%
in this period if the Company used the previous sales recognition method under
the old SBR rubber sales contract. In addition, the similar situation also
happens to another category's rubber sales, which would make up about another
5.7% of the segment's revenue if there was no sales agent agreement change nor
sales recognition method change.
The Company's Tire Export Division, operating under F.T.Z.Sentaida and
Zhongsen Holdings, achieved about $75.5 million of revenue, which represented
28.7% of the Company's total net sales for the nine months ended September 30,
2007. It was up approximately 23.0% in comparison with the corresponding figure
for the same period in 2006.
The Company's Tire Domestic Sales Division, operating under Sentaida Tires,
generated about $40.4 million net sales, accounted for about 15.4% of the
Company's consolidated net sales. It increased by 25.3% comparing with the
amount for the same period in 2006.
Results of Operations:
1
Quarter ended September 30, 2007 compared to quarter ended September 30, 2006.
The following table sets forth the period change for each category of the
statement of operations, as well as each category as a percentage of net sales.
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
unaudited unaudited % of change
2007.1-9 % of 2006.1-9 % of based on
US$ sales US$ sales 2006.1-9
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Sales 262,834,994 100.0% 258,867,580 100.0% 1.5%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Cost of goods sold 248,564,259 94.6% 246,575,915 95.3% 0.8%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Gross profit 14,270,735 5.4% 12,291,665 4.7% 16.1%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Operating expenses
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Freight charges 4,369,457 1.7% 4,142,056 1.6% 5.5%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Commissions and rebates 54,253 0.0% 692,366 0.3% -92.2%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Insurance 215,543 0.1% 204,799. 0.1% 5.2%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Selling expenses 2,007,341 0.8% 1,848,084 0.7% 8.6%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
General & Administrative expenses 582,805 0.2% 334,176 0.1% 74.4%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Total expenses 7,229,399 2.8% 7,221,481 2.8% 0.1%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Income/loss from operations 7,041,336 2.7% 5,070,184 2.0% 38.9%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Other income and expenses
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Miscellaneous income 602,398 0.2% 225,255 0.1% 1.7 times
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Interest expenses -2,918,971 -1.1% -2,283,247 -0.9% 27.8%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Other net -2,316,574 -0.9% -2,057,992 -0.8% 12.6%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Income/loss from operation before
income tax 4,724,763 1.8% 3,012,192 1.2% 56.9%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Provision (benefit) for income taxes 427,679 0.2% 134,890. 0.1% 2.2 times
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Net income/ loss 4,297,084 1.6% 2,877,302 1.1% 49.3%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Foreign currency translation
gain(loss) 230,359 0.1% -8,946 0.0% 26.7 times
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Comprehensive Income 4,527,443 1.7% 2,868,357 1.1% 57.8%
- ---------------------------------------- ------------ --------- ------------ ---------- ---------------
Net Sales:
The net sales for the nine months ended September 30, 2007 were about $262.8
million, increased by approximately $3.9 million in absolute amount. It was 1.5%
higher than the net sales for the same period in 2006. The increase mainly
contributed by tire domestic sale and distribution. On one hand, the Company
carried two new high quality Chinese tire brands to sell in early 2007, which
diversify the Company's product offering and bring more revenue to the Company.
On the other hand, the Company has been focusing on developing distribution
network and enhancing the ability to expand the customer base. Therefore, not
only the existing customers bought more tires than before, but also the Company
developed some new customers. All these contributed to the increase in revenue.
2
Gross Profit:
In terms of the absolute amount, the Company's gross profit increased about $2
million for the nine months ended September 30, 2007, up 16.1% comparing with
the corresponding figure in 2006. Due to the favorable purchase price and sales
price the Company could get, the cost of good sold slightly dropped by 0.8%
comparing with the 2006's figure, and the overall gross profit margin had been
improved a bit from 4.7% in 2006 to 5.4% in 2007.
Operating Expenses:
Operating expenses for the nine months ended September 30, 2007 was maintained
at the same level as that in 2006, which was about $7.2 million. It accounted
for 2.8% of the revenue in each year. In respect of the absolute amount of each
category included in operating expenses, some of them were increased. However,
when considers each category as percentage of sales, there was no obvious
increase comparing with the corresponding figure in 2006.
Selling expenses increased by about $0.16 million, up 8.6% comparing with the
figure in 2006. The increase in selling expenses primarily resulted from higher
employee related expenses. There was also increase in depreciation expenses
relating to the Company's warehousing infrastructure and buildings of the
Company's Chain stores.
General and administrative expenses were increased to about $0.58 million for
the first nine months ended September 30, 2007 from about $0.33 million for the
same period in 2006. It was up 74.4%. The about $0.25 million increase was
resulted from increase in employee related expenses, such as salaries and social
welfare increased by about $50,725; listing related fee was about $62,000;
miscellaneous expenses like travel expenses, fuel cost and vehicle maintenance
expenses etc. increased by about $67,000; local tax increased by about $72,000.
Freight charges were about $4.4 million for the nine months ended September 30,
2007. It was increased by 5.5 % comparing with the figure for the same period in
2006. Freight charges accounted for 1.7% and 1.6% of revenue for the first nine
months in 2007 and 2006, respectively. Miscellaneous charges like port charges,
goods handling charges, custom miscellaneous charges for goods examination,
goods loading and unloading etc. were all included in freight charges. The about
$0.3 million increase in freight charges was primarily due to the increased
sales of tire export. The increase was in proportion to the increase in sales of
tires export.
Commission and rebates dropped from about $0.7 million in the nine months ended
3
September 30, 2006 to $54,253 for the same period in 2007, decreased by about
92%. Before 2007, the Company contracted with a sales agent to sell tires to USA
market and paid commissions to the sales agent. The contract with the sales
agent ended in early 2007, therefore, commission and rebates were reduced
significantly.
The dramatic decrease in commissions and rebates offset the increase in other
categories included in operating expenses, which contributed to the stable level
of operating expenses. Due to the overall increase in revenue with no obvious
growth in operating expenses, the Company achieved about $7 million income from
operation for the first nine month in 2007. It was about 38.9% higher than the
approximate $5 million of income from operation for the same period in 2006.
Interest Expense:
The Company experienced about $0.6 million of increase in interest expense to
approximately $2.9 million for the nine months ended September 30, 2007 from
about $2.3 million for the same period in 2006. Interest expense for discounting
notes, short term debt for working capital turnover and trading finance were all
included in interest expense. For the nine months ended September 30, 2007,
interest expense was about $2 million, miscellaneous financial charges were
about $0.9 million. They were about $1.7 million and $0.6 million for the same
period in 2006. The increase in interest expense was primarily due to the rise
of interest rate charged by banks. The average annual interest rate in 2006 was
about 6%, while it was about 6.4% for the nine months in 2007. In addition, the
opening balance for the short-term borrowing in 2007 was about $18.4 million
higher than that in 2006, which were all paid off in the first nine months 2007.
It also resulted in the increase in interest expense.
Net Income:
The Company achieved about $4.3 million of net income for the nine months ended
September 30, 2007, which increased by about $1.4 million (approximately 49.3%)
comparing with $2.9 million for the same period in 2006. It was mainly
attributed to stable level of operating expenses, increase in revenue and income
from operations.
Liquidity and Capital Resources:
The following table summarizes the cash flows for period ended September 30,
2007 and 2006.
----------------------------------------------- -------------- --------------
2007.1-9 2006.1-9
----------------------------------------------- -------------- --------------
US$ US$
----------------------------------------------- -------------- --------------
Cash provided by (used in) operating (3,019,846) (13,817,451)
activities
----------------------------------------------- -------------- --------------
Cash provided by (used in) investment (2,393,579) (3,098,063)
activities
----------------------------------------------- -------------- --------------
4
----------------------------------------------- -------------- --------------
Cash provided by (used in) financing 2,030,319 20,078,988
activities
----------------------------------------------- -------------- --------------
Effect of exchange rate change on cash 343,666 (103,898)
----------------------------------------------- -------------- --------------
Net increase in cash and cash equivalents (3,039,440) 3,059,576
----------------------------------------------- -------------- --------------
Cash and cash equivalents beginning of the 4,311,388 4,161,335
year
----------------------------------------------- -------------- --------------
Cash and cash equivalents ending of the year 1,271,948 7,220,911
----------------------------------------------- -------------- --------------
Cash payments for interest 2,666,482 2,559,633
----------------------------------------------- -------------- --------------
Cash payment (receipts) for taxes 48,277 77,702
----------------------------------------------- -------------- --------------
Operating activities:
Total net cash used in operating activities in the nine months ended September
30, 2007 was reduced by $10.8 million to approximate $3 million as comparing
with about $13.8 million for the same period in 2006. The decrease in cash used
in operating activities was primarily because the increase in accounts
receivable (about $3 million of increase) in the first nine months ended
September 30, 2007 was significantly dropped comparing with about $22.2 million
of increase in accounts receivable for the same period in 2006. In addition, the
increase in inventory (about $1.9 million of increase) was also less than that
(about $ 5.6 million of increase) in 2006. Net working capital at September 30,
2007 totaled $11.9 million comparing with $10.3 million at December 31, 2006, an
increase of $1.6 million. Component of this increase included an increase in
inventory, accounts receivable, related party receivable.
Investing activities:
Net cash used in investing activities decreased by approximately $0.7 million to
$2.4 million in the nine months ended September 30, 2007 comparing with $3.1
million for the same period in 2006. The decrease in cash used in investing
activities was due primarily to a reduction in capital expenditure. In 2006,
there was an increase in investment on newly-established full function
aftermarket service centers in Qingdao, which resulted in corresponding increase
in fixed assets such as buildings and equipments etc. This investment did not
repeat in 2007.
Financing activities:
Net cash provided by financing activities decreased by $18.0 million to about $2
million in the first nine months ended September 30, 2007 comparing with about
$20 million for the same period in 2006. The decrease in cash provided by
financing activities was primarily due to the decrease of amount used in trade
financing. Export bill purchase, import bill advance, documents against payment
and documents against acceptance mainly constitute the Company's short term
borrowings. Due to the Company could get longer credit term from its suppliers
5
in 2007 than it was in 2006, the accounts payable was increased, while the need
for import bill advance and export bill purchase etc. was reduced. This resulted
in the increase in short term borrowings (about $2 million of increase) at
September 30, 2007 significantly less than the increase in short terms
borrowings for the same period in 2006 (about $23 million of increase). In
addition, the Company had long-term debt about $2.5 million at September 30,
2006, and there was none at September 30, 2007.
Revolving credit facility:
As of September 30, 2007, the Company could get total revolving credit facility
up to about $111.7 million from cooperative commercial banks (of which up to
$25.2 million may be utilized in the form of letters of credit). As of September
30, 2007 the outstanding of the credit facility used was about $42.2 million.
Import bill advance, export bill purchase, packing loan, consignment of
collection, documents against payment, documents against acceptance and letters
of credit mainly constitute the credit facility. Corresponding financial charges
are based on the interest rate defined in each individual contract between the
Company and the banks. In general, the interest rate for import bill advances
and export bill purchases is based on the average of three months LIBOR plus
0.8%. The finance charge for opening a letter of credit is approximately 0.1%;
finance charges for documents against payment and documents against acceptance
are at a rate fluctuating around 0.1%. The letters of credit negotiation charge
is at 0.125%. In total, the interest expense and miscellaneous financial charges
incurred as of September 30, 2007 was about $2.9 million.
The obligations of credit are guaranteed by Sentaida Group Ltd, Sentaida Rubber
Co. Ltd, and also bear the personal guarantee of one of the stockholders of
Sentaida Group. The contractual agreements with banks contain covenants which
restrict the Company's ability to incur additional debt, enter into guarantees,
make loans and investments, and modify certain material agreements, and other
customary covenants. The Company has not violated any of the covenants during
the period reported.
6
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Below are the names and certain information regarding the Company's
executive officers and directors following completion of the acquisition.
- --------------------------------------------------------------------------------
NAME AGE POSITION
- --------------------------------------------------------------------------------
Qin Long 42 Chairman of the Board and Chief Executive Officer
- --------------------------------------------------------------------------------
Jeff Chen 46 Director and President
- --------------------------------------------------------------------------------
Ji Gongsheng 42 Direcotr and Vice President and General Manager
of Qingdao Qingdao Free-Trading Zone Sentaida
International Trade Co., Ltd.
- --------------------------------------------------------------------------------
Liang Junfeng 47 Director and Vice President and General Manager
of Qingdao Sentaida Tire Co., Ltd
- --------------------------------------------------------------------------------
Liang Junbao 44 Director and Chief Financial Officer
- --------------------------------------------------------------------------------
Officers are elected annually by the Board of Directors, at the Company's
annual meeting, to hold such office until an officer's successor has been duly
appointed and qualified, unless an officer sooner dies, resigns or is removed by
the Board.
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
Mr. Qin Long, Chairman & CEO of the Company: age 42, worked as general
manager in Tizong Rubber Company in Qingdao from 1990 to 1998. He joined the
Company as a founder and chairman of board in 2000. In the last 7 years, Mr. Qin
has led the Company and built it from a start-up. Under his leadership, the
Company has grown from one single line of business in natural rubber trading to
today's world-wide marketing and distribution of both rubber and tires. The
Company's annual sales have increased from a few million dollars in 2000 to $327
million in 2006.
Mr. Jeff Chen, Board Director and President of Zhongsen Holdings Co., Ltd.,
age 46, graduated from Beijing Foreign Studies University in 1983 with a major
in International Trade. Before joining Zhongsen Holdings in 2006, he served as
President of Aeon Holdings Co. in Hong Kong for four (4 ) years. Prior to that,
he held several senior managerial positions in different international
companies, which include SinoChem, where he had served as General Manager for
31
Eastern China Region for 12 years and led the region to generate RMB 3 billion
of annual sales in 2000.
Mr. Ji Gongsheng, Vice President of the Company and General Manager of
Qingdao (F.T.Z) Sentaida Int'l Trade Co., Ltd. age 42, graduated from Fudan
University with a major in Economics. Before he joined the Company in 2004, he
had worked as General Manager of the Rubber Division of SinoChem International
Trading Group for nine (9) years. Prior to that, he worked as Division Manager
at Qingdao Light & Chemical Industrial Company from 1984 to 1995. Mr. Ji is a
well-known trader in the China rubber industry.
Mr. Liang Junfeng, Vice President of the Company and General Manager of
Qingdao Sentaida Tire Co., Ltd., age 47. He joined Qingdao F.T.Z. Sentaida
International Trading Co. in 2002 and founded Qingdao Sentaida Tire Co., with
Mr. Qin Long. In the last three years, he has led the Company's Domestic Tire
business division and generated over RMB 1.3 billion of aggregate sales. Before
he joined the Company, he worked as Sales Manager in Weihai Triangle Tire Co,
one of the largest tire-makers in China, for 9 years. From 1980 to 1993, he
served as Sales Manager at Tai'an City Merchant Supply Company.
Mr. Liang Junbao, Chief Financial Officer, age 44, Certified Senior
Accountant, graduated from Tianjin University with an MBA degree in 1996. Mr.
Liang has served in this capacity since he joined the Company in December 2002.
Prior to that, he had worked as Chief Accountant and CFO at Weihai Triangle Tire
Co. for eight (8) years. From 1988 to 1994, Mr. Liang was a manager in the
Finance Department of Ningyang Fertilizer Factory in Ningyang County, Shandong
Province.
EXECUTIVE COMPENSATION
No compensation has been paid to any executive office during the past three
years.
There are no current employment agreements between any individuals and the
Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
F.T.Z Sentaida has business relationship with Qingdao Sentaida Rubber Co.
Ltd. ("Sentaida Rubber"). Sentaida rubber is a subsidiary of Sentaida Group Co.,
Ltd, which also owned 51% of shares of Sentaida Tires and F.T.Z Sentaida before
Sentaida Tires and F.T.Z Sentaida are acquired by the Company. Until December
31, 2006, F.T.Z Sentaida had about $19.6 million of related party receivable,
which was payable by Sentaida rubber. There is an agreement between FTZ Sentaida
and Sentaida Rubber, which states that all the amounts owed by Sentaida Rubber
will be paid within one year. All the debts are guaranteed by Sentaida Group
Co., Ltd.
LQJ Global Tire ("LQJ") is another related party. One of its shareholders
is Mr. Qin Long (one of the directors of Sentaida Group) who owns 70% of LQJ's
shares. In 2006, LQJ accounted for about 71% of the related party sales, and
about 18% of the related party receivables (approximately $5 million). The sales
32
to LQJ are normal business operation and the settlement of payment is made under
"document against acceptance" in 60 days.
As current plan, these related transactions will be resolved by cash and
fixed asset transfer. Detail procedure for fixed asset transaction is in
discussion with financial and legal expert.
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth information as of January 1, 2008, both
before giving effect to the Transactions, concerning the beneficial ownership of
the Common Stock of the Company by each person who is known to the Company to
own beneficially more than five percent of the outstanding shares of Common
Stock of the Company:
Percentage of
Common Stock Number of Shares
Number of Shares of Outstanding of Common Stock Percentage of Common
Name and Address Common Stock Before Beneficially Owned Stock Outstanding
of Beneficial Owner Beneficially Owned Transactions After Transactions After Transactions
- ------------------- ------------------ ------------ ------------------ ---------------------
Kevin B. Halter, Jr. (1) 412,802 45.3 411,695 1.6
2591 Dallas Parkway, Suite 102
Frisco, Texas 75034
Pam J. Halter 0 0 0 0
2591 Dallas Parkway, Suite 102
Frisco, Texas 75034
Halter Capital Corporation 593,605 65.1 591,391 2.3
2591 Dallas Parkway, Suite 102
Frisco, Texas 75034
All Executive Officers and Directors as 593,605 65.1 591,391 2.3
a Group (two persons)
(1) Kevin B. Halter, Jr. owns 50% of Halter Capital Corporation; 50% of Halter
Capital Corporation's stock ownership is included in his holdings, namely
296,802 shares.
As of January 1, 2008, there were 912,214 shares of common stock issued and
outstanding. We have no compensation plans (including individual compensation
arrangements) under which shares of our common stock are authorized for
33
issuance. Prior to closing, the Company will redeem 2,214 shares from Halter
Capital Corporation at par value.
The following table sets forth information as of January 1, 2008 both
before and after giving effect to the Transactions, concerning the beneficial
ownership of the common stock of the Company by each person who is known to the
Company to own beneficially more than five percent of the outstanding shares of
common stock.
Percentage of
Number of Shares of Common Stock Number of Shares
Common Stock Outstanding Common Stock Percentage of Common
Name and Address of Beneficially Owned Before Beneficially Owned Stock Outstanding
Beneficial Owner(1)(3) Before Transactions Transactions After Transactions(2) After Transactions
---------------------- ------------------- ------------ --------------------- ------------------
Qin Long 0 0 11,310,000 43.5
Jeff Chen 0 0 11,700,000 45.0
All offices and directors as a 0 0 23,010,000 88.5
group (5 persons)
(1) The address for each beneficial owner is No. 177 Chengyang Section, 308
National Highway, Danshan Industrial Area, Qingdao, China.
(2) As used herein, a person is deemed to be the "beneficial owner" of a
security if he or she has or shares voting or investment power with respect
to such security, or has the right to acquire such ownership within sixty
(60) days. As used herein, "voting power" includes the power to vote or to
direct the voting of shares, and "investment powers" includes the power to
dispose or to direct the disposition of shares, irrespective of any
economic interest therein.
(3) Except as otherwise indicated by footnote, the persons names in the table
have sole voting and investment power with respect to all Common Stock
beneficially owned by them.
Description of Registrant's Securities.
The following summary is qualified in its entirety by reference to the
Company's Articles of Incorporation ("Articles") and its Bylaws. The Company's
authorized capital stock consists of 100,000,000 shares of common stock, $.001
par value per share, and 10,000,000 shares of preferred stock, $.001 par value
per share.
Common Stock
As of February 5, 2008, (post closing) 26,000,000 common shares of the
Company's common stock are held of record by approximately 32 holders and an
34
unknown number of beneficial holders. Each share of common stock entitles the
holder of record thereof to cast one vote on all matters acted upon at the
Company's stockholder meetings. Directors are elected by a plurality vote.
Because holders of common stock do not have cumulative voting rights, holders or
a single holder of more than 50% of the outstanding shares of common stock
present and voting at an annual meeting at which a quorum is present can elect
all of the Company's directors. Holders of common stock have no preemptive
rights and have no right to convert their common stock into any other
securities. All of the outstanding shares of common stock are fully paid and
non-assessable, and the shares of common stock to be issued in connection with
the exercise of options under the Option Plan will be fully paid and
non-assessable when issued.
Holders of common stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors in its sole
discretion from funds legally available there for. In the event the Company is
liquidated, dissolved or wound up, holders of common stock are entitled to share
ratably in the assets remaining after liabilities and all accrued and unpaid
cash dividends are paid.
Preferred Stock
The Board of Directors of the Company has the authority to divide the
authorized preferred stock into series, the shares of each series to have such
relative rights and preferences as shall be fixed and determined by the Board of
Directors. The provisions of a particular series of authorized preferred stock,
as designated by the Board of Directors, may include restrictions on the payment
of dividends on common stock. Such provisions may also include restrictions on
the ability of the Company to purchase shares of common stock or to purchase or
redeem shares of a particular series of authorized preferred stock. Depending
upon the voting rights granted to any series of authorized preferred stock,
issuance thereof could result in a reduction in the voting power of the holders
of common stock. In the event of any dissolution, liquidation or winding up of
the Company, whether voluntary or involuntary, the holders of the preferred
stock will receive, in priority over the holders of common stock, a liquidation
preference established by the Board of Directors, together with accumulated and
unpaid dividends. Depending upon the consideration paid for authorized preferred
stock, the liquidation preference of authorized preferred stock and other
matters, the issuance of authorized preferred stock could result in a reduction
in the assets available for distribution to the holders of common stock in the
event of the liquidation of the Company.
There are no shares of preferred stock designated or issued as of the date
hereof.
Certain Rights of Holders of Common Stock
The Company is a Nevada corporation organized under Chapter 78 of the
Nevada Revised Statutes ("NRS"). Accordingly, the rights of the holders of
common stock are governed by Nevada law. Although it is impracticable to set
forth all of the material provisions of the NRS or the Company's Articles and
Bylaws, the following is a summary of certain significant provisions of the NRS
35
and/or the Company's Articles and Bylaws that affect the rights of securities
holders.
Anti Takeover Provisions
Special Meetings of Stockholders; Director Nominees
---------------------------------------------------
The Company's Bylaws and Articles provide that special meetings of
stockholders may be called by stockholders only if the holders of at least 80%
of the common stock join in such action. The Bylaws and Articles of the Company
also provide that stockholders desiring to nominate a person for election to the
Board of Directors must submit their nominations to the Company at least 90 days
in advance of the date on which the last annual stockholders' meeting was held,
and provide that the number of directors to be elected (within the minimum -
maximum range of 1 to 21 set forth in the Articles and Bylaws of the Company)
shall be determined by the Board of Directors or by the holders of at least a
majority of the common stock. While these provisions of the Articles and Bylaws
of the Company have been established to provide a more cost-efficient method of
calling special meetings of stockholders and a more orderly and complete
presentation and consideration of stockholder nominations, they could have the
effect of discouraging certain stockholder actions or opposition to candidates
selected by the Board of Directors and provide incumbent management a greater
opportunity to oppose stockholder nominees or hostile actions by stockholders.
The affirmative vote of holders of at least a majority of the common stock is
necessary to amend, alter or adopt any provision inconsistent with or repeal any
of these provisions.
Removal of Directors
--------------------
The Articles of the Company provide that directors may be removed from
office only for cause by the affirmative vote of holders of at least a majority
of the common stock. Cause means proof beyond the existence of a reasonable
doubt that a director has been convicted of a felony, committed gross negligence
or willful misconduct resulting in a material detriment to the Company, or
committed a material breach of such director's fiduciary duty to the Company
resulting in a material detriment to the Company. The inability to remove
directors except for cause could provide incumbent management with a greater
opportunity to oppose hostile actions by stockholders. The affirmative vote of
holders of at least a majority of the common stock is necessary to amend, alter
or adopt any provision inconsistent with or repeal this provision.
Control Share Statute
---------------------
Sections 78.378 - 78.3793 of the Nevada statutes constitute Nevada's
control share statute, which set forth restrictions on the acquisition of a
controlling interest in a Nevada corporation which does business in Nevada
(directly or through an affiliated corporation) and which has 200 or more
stockholders, at least 100 of whom are stockholders of record and residents of
Nevada. A controlling interest is defined as ownership of common stock
36
sufficient to enable a person directly or indirectly and individually or in
association with others to exercise voting power over at least 20% but less than
33.3% of the common stock, or at least 33.3% but less than a majority of the
common stock, or a majority or more of the common stock. Generally, any person
acquiring a controlling interest must request a special meeting of stockholders
to vote on whether the shares constituting the controlling interest will be
afforded full voting rights, or something less. The affirmative vote of the
holders of a majority of the common stock, exclusive of the control shares, is
binding. If full voting rights are not granted, the control shares may be
redeemed by the Company under certain circumstances. The Company does not
believe the foregoing provisions of the Nevada statutes are presently applicable
to it because it does not presently conduct business in Nevada; however, if in
the future it does conduct business in Nevada then such provisions may apply.
Business Combination Statute
----------------------------
Sections 78.411 - 78.444 of the NRS set forth restrictions and prohibitions
relating to certain business combinations and prohibitions relating to certain
business combinations with interested stockholders. These Sections generally
prohibit any business combination involving a corporation and a person that
beneficially owns 10% or more of the common stock of that company (an
"Interested Stockholder") (A) within five years after the date (the "Acquisition
Date") the Interested Stockholder became an Interested Stockholder, unless,
prior to the Acquisition Date, the corporation's board of directors had approved
the combination or the purchase of shares resulting in the Interested
Stockholder becoming an Interested Stockholder; or (B) unless five years have
elapsed since the Acquisition Date and the combination has been approved by the
holders of a majority of common stock not owned by the Interested Stockholder
and its affiliates and associates; or (C) unless the holders of common stock
will receive in such combination, cash and/or property having a fair market
value equal to the higher of (a) the market value per share of common stock on
the date of announcement of the combination or the Acquisition Date, whichever
is higher, plus interest compounded annually through the date of consummation of
the combination less the aggregate amount of any cash dividends and the market
value of other dividends, or (b) the highest price per share paid by the
Interested Stockholder for shares of common stock acquired at a time when he
owned 5% or more of the outstanding shares of common stock and which acquisition
occurred at any time within five years before the date of announcement of the
combination or the Acquisition Date, whichever results in the higher price, plus
interest compounded annually from the earliest date on which such highest price
per share was paid less the aggregate amount of any cash dividends and the
market value of other dividends. For purposes of these provisions, a "business
combination" is generally defined to include (A) any merger or consolidation of
a corporation or a subsidiary with or into an Interested Stockholder or an
affiliate or associate; (B) the sale, lease or other disposition by a
corporation to an Interested Stockholder or an affiliate or associate of assets
of that corporation representing 5% or more of the value of its assets on a
consolidated basis or 10% or more of its earning power or net income; (C) the
issuance by a corporation of any of its securities to an Interested Stockholder
or an affiliate or associate having an aggregate market value equal to 5% or
37
more of the aggregate market value of all outstanding shares of that
corporation; (D) the adoption of plan to liquidate or dissolve a corporation
proposed by or under an agreement with the Interested Stockholder or an
affiliate or associate; (E) any receipt by the Interested Stockholder or an
affiliate, except proportionately as a stockholder, of any loan, advance,
guarantee, pledge or other financial assistance or tax credit or other tax
advantage; and (F) any recapitalization or reclassification of securities or
other transaction that would increase the proportionate shares of outstanding
owned by the Interested Stockholder or an affiliate. Sections 78.411-78.444 of
the Nevada statutes are presently applicable to the Company.
Mergers, Consolidations and Sales of Assets
-------------------------------------------
Nevada law provides that an agreement of merger or consolidation, or the
sale or other disposition of all or substantially all of a corporation's assets,
must be approved by the affirmative vote of the holders of a majority of the
voting power of a corporation (except that no vote of the stockholders of the
surviving corporation is required to approve a merger if certain conditions are
met, unless the articles of incorporation of that corporation states otherwise,
and except that no vote of stockholders is required for certain mergers between
a corporation and a subsidiary), but does not require the separate vote of each
class of stock unless the corporation's articles of incorporation provides
otherwise (except that class voting is required in a merger if shares of the
class are being exchanged or if certain other rights of the class are affected).
The Company's Articles do not alter these provisions of Nevada law.
Directors; Removal of Directors
-------------------------------
Under Nevada law, the number of directors may be fixed by, or determined in
the manner provided in the articles of incorporation or bylaws of a corporation,
and the board of directors may be divided into classes as long as at least 25%
in number of the directors are elected annually. Nevada law further requires
that a corporation have at least one director. Directors may be removed under
Nevada law with or without cause by the holders of not less than a majority of
the voting power of the corporation, unless a greater percentage is set forth in
the articles of incorporation. The Articles of the Company provide that
directors may be removed only for cause by a majority of stockholders.
Amendments to Bylaws
--------------------
The Company's Bylaws may be amended by the Board of Directors or
stockholders, provided, however that certain provisions can only be amended by
the affirmative vote of holders of at least a majority of the common stock.
These provisions relate to special meetings of stockholders, actions by written
consent of stockholders, nomination of directors by stockholders, proceedings
for the conduct of stockholder's meetings and the procedures for fixing the
number of and electing directors.
38
Limitation on Liability of Directors
------------------------------------
Section 78.037 of the NRS provides that a Nevada corporation may limit the
personal liability of a director or officer to a corporation or its stockholders
for breaches of fiduciary duty, except that such provision may not limit
liability for acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law, or payment of dividends or other distributions in
violation of the Nevada statutes. The Company's Articles provide that no
director shall be personally liable to the Company or its stockholders for
monetary damages or breach of fiduciary duty as a director, except for liability
(A) for any breach of the director's duty of loyalty to the Company or its
stockholders, (B) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (C) liability under the
Nevada statutes, or (D) for any transaction from which the director derived an
improper personal benefit.
In the opinion of the Securities and Exchange Commission, the
indemnification and limitation of liability provisions described above would not
eliminate or limit the liability of directors and officers under the federal
securities laws.
Appraisal Rights
----------------
The Nevada statutes provide dissenting or objecting security holders with
the right to receive the fair value of their securities in connection with
certain extraordinary corporate transactions. These appraisal rights are
available with respect to certain mergers and share exchanges and in connection
with the granting of full voting rights to control shares acquired by an
interested stockholder. However, unless the transaction is subject to the
control share of the Nevada statutes, a stockholder of a Nevada corporation may
not assert dissenters' rights, in most cases, if the stock is listed on a
national securities exchange or held by at least 2,000 stockholders of record
(unless the articles of incorporation of the corporation expressly provide
otherwise or the security holders are required to exchange their shares for
anything other than shares of the surviving corporation or another publicly held
corporation that is listed on a national securities exchange or held of record
by more than 2,000 stockholders). The Company's Articles do not alter these
provisions of Nevada law.
Distributions
-------------
Dividends and other distributions to security holders are permitted under
the Nevada statutes as authorized by a corporation's articles of incorporation
and its board of directors if, after giving effect to the distribution, the
corporation would be able to pay its debts as they become due in the usual
course of business and the corporation's total assets would exceed the sum of
its total liabilities plus (unless the articles of incorporation provide
otherwise) the amount needed to satisfy the preferential rights on dissolution
of holders of stock whose preferential rights are superior to those of the
shares receiving the distribution.
39
Preemptive Rights
-----------------
Under the Nevada statutes, stockholders of Nevada corporations organized
prior to October 1, 1991 have preemptive rights unless the articles of
incorporation expressly deny those rights or the stock issuance is among those
described in Section 78.265. A stockholder who has preemptive rights is
entitled, on terms and conditions prescribed by the board of directors, to
acquire proportional amounts of the corporation's unissued or treasury shares in
most instances in which the board has decided to issue them. The Company's
Articles expressly deny the availability of preemptive rights to the Company's
stockholders.
Cumulative Voting
-----------------
Under the Nevada statutes, the articles of incorporation of a corporation
may provide for cumulative voting, which means that the stockholders are
entitled to multiply the number of votes they are entitled to cast by the number
of directors for whom they are entitled to vote and then cast the product for a
single candidate or distribute the product among two or more candidates.
Cumulative voting is not available to stockholders of a Nevada corporation,
unless its articles of incorporation expressly provide for that voting right.
The Company's Articles do not contain a provision permitting stockholders to
cumulate their votes when electing directors.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the OTC Bulletin Board, referred to
herein as the OTCBB, under the symbol "RUBD". Historically the shares have
traded very infrequently and actual price information is not readily available.
DIVIDENDS
The Company has never declared or paid any cash dividends on its common
stock. The Company currently intends to retain future earnings, if any, to
finance the expansion of its business. As a result, the Company does not
anticipate paying any cash dividends in the foreseeable future.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's directors and executive officers are indemnified as provided
by the Nevada Revised Statutes and the Company's Bylaws. These provisions state
that the Company's directors may cause the Company to indemnify a director or
former director against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, actually and reasonably incurred
by him as a result of him acting as a director. The indemnification of costs can
include an amount paid to settle an action or satisfy a judgment. Such
indemnification is at the discretion of the Company's board of directors and is
40
subject to the Securities and Exchange Commission's policy regarding
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, or otherwise, the Company 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.
ITEM 4.01 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On February 5, 2008, in connection with the acquisition of Zhongsen, Rubd
terminated the services of Sherb & Co., LLP, as the Company's independent
auditor. Sherb & Co., LLP performed the audits for the year ended May 31, 2007,
which report did not contain any adverse opinion or a disclaimer of opinion, nor
was it qualified as to audit scope or accounting principles but did carry a
modification as to going concern. During Rubd's most recent fiscal year and
during any subsequent interim period prior to the February 5 termination as
Rubd's independent auditors, there were no disagreements which Sherb & Co., LLP,
with respect to accounting or auditing issues of the type discussed in Item
304(a)(iv) of Regulation S-B.
On February 5, 2008, Rubd provided Sherb & Co., LLP with a copy of this
disclosure and requested that it furnish a letter to Rubd, addressed to the SEC,
stating that it agreed with the statements made herein or the reasons why it
disagreed.
A letter from Sherb & Co., LLP was provided on February 5, 2008 and is
attached as an exhibit hereto.
On February 5, 2008, Rubd's board of directors approved the engagement of
the firm of Bernstein & Pinchuk LLP. as Rubd's independent auditors. During
Rubd's two most recent fiscal years or any subsequent interim period prior to
engaging Bernstein & Pinchuk LLP, Rubd had not consulted Bernstein & Pinchuk LLP
regarding any of the accounting or auditing concerns stated in Item 304(a)(2) of
Regulation S-B.
41
ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT.
See Item 2.01.
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS;
APPOINTMENT OF PRINCIPAL OFFICERS.
See Item 1.01.
ITEM 5.06 CHANGE IN SHELL COMPANY STATUS.
See Item 2.01
ITEM 8.01 OTHER EVENTS
Effective immediately, the fiscal year of the Company shall be changed to
end on December 31 from May 31.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
(b) Pro forma financial information.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
16.1 Auditors Letter per Item 4.01
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
RUB A DUB SOAP, INC.
Dated: February 5, 2008 By: /s/ Qin Long
-----------------------------------
Name: QIN Long
Title: Chief Executive Officer
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd,
Qingdao Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd
We have audited the accompanying combined balance sheets of Qingdao Free-Trading
Zone Sentaida International Trade Co., Ltd, Qingdao Sentaida Tires Co., Ltd. and
Zhongsen Trading Co., Ltd. (hereinafter referred to collectively as "the
Company"), as of December 31, 2006 and 2005 and the related combined statements
of operations and comprehensive income, changes in stockholders' equity, and
cash flows for each of the three years ended December 31, 2006. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2006 and 2005 and the results of its operations, comprehensive
income and its cash flows for each of the three years ended December 31, 2006 in
conformity with accounting principles generally accepted in the United States of
America.
The statements of cash flows have been changed to reflect the reclassification
of restricted cash into investing activities. Note 2 has been changed to include
an additional disclosure.
/s/ Bernstein & Pinchuk LLP
New York, New York
September 13, 2007-except for the changes to the statements of cash flows to
reflect the reclassification of restricted cash into investing activities and an
additioanl disclosure included in note 2 for which the date is February 1, 2008.
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd,
Qingdao Sentaida Tires Co., Ltd, and
Zhongsen Trading Co., Ltd.
Combined Balance sheets
December 31,
(US dollars)
----------------------
2006 2005
---------- ----------
ASSETS
CURRENT ASSETS
Cash 4,311,388 4,161,335
Restricted cash 7,672,729 5,537,398
Notes receivable 3,562,308 1,385,312
Accounts receivable, net 19,345,863 14,400,434
Related parties receivables 28,349,891 7,825,023
Inventories , net 8,825,745 10,552,109
Other receivables and prepayments 7,906,661 15,720,703
Prepaid expenses 3,186 1,801
Other assets 51,362 194,252
---------- ----------
Total Current Assets 80,029,133 59,778,367
---------- ----------
PROPERTY, PLANT & EQUIPMENT, net 5,045,953 2,875,297
---------- ----------
85,075,086 62,653,664
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings 38,626,247 22,105,740
Notes payable 13,482,571 13,005,673
Accounts payable and accrued expenses 10,633,850 6,103,434
Related parties payables 3,315,847 --
Other payables and accruals 497,327 641,779
Taxes payable 395,183 684,809
Other liabiltities 2,747,264 7,385,572
---------- ----------
Total Current Liabilities 69,698,289 49,927,006
---------- ----------
LONG TERM LIABILITIES
Long term loan -- 2,477,271
STOCKHOLDERS' EQUITY
Common stock -- --
Paid in capital 3,048,765 3,048,765
Additional paid in capital 1,791 --
Appropriated of retained earnings 1,143,165 998,876
Unappropriated of retained earnings 10,483,368 6,032,521
Accumulated other comprehensive income 699,707 169,225
---------- ----------
Total Stockholders' Equity 15,376,797 10,249,387
---------- ----------
85,075,086 62,653,664
========== ==========
See notes to the combined financial statements
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd,
Qingdao Sentaida Tires Co., Ltd, and
Zhongsen Trading Co., Ltd.
Combined Statements of Operations and Comprehensive Income
For the Years Ended Dedember 31,
(US dollars)
-----------------------------------------------
2006 2005 2004
------------- ------------- -------------
SALES $ 332,535,270 $ 245,086,065 $ 164,260,125
COST OF SALES 315,093,435 230,577,464 157,799,507
------------- ------------- -------------
GROSS PROFIT 17,441,835 14,508,602 6,460,618
------------- ------------- -------------
OPERATING EXPENSES
Freight charges 5,847,439 3,205,514 1,876,171
Commissions and rebates 145,621 1,951,499 330,249
Insurance 270,079 268,125 53,881
Selling Expenses 2,319,384 1,747,178 182,776
General and Administrative Expenses 482,299 398,315 78,912
------------- ------------- -------------
9,064,821 7,570,632 2,521,989
------------- ------------- -------------
INCOME FROM OPERATIONS 8,377,014 6,937,970 3,938,629
------------- ------------- -------------
OTHER INCOME (EXPENSES)
Miscellaneous income 265,535 (189,880) (136,457)
Interest expense (3,474,729) (2,299,172) (1,219,093)
------------- ------------- -------------
(3,209,194) (2,489,052) (1,355,550)
------------- ------------- -------------
INCOME BEFORE TAXES 5,167,819 4,448,918 2,583,078
------------- ------------- -------------
PROVISION FOR TAXES
Current 572,682 205,158 862,252
------------- ------------- -------------
------------- ------------- -------------
NET INCOME 4,595,137 4,243,759 1,720,826
------------- ------------- -------------
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain (loss) 96,322 (15,820) (4,445)
------------- ------------- -------------
COMPREHENSIVE INCOME 4,691,459 4,227,939 1,716,381
============= ============= =============
EARNINGS PER COMMON SHARE:
Basid and Diluted NA NA NA
============= ============= =============
See notes to the combined financial statements
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd,
Qingdao Sentaida Tires Co., Ltd, and
Zhongsen Trading Co., Ltd.
Combined Statements of Cash Flows
(US dollars)
----------------------------------------
Years ended December 31,
----------------------------------------
2006 2005 2004
----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net Income 4,595,137 4,243,759 1,720,826
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation 570,110 176,816 27,275
Changes in operating assets and liabilities
Decrease (Increase) in operating assets:
Accounts receivable (4,381,897) 8,550,959 (14,780,042)
Notes receivable (2,087,747) (1,314,616) (48,267)
Related parties receivables (19,851,279) 7,616,580 (15,162,552)
Inventories 2,029,111 (7,505,999) (1,647,300)
Other receivables 8,157,115 (11,243,381) (1,429,229)
Prepaid expenses (1,299) (1,773) --
Prepayments 1,413 (1,375) --
Intangible assets (42,787) -- --
Increase (Decrease) in operating liabilites:
Accounts payable and accrued expenses 4,241,435 684,577 5,023,594
Notes payable 50,113 12,068,329 --
Related parties payables 3,247,556 -- --
Other payables and accruals (162,052) (1,412,428) 7,860,828
Taxes payable (305,616) (538,922) 782,860
Other liabilities (4,779,562) (402,090) 7,593,024
----------- ----------- -----------
Net Cash Provided (Used) by Operating Activities (8,720,251) 10,920,436 (10,058,983)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (2,628,317) (2,935,294) (120,240)
Purchase of land lease -- -- --
Restricted cash (1,954,068) (2,531,890) (2,928,217)
Investment 191,493 (192,856) --
Construction in progress (30,317) (3,097) --
----------- ----------- -----------
Net Cash Used by Investing Activities (4,421,209) (5,663,135) (3,048,456)
CASH FLOWS FROM FINANCING ACTIVITIES
Disposal of investment 1,791 -- --
Net change in short term borrowings 15,796,892 (3,538,303) 9,603,508
Common shares issued -- -- --
Long-term borrowings (2,558,363) -- 2,413,564
----------- ----------- -----------
Net Cash Provided (Used) by Financing Activities 13,240,320 (2,299,667) 12,017,073
Effect of exchange rate change on cash 51,192 186,470 (5,281)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 150,053 3,144,103 (1,095,647)
CASH AND CASH EQUIVALENTS, beginning of year 4,161,335 1,017,232 2,112,879
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year 4,311,388 4,161,335 1,017,232
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
- ------------------------
Interest paid 3,474,729 2,336,277 1,219,200
=========== =========== ===========
Income taxes paid 226,875 281,165 91,432
=========== =========== ===========
See notes to the combined financial statements
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd,
Qingdao Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
Combined Statements Of Changes In Stockholders' Equity
For the Years Ended December 31, 2006, 2005 And 2004
(US dollars)
----------------------------------------------------------------------------------------
Additional Appropriated Unappropriated Accumulated Other
Paid-in Paid-in Retained Retained Comprehensive Stockholders'
Capital Capital Earnings Earnings Income Equity
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 1, 2004 $ 1,810,129 $ -- $ 160,022 $ 906,790 $ 221.00 $ 2,877,162
Additional Paid-In Capital
Net income -- -- 257,457 1,463,369 -- 1,720,826
Foreign currency translation -- -- -- -- (4,445) (4,445)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 $ 1,810,129 $ -- $ 417,479 $ 2,370,158 $ (4,224) $ 4,593,543
------------ ------------ ------------ ------------ ------------ ------------
Paid-In Capital For
Sentaida Tire 1,238,636 -- -- -- -- 1,238,636
Net income -- -- 581,397 3,662,362 -- 4,243,759
Foreign currency translation -- -- -- -- (15,820) (15,820)
Effect of exchange rate
change on SE -- -- -- -- 189,269 189,269
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2005 $ 3,048,765 $ -- $ 998,876 $ 6,032,521 $ 169,225 $ 10,249,387
============ ============ ============ ============ ============ ============
Additional Paid-In Capital -- 1,791 -- -- -- 1,791
Net income -- -- 144,289 4,450,848 -- 4,595,137
Foreign currency translation -- -- -- -- 96,322 96,322
Effect of exchange rate
change on SE -- -- -- -- 434,160 434,160
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2006 $ 3,048,765 $ 1,791 $ 1,143,165 $ 10,483,368 $ 699,707 $ 15,376,796
============ ============ ============ ============ ============ ============
See notes to the combined financial statements
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Company and Business:
Principles of Combination
The accompanying financial statements include the combined accounts of
Qingdao Free-TradingZone Sentaida International Trade Co., Ltd. ("F.T.Z.
Sentaida"), Qindao Sentaida Tires Co., Ltd. ("Sentaida Tires") and Zhongsen
Trading Co., Ltd. ("BVI"), collectively referred to as "the Company". All
intercompany accounts and transactions have been eliminated.
Organization
F.T.Z. Sentaida was formed in January 2000 under the corporate laws of the
People's Republic of China ("PRC"). It engages in the rubber import and
distribution and in the tire export business.
Sentaida Tires was established in December 2004 under the corporate laws of
the People's Republic of China ("PRC"). Its primary business is to sell and to
distribute tires in China's domestic market.
Zhongsen Trading was incorporated in the British Virgin Islands under the
International Business Company Act (Cap.291), in January 2005. It is also
involved in rubber import and distribution, and tire exports.
Nature of Business
F.T.Z. Sentaida's primary business is rubber imports and distribution. Its
net sales in rubber were about $213 million in 2006, which represented 64% of
the combined companies' net sales. The company has established close and
long-term business relationships with the world's top natural rubber suppliers
in Southeast Asia and its client base has covered a majority of the top Chinese
and foreign-invested tire manufacturers in China.
F.T.Z Sentaida's tires export sales generated $31 million which is
equivalent to 9% of the total company's net sales in 2006. It has established a
long-term export agent relationship with all major Chinese tire manufacturers
and carries selected Chinese brand tires in overseas market.
6
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Sentaida Tires is mainly involved in domestic tire sales and distribution.
In 2006, its net sales were about $42.9 million, which represented approximately
13% of the company's net sales. It has one of the largest independent tire
distribution networks in China with four major regional distribution facilities
selling around one thousand (1,000) independent tire dealers, retailers and
corporation clients. It has the most complete product offering in the tire
replacement market.
Zhongsen Trading Co., Ltd. (BVI) generated net sales of $45.6 million in
2006, which represented about 14% of the total net sales. The sales revenue on
BVI's tires export and its rubber import and distribution business was about $
40.8 million and $4.8 million, respectively.
2. Summary of significant accounting policies:
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 disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassification
Some amounts have been reclassified to conform to the current financial
statement presentation under GAAP. The classification amounts were comprised of
a change between prepaid expenses and tax payable, and a change between other
current assets, building and leasehold improvements and current liabilities as
of December 31, 2004, 2005 and 2006.
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Cash and Cash Equivalents
The Company considers all deposits with an original maturity of three
months or less and short-term highly liquid investments, which are readily
convertible into cash to be cash and cash equivalents in the combined financial
statements.
All cash in banks in China is uninsured. Although China is considered
economically stable, it is possible that unanticipated events could disrupt
banks' operation. Therefore, the Company has a credit risk exposure of uninsured
cash in banks.
Revenue Recognition
The Company recognizes revenue when title and risk of loss passes to the
customer.
In general, the Company does not allow customers to return products unless
there are defects in manufacturing or workmanship. Sales returns need to go
through a strict process and have to be authorized by management. Sales returns
are continually monitored. Based on historical experience of actual returns
management believes that the Company does not need to have a provision for sales
returns.
Concentration of Credit Risk
In the normal course of business, the Company may give credit to its
customers after performing a credit analysis based on a number of financial and
other criteria. The Company performs ongoing credit evaluations of customers'
financial condition and does not normally require collateral. However, letters
of credit and other security are occasionally required for certain new and
existing customers.
In the combined net sales, the concentration of risk mainly comes from the
customers of FTZ Sentaida and Zhongsen Trading (BVI). The top ten customers
accounted for approximately 48%, 44% and 53% of the combined net sales for the
fiscal years of 2006, 2005 and 2004, respectively.
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Details of concentration risk for fiscal 2006:
------------------------------------------------- ----------------- ----------------------------
Order of customers for contributing to combined Nature of percentage of combined net
net sales customers sales
------------------------------------------------- ----------------- ----------------------------
No. 1 Zhaoyuan Liao Rubber Product LLC Normal customer 15%
------------------------------------------------- ----------------- ----------------------------
No. 2 LQJ Global Tires Related party 11%
------------------------------------------------- ----------------- ----------------------------
No. 3 Sentaida Rubber LLC. Related party 4%
------------------------------------------------- ----------------- ----------------------------
Sum of No.4 customer to No. 10 customer Normal customer 18%
------------------------------------------------- ----------------- ----------------------------
Details of concentration risk for fiscal 2005:
------------------------------------------------- ----------------- ----------------------------
Order of customers for contributing to combined Nature of percentage of combined net
net sales customers sales
------------------------------------------------- ----------------- ----------------------------
No. Zisser Tire Auto Normal customer 13%
------------------------------------------------- ----------------- ----------------------------
No. 2 Zhaoyuan Liao Rubber Product LLC Normal customer 7%
------------------------------------------------- ----------------- ----------------------------
No. 3 Qingdao Doublestar Tire industrial LLC Normal customer 4%
------------------------------------------------- ----------------- ----------------------------
Sum of No.4 customer to No. 10 customer Normal customer 20%
------------------------------------------------- ----------------- ----------------------------
Details of concentration risk for fiscal 2004:
------------------------------------------------- ----------------- ----------------------------
Order of customers for contributing to combined Nature of percentage of combined net
net sales customers sales
------------------------------------------------- ----------------- ----------------------------
No. 1 Zhaoyuan Liao Rubber Product LLC Normal customer 13%
------------------------------------------------- ----------------- ----------------------------
No. 2 Zisser Tires and Auto Normal customer 9%
------------------------------------------------- ----------------- ----------------------------
No. 3 DAEWOO INT'L CORP Related party 7%
------------------------------------------------- ----------------- ----------------------------
Sum of No.4 customer to No. 10 customer Normal customer 24%
------------------------------------------------- ----------------- ----------------------------
Accounts receivable
Ten of our customers accounted for 89.4% and 92.3% of the accounts
receivable as at December 31, 2006 and 2005, respectively. In 2006, the top one
accounted for 19% of the account receivable. The second one accounted for 16%.
The third and the fourth accounted for 12% and 10% of the accounts receivable,
respectively.
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Allowance for doubtful accounts
The Company recognizes an allowance for doubtful accounts to ensure that
accounts receivable, related party receivables and other receivables are not
overstated due to any uncollectible accounts. Based on management's evaluation
of the customers' ability to make payment, the probability of inability to pay
is low; therefore, the Company did not make any allowance for doubtful accounts.
Inventories
For Sentaida Tires, inventories consist primarily of automotive tires,
custom wheels, automotive service accessories and related products. Inventories
are valued at the lower of cost (computed in accordance with the weighted
average method) or market. The Company performs periodic assessments to
determine the existence of obsolete, slow-moving and non-saleable inventories
and management believes there is no need to have an allowance for obsolescence.
The inventory of Sentaida Tires in 2005 and 2006 was about $4.6 million and $5.7
million respectively.
For Zhongsen Trading (BVI) and FTZ Sentaida, the inventory for rubber and
tires are stated at the lower of cost (computed in accordance with the
first-in-first-out method) or market. The inventory of tires in BVI and FTZ
Sentaida maintain at minimum level. FTZ Sentaida's inventory of rubber for the
years ended at December 31, 2005 and 2006 was approximately $5.9 million and $3
million, respectively. Management adjusts the inventory level each year
according to the fluctuation of the demand for rubber.
Property and Equipment
Property and equipment are stated at cost at date of acquisition. The
Company adopts the straight-line method of depreciation at annual rates
sufficient to depreciate the cost of the assets less estimated salvage value
over the assets' estimated useful lives. Maintenance and repair expenditures are
charged to expense as incurred and expenditures for improvements and major
renewals are capitalized. When an asset is sold or retired, the related
accumulated depreciation is removed from the account in the year.
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Impairment
Impairments of long-lived assets are recognized when events or changes in
circumstances indicate that the carrying amount of the asset or related groups
of assets may not be recoverable and the Company's estimate of undiscounted cash
flows over the assets' remaining estimated useful lives are less than the
assets' carrying value. Measurement of the amount of impairment may be based on
appraisals, market values of similar assets or estimated discounted future cash
flows resulting from the use and ultimate disposition of the asset.
Throughout the fiscal years 2006, 2005 and 2004, management has reviewed
the carrying value of long-term fixed assets for impairment when events or
circumstances indicate possible impairment. Management has concluded that the
estimated future cash flows anticipated to be generated during the remaining
life of these assets support their current net carrying value, thus, no
impairment charges have been recorded for such periods.
Goodwill and Other Intangible Assets
Under SFAS No. 142 "Goodwill and Other Intangible Assets," goodwill and
intangible assets with indefinite lives are no longer amortized, but are tested
for impairment annually and more frequently in the event of an impairment
indicator. SFAS No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives, and
reviewed whenever events or circumstances indicate impairment may exist.
Foreign currency translation
The functional currency of the Company is Chinese Yuan (RMB) and their reporting
currency is the US dollar. Combined balance sheet accounts are translated into
US dollars at the period-end exchange rate and all revenue and expenses are
translated into US dollars at the average exchange rate prevailing during the
period in which these items arise. Translation gains and losses are deferred and
accumulated as a component of other comprehensive income in the shareholders'
equity section of the balance sheet. Exchange transaction gains and losses that
arise from exchange rate fluctuations affecting
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
transactions denominated in a currency other than the functional currency are
included in the statement of operation as incurred. The foreign currency
exchange losses were about $4,445 and $15,820 for 2004 and 2005. The foreign
currency exchange gain in 2006 was about $ 96,322.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments",
requires disclosing fair value to the extent practicable for financial
instruments that are recognized or unrecognized in the balance sheet. The fair
value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
For certain financial instruments, including cash, accounts receivables,
related party receivables and other receivables, accounts payable, other
payables and accrued expenses and short term debt, it is assumed that the
carrying amounts approximate fair value because of the near term maturities of
such obligations. The carrying value of revolving credit facility approximates
fair value due to the variable rate of interest paid. For long-term debt, the
carrying amount is assumed to approximate fair value based on the current rates
at which the Company could borrow funds with similar remaining maturities.
Vendor Rebates
The Company receives rebates from its vendors under a number of different
programs. Many of the vendor programs provide for the Company to receive rebates
when any of a number of measures is achieved, generally related to the volume of
purchases. These rebates are accounted for as a reduction to the price of the
product, which reduces the carrying value of inventory until the product is
sold. Throughout the year, the amount recognized for annual rebates is based on
purchases that management considers probable for the full year. These estimates
are continually revised to reflect rebates earned based on actual purchase
levels.
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Customer Rebates
The Company offers rebates to its customers under a number of different
programs. The majority of these programs provide for the customer to receive
rebates, generally in the form of a reduction in the related accounts receivable
balance, when certain measures are achieved, generally related to the volume of
product purchased from the Company. The amount of rebates is recorded based on
the actual level of purchases made by customers that participate in the rebate
programs.
Legal and Tax Proceedings
The Company is involved occasionally in lawsuits as well as audits and
reviews regarding its state and local tax filings, arising out of the ordinary
conduct of its business. Although no assurances can be given, management does
not expect that any of these matters will have a material adverse effect on the
Company's financial statements. As to tax filings, the Company believes that the
various tax filings have been made timely and in accordance with applicable
state and local tax code requirements.
Warranty
The tires that FTZ Sentaida and Sentaida Tires sell are guaranteed directly
by the manufacturers, FTZ Sentaida and Sentaida Tires are not accountable for
customers. In respect of rubber imported, the FTZ Sentaida has insurance
coverage for the quality. Therefore, the Company does not make provisions for
warranty.
In respect for Sentaida tires, although it has no responsibility for the
quality of the tires, it serves as agent to making damages claims for its
customers from manufacturers. Sentaida Tires may compensate customers first,
either be replacement tires or cash, and then, will get reimbursement from
manufacturers or suppliers in tires or cash. About $0.49 million of warranty
tires returned by customers was included in the value of inventory as at
December 31, 2006 in the year ended December 31, 2005, there were none.
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Related Party Transactions
Related party sales were about $49 million in 2006 and related party
receivables were about $28 million (as at December 31, 2006.
One of the related parties, Qingdao Sentaida Rubber Co. Ltd. ("Sentaida
Rubber") is a wholly-owned subsidiary of Sentaida Group Ltd, which owned 51% of
shares of Sentaida Tires and F.T.Z Sentaida. It accounted for 29% of the related
party sales and 71% of the related party receivables in 2006. There is an
agreement between FTZ Sentaida and Sentaida Rubber, which states that all the
amounts owed by Sentaida Rubber will be paid within one year. All the debts are
guaranteed by Sentaida Group Ltd.
LQJ Global Tire ("LQJ") is another related party. One of its shareholders
is Director Qin (one of the directors of Sentaida Group) who owns 70% of LQJ's
shares. In 2006, LQJ accounted for about 71% of the related party sales, and
about 18% of the related party receivables. The sales to LQJ are normal business
operation and the settlement of payment is made under "document against
acceptance" in 60 days.
As at December 31, 2005, the related party receivables were about $7.8
million. Sentaida Rubber accounted for 18% of the related party receivable; the
second one, Delinte International Logistic Co. Ltd. accounted for 4% and LQJ
accounted for 3% of the related party receivable.
The Company uses office and warehouse space free of rent from Sentaida
Rubber Co., Ltd., a related party.
3. Cash and Restricted cash
Restricted cash is included in cash and cash equivalents, which is mainly
used for deposit of letter of credit, deposit of note payable and deposit for
transaction of foreign currency; usually the term of deposits is are within 90
days, though some are within six months.
-------------------------------------------------------------------------
2005 2006
-------------------------------------------------------------------------
Restricted cash $ 5,537,397 $ 7,672,729
-------------------------------------------------------------------------
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
4. Accounts Receivable:
--------------------- ---------------- ---------------- -------------------
2005 ($) 2006 ($) % of increase
--------------------- ---------------- ---------------- -------------------
Revenue 245,086,065 332,535,270 35.7%
--------------------- ---------------- ---------------- -------------------
Accounts receivable 14,400,433 19,345,863 34.3%
--------------------- ---------------- ---------------- -------------------
In 2006, accounts receivable increased by 34.3% compared with the balance
in 2005, revenue increased by 35.7%. The change of accounts receivable was
proportional with the increase in revenue.
5. Property and Equipment
The following table represents the property and equipment at December 31,
2006 and 2005.
------------------------------------ -------------- ----------------
2006(US$) 2005(US$)
------------------------------------ -------------- ----------------
Office Equipment 28,949 21,839
------------------------------------ -------------- ----------------
Machinery and Equipment 1,826,827 1,633,059
------------------------------------ -------------- ----------------
Computer 71,572 54,628
------------------------------------ -------------- ----------------
Vehicle 73,877 24,524
------------------------------------ -------------- ----------------
Building 3,626,880 1,320,905
------------------------------------ -------------- ----------------
Total property and equipment 5,628,104 3,054,957
------------------------------------ -------------- ----------------
Less---accumulated depreciation 582,151 179,660
------------------------------------ -------------- ----------------
Property and equipment (net) 5,045,953 2,875,296
------------------------------------ -------------- ----------------
Depreciation expense for the fiscal year ended December 31, 2006 were about
0.57 million, $ 0.17 million for December 31, 2005 and $ 0.27 million for
December 31, 2004. Depreciation expense is included in selling, general and
administrative expense in the combined statements of operations.
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
A property that is worth about $1.36 million valued at cost is
collateralized for a short term debt for one year.
Another property that is worth about $2 million valued at cost was bought
under personal mortgage of three employees of Sentaida Group Ltd. The advance
payment of about $ 1.2 million is paid by Sentaida Tires and the about
$0.76million of mortgage is paid every month under the name of the three
employees by Sentaida Rubber Ltd. There are agreements between the three
employees, Sentaida Tires and Sentaida Rubber Ltd, which clearly indicate that
the three employees are just nominal owners of the property and nominal bearers
of the mortgage. All the rights and obligations related to the property are
assumed by Sentaida Tires. The property is used by Sentaida Tires with no
consideration in return. It is the real owner of the property. The advance
payment is paid by Sentaida Tires but the mortgage payments are currently paid
by Sentaida Rubber Ltd.
The interest on the mortgage is floating and it is based on 130% of the annual
prime rate. Therefore, the estimation of the mortgage's remaining balance is
based on the year 2007's prime rate, 6.84% plus 30%, which is equivalent to the
annual rate 8.892%.
----------------- --------------------------------------------------
Year Total amount of principal and interest
----------------- --------------------------------------------------
2007 $120,909
----------------- --------------------------------------------------
2008 $120,909
----------------- --------------------------------------------------
2009 $120,909
----------------- --------------------------------------------------
2010 $120,909
----------------- --------------------------------------------------
2011 $120,909
----------------- --------------------------------------------------
2012--2015 $473,560
----------------- --------------------------------------------------
6. Other receivables and prepayments
Other receivables were about $4.9 million and $3.9 million as at December
31, 2006 and 2005, respectively. Other receivables are mainly comprised of some
miscellaneous
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
port charges, shipment and handling costs that the Company paid on behalf of our
customers; then those costs will be reimbursed by the customers. Those costs
were about $2.8 million and $3.5 million in 2006 and 2005, respectively.
In 2006, included in the amounts of other receivables, approximately $2
million was lent to an unrelated party. There is an agreement between the two
parties. The term of the lending is one year, which will be paid back by the
unrelated party by the end of 2007. This loan is non-interest bearing.
Prepayments were approximately $3 million and $ 11.8 million as at December
31, 2006 and 2005, respectively. In 2006, there was approximately $1 million of
prepayment to FTZ Sentaida and Sentaida Tires' suppliers, and about $2 million
were paid to Sentaida Tires suppliers. One supplier, Zhaoyuan Liao Rubber
Products Co. Ltd, accounted for about 95% of the $2 million prepayment.
Prepayments to FTZ Sentaida and Sentaida Tires' suppliers were $ 10.5 million as
at December 31 2005.
7. Notes receivable
Note receivable was about $ 3.6 million and $1.4 million as at December 31 2006
and 2005 respectively. It mainly came from Sentaida Tires' customers. These
notes are due within six months and no interest or extra amounts are required
and received.
8. Short Term Borrowings
In 2006, FTZ Sentaida had about $2.2 million short term debt for working
capital turnover from two banks at an average annual interest rate of about 6%.
Among the borrowings, about $1 million is outstanding and due in June 2007. This
debt is collateralized by the land of one of the company's strategic business
partners. Another outstanding of $1.2 million is due in November 2007, which is
collateralized by a property of Sentaida Tire. The property is worth about $1.36
million valued at cost.
FTZ Sentaida has increased the credit facility to support business
expansion. The outstanding import bill advance, export bill purchase,
consignment of collection, document against payment and document against
acceptance are about $36 million in total. Corresponding financial charge are
based on the interest rate defined in each individual contract between FTZ
Sentaida and the banks. In general, the interest rate for
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
import bill advance and export bill purchase is based on the average of three
month LIBOR plus 1%. The financial charge of establishment of letter of credit
is about 0.1%; financial charges for document against payment and document
against acceptance are at the rate fluctuated around 0.1%. The letter of
credit's negotiation charge is at 0.125%.
The obligations of credit are secured by a pledge of substantial land, building
and fixed assets of Sentaida Group Ltd and are also personally guaranteed by one
of stockholders of Sentaida Group. The contractual agreements with banks contain
covenants which restrict the company's ability to incur additional debt, enter
into guarantees, make loan and investment, and modify certain material
agreements, and other customary covenants. Through out the year, there is no
violation of the covenants by FTZ Sentaida.
9. Notes Payable
Notes payable was approximately $13.5 and $13 million as at December 31,
2006 and 2005, respectively. Most of the notes payable were issued to FTZ
Sentaida and Sentaida Tires' suppliers and were due within six month with no
interest charge. Restricted cash for notes payable in 2005 was about $4.2
million. For the notes payable in 2006, it was about $10.6 million issued to FTZ
Sentaida's suppliers and about $2 million issued to a related party. Restricted
cash was about $5.6 million.
10. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were about $10.6 million and $6.1
million as at December 31, 2006 and 2005, respectively. All these amounts were
payable to FTZ Sentaida and Sentaida Tires' normal business suppliers and
usually were due within six months.
11. Other liabilities
Other liabilities were approximately $2.7 million and $7.4 million as at
December 31, 2006 and 2005, respectively. Almost all the other liabilities were
advance from FTZ Sentaida and Sentaida Tires' customers.
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
12 Long term liabilities
On September 22, 2006 the long term debt for about $2.5 million was paid
off. No new long term debt borrowed in 2006.
13. Tax payable
The Company accounts for its income taxes by using the asset and liability
method of accounting for deferred income taxes. Deferred income taxes reflect
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 reporting purposes, at the applicable enacted tax rates.
According to the tax law, the Company makes provisions on taxable income at
an effective tax rate of 33%. The company makes tax provision and tax payment
quarterly, and the tax settlement for the whole year is made before the end of
April of the following year.
There are no differences between the book and tax bases of the Company's
assets and liabilities; therefore, there were no deferred tax assets or
liabilities as of December 31, 2006 and 2005.
According to the statement of state tax bureau, there are some preferential
tax policies for newly registered commercial company. Sentaida Tires was newly
established in 2005, and so, enjoyed one year tax-free policy.
Tax payable for 2006 and 2005 was about $ 0.40 and $ 0.68 million, respectively.
14 Appropriated Retained Earnings;
In conformity with Chinese Law and the articles of incorporation, the
company has to make an appropriation of retained earnings. The appropriated
retained earnings are 15% of each year's net income with a maximum of 50% of
paid-in capital. The appropriated retained earnings can be used to offset the
Company's loss, for business expansion or transfer to paid-in capital as
additional paid-in capital, or for dividend distribution. Except for offset of
the Company's loss, the balance of the appropriated retained earnings
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
should not be less than 25% of the paid-in capital after the use of the
appropriation of retained earnings. The appropriated retained earnings at
December 31, 2006 and 2005 were about $1.1 million and $1million, respectively.
15. Common Stock
F.T.Z Sentaida and Sentaida Tires do not have authorized shares and never
issued any kind of stocks. The two companies only have paid in capital, which
equals to the registered capital. For BVI, it has 50,000 authorized shares but
never issued. It has no paid in capital as well.
16. Freight Charges
Freight charges were about $5.8 million in 2006, $3.2 million in 2005 and
$1.9 million in 2004. For FTZ Sentaida and ZhongSen Trading, most of the sales
are done at CIF price. Due to the increase in sales, the freight charges
increased significantly.
17. Interest Expense
Interest expense for discounting notes, short term debt for working capital
turnover and trading finance are all included in interest expenses. Interest
expense for discounting notes was about $ 1.2 million, $0.7 million and $0.12
million in 2006, 2005 and 2004 respectively. Interest for short term debt was
about $0.27 million, $0.16 million and $47,393 in 2006, 2005 and 2004
respectively. Interest for trade finance was about $ 2.1 million, $ 1 million
and $0.6 million in 2006, 2005 and 2004, respectively.
18. Subsequent Events
1. Zhongsen Trading Co., Ltd has changed its name to Zhongsen Holdings Co.
("Holdings"), Ltd. in August 2007. In July 2007, Zhongsen International Co.
Group Ltd. in Hong Kong reached agreements with the shareholders of both F.T.Z.
Sentaida and
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Sentaida Tires to acquire 100% of their equity interest through a cash purchase.
In August 2007, such acquisitions were approved by the appropriate Chinese
authorities. Consequently, both of the companies changed their status from China
domestic companies into that of wholly-owned foreign invested enterprises. In
October 2007, Zhongsen International Co. Group Ltd. acquired 100% of equity
interest of Zhongsen Holdings.
2. In 2007, Yokohama Rubber Co. Ltd., the seventh largest tire manufacturer in
the world, with several subsidiaries in Jiangsu and Zhejiang Province, signed
sales and distribution agent agreements with Sentaida Tires. By strengthening
the cooperation with Yokohama, the Company will further enhance its product
offering and sales capabilities.
3 On June 30, 2007, short term debt of approximately $ 0.54 million was paid
off. On July 12, 2007 the other short term debt of approximately $ 0.55 million
was paid off.
4. In October 2007, Zhongsen International Co. Group Ltd was acquired by a
company listed in OTCBB.
19. Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". The new
statement amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. This statement requires
that those items be recognized as current-period charges and requires that
allocation of fixed production overheads to the cost of conversion be based on
the normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. We do not expect the adoption of
this statement to have a material impact on the Company's financial condition or
results of operations.
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligation", or FIN 47, to clarify that the term
"conditional asset retirement obligation" as used in SFAS No. 143 refers to a
legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. An entity must recognize a liability
for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. FIN 47 also defines when an
entity would have sufficient information to reasonably estimate the fair value
of an asset retirement obligation. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005. The adoption of this statement did
not have a material impact on the Company's financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", which changes the requirements for the accounting and reporting of
a change in accounting principle. SFAS No. 154 applies to all voluntary changes
in accounting principle as well as to changes required by an accounting
pronouncement that does not include specific transition provisions. SFAS No. 154
requires that changes in accounting principle be retrospectively applied. SFAS
No. 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not believe
adoption of this statement will have a material impact on the Company's
financial statements.
In June 2005, the EITF reached a consensus on EITF 05-6, "Determining the
Amortization Period for Leasehold Improvements Purchased after Lease Inception
or Acquired in a Business Combination". EITF 05-6 requires leasehold
improvements purchased after the beginning of the initial lease term or that are
acquired in a business combination to be amortized over the lesser of the useful
life of the assets of a term that includes the original lease term plus any
renewals that are reasonably assured at the date the leasehold improvements are
purchased or acquired. In September 2005, the EITF modified the consensus to
clarify that this issue does not apply to preexisting leasehold improvements.
This guidance was effective for leasehold improvements purchased or acquired in
reporting periods beginning after June 29, 2005. The adoption of this statement
did not have a material impact on the Company's financial statements.
In November 2005, the FASB issued Staff Position Nos. FAS 115-1 and FAS 124-1
"The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Investments". This statement addresses the determination as to when an
investment is considered impaired, whether the impairment is
other-than-temporary and the measurement of an impairment loss. The statement is
effective for reporting periods beginning after December 15, 2005. The Company
does not believe adoption of this statement will have material impact on the
Company's financial statements.
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return, and also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company does not believe adoption of this statement will have a
material impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value and requires enhanced disclosures about fair value measurements. SFAS
157 requires companies to disclose the fair value of its financial instruments
according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined).
Additionally, companies are required to provide enhanced disclosure regarding
instruments in the level 3 categories, including a reconciliation of the
beginning and ending balances separately for each major category of assets and
liabilities. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The Company does not believe adoption of this statement will have a
material impact on the Company's financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 "Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements" ("SAB 108"). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The SEC staff believes that registrants should quantify errors using both a
balance sheet and income statement approach and evaluate whether either approach
results in quantifying misstatement that, when all relevant quantitative and
qualitative factors considered, is material. SAB 108 is effective for fiscal
years ending on or after November 15, 2006, with early application encouraged.
The
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd, Qingdao
Sentaida Tires Co., Ltd, and Zhongsen Trading Co., Ltd.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
December 31, 2006, 2005 and 2004
- --------------------------------------------------------------------------------
Company does not believe that SAB 108 will have a material impact on its
financial position or results of operations.
Zhongsen International Company Group Limeted
Consolidated Balance Sheet
As of September 30, 2007
(US dollars)
------------
09/30/2007
unaudited
ASSETS
CURRENT ASSETS
Cash 1,271,948
Restricted cash 9,893,610
Notes receivable 2,719,339
Accounts receivable, net 23,224,402
Related parties receivables 51,804,471
Inventories , net 11,152,359
Other receivables and prepayments 11,627,710
Prepaid expenses 3,070
Other assets 100,899
------------
Total Current Assets 111,797,809
------------
PROPERTY, PLANT & EQUIPMENT, net 5,228,926
------------
117,026,735
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings 42,197,485
Notes payable 16,768,650
Accounts payable and accrued expenses 30,381,301
Related parties payables --
Other payables and accruals 6,762,182
Taxes payable 2,006,767
Other liabiltities 1,736,758
Advance from customers --
------------
Total Current Liabilities 99,853,142
------------
LONG TERM LIABILITIES
Long term loan --
MINORITY INTEREST
STOCKHOLDERS' EQUITY
Common stock
Paid in capital --
Additional paid in capital (388,769)
Appropriated of retained earnings 1,143,165
Unappropriated of retained earnings 14,780,452
Accumulated other comprehensive income 1,638,745
------------
Total Stockholders' Equity 17,173,593
------------
117,026,735
============
See notes to consolidated financial statements
Zhongsen International Company Group Limeted
Consolidated Statements of Operations and Comprehensive Income
For the Nine Months Ended
(US dollars)
------------------------------
09/30/2007 09/30/2006
------------- -------------
unaudited unaudited
SALES $ 262,834,994 $ 258,867,580
COST OF SALES 248,564,259 246,575,915
------------- -------------
GROSS PROFIT 14,270,736 12,291,665
------------- -------------
OPERATING EXPENSES
Freight charges 4,369,457 4,142,056
Commissions and rebates 54,253 692,366
Insurance 215,543 204,799
Selling Expenses 2,007,341 1,848,084
General and Administrative Expenses 582,805 334,176
------------- -------------
7,229,399 7,221,481
------------- -------------
INCOME FROM OPERATIONS 7,041,337 5,070,184
------------- -------------
OTHER INCOME (EXPENSES)
Miscellaneous income 602,398 225,255
Interest expense (2,918,971) (2,283,247)
------------- -------------
(2,316,574) (2,057,992)
------------- -------------
INCOME BEFORE TAXES 4,724,763 3,012,192
------------- -------------
PROVISION FOR TAXES
Current 427,679 134,890
------------- -------------
NET INCOME 4,297,084 2,877,302
------------- -------------
OTHER COMPREHENSIVE INCOME
Foreign currency translation gain (loss) 230,359 (8,946)
------------- -------------
COMPREHENSIVE INCOME 4,527,443 2,868,357
============= =============
EARNINGS PER COMMON SHARE:
Basid and Diluted NA NA
============= =============
See notes to consolidated financial statements
Zhongsen International Company Group Limeted
Consolidated Statements of Cash Flows
For the Periods Ended
(US dollars)
-------------------------
09/30/2007 09/30/2006
----------- -----------
unaudited unaudited
CASH FLOW FROM OPERATING ACTIVITIES
Net Income 4,297,084 2,877,302
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation 450,389 374,996
Changes in operating assets and liabilities
Decrease (Increase) in operating assets:
Accounts receivable (3,042,758) (22,170,479)
Notes receivable 964,783 230,518
Related parties receivables (21,863,636) (17,680,590)
Inventories (1,933,843) (5,572,365)
Other receivables (3,335,454) 2,144,124
Prepaid expenses 239 (21,906)
Prepayments -- 1,406
Intangible assets (10,032) (34,791)
Increase (Decrease) in operating liabilites:
Accounts payable and accrued expenses 15,556,619 17,270,199
Notes payable 2,691,590 361,673
Related parties payables (3,377,077) --
Other payables and accruals 6,116,335 1,347,334
Taxes payable 1,562,937 257,083
Other liabilities (1,097,022) 6,798,045
----------- -----------
Net Cash Used by Operating Activities (3,019,846) (13,817,451)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (354,145) (2,380,495)
Restricted cash (1,914,793) (775,179)
Investment (37,246) 189,092
Construction in progress (87,395) (131,480)
----------- -----------
Net Cash Used by Investing Activities (2,393,579) (3,098,063)
CASH FLOWS FROM FINANCING ACTIVITIES
Disposal of investment -- 1,768
Net change in short term borrowings 2,030,319 22,603,493
Long-term borrowings -- (2,526,273)
----------- -----------
Net Cash Provided by Financing Activities 2,030,319 20,078,988
Effect of exchange rate change on cash 343,666 (103,898)
NET(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,039,440) 3,059,576
CASH AND CASH EQUIVALENTS, beginning of year 4,311,388 4,161,335
----------- -----------
CASH AND CASH EQUIVALENTS, end of year 1,271,948 7,220,911
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid 2,666,482 2,559,633
=========== ===========
Income taxes paid 48,277 77,702
=========== ===========
See notes to consolidated financial statements
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
1. Company and Business
Zhongsen International Company Group Limited ("Zhongsen International") was
incorporated in Hong Kong in July 2007. Zhongsen International itself has no
significant business operations and assets other than holds equity interests in
Qingdao Free-Trading Zone Sentaida International Trade Co., Ltd. ("F.T.Z.
Sentaida"), Qingdao Sentaida Tires Co., Ltd. ("Sentaida Tires") and Zhongsen
Holdings Co., Ltd. ("Zhongsen Holdings").
F.T.Z. Sentaida was formed in January 2000 under the corporate laws of the
People's Republic of China ("PRC"). It engages in the rubber import and
distribution and in the tire export business. For rubber business, it has
established close business relationships with the world's top natural rubber
suppliers in Southeast Asia. Its client base has covered a majority of the top
Chinese and foreign-invested tire manufacturers in China. For tires export
business, it has established a long-term export agent relationship with all
major Chinese tire manufacturers and carries selected Chinese brand tires in
overseas market.
Sentaida Tires was established in December 2004 under the corporate laws of the
People's Republic of China ("PRC"). Its primary business is to sell and to
distribute tires in China's domestic market. It has one of the largest
independent tire distribution networks in China selling to around one thousand
(1,000) independent tire dealers, retailers and corporation clients. It has the
most complete product offering in the tire replacement market.
Zhongsen Holdings (formerly Zhongsen Trading Co., Ltd.) was incorporated in the
British Virgin Islands under the International Business Company Act (Cap.291),
in January 2005. It is also involved in the import and distribution of rubber,
and in tire exports. Zhongsen International and Zhongsen Holdings were wholly
owned by one common shareholder who transferred his shares of Zhongsen Holdings
to Zhongsen International in September 2007 for the purpose of consolidating
both companies.
On July 24, 2007, Zhongsen International reached agreements with the
shareholders of both F.T.Z. Sentaida and Sentaida Tires to acquire 100% of their
equity interests for a certain amount of cash. In August 2007, such acquisitions
were approved by the appropriate Chinese authorities; consequently, both
companies changed their status from China domestic companies into that of
wholly-owned foreign invested enterprises. $2,030,273.16 will be paid to the
shareholders of F.T.Z. Sentaida and $1,359,051.57 to the shareholders of
Sentaida Tires, respectively, for their equity interest in each company. The
cash payment should be made not later than November 14, 2007 in accordance with
the acquisition agreement. In addition, pursuant to the acquisition agreement,
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
the management teams of each company will remain as before the acquisition.
Also, if Zhongsen International can not obtain equity financing by selling
shares in capital markets outside of China within three months after the
acquisition agreement was signed, then, the agreement will not be binding
anymore, and Zhongsen International must unwind the whole acquisition
transaction; therefore the equity interests will be returned to the original
owners of the Company.
2. Summary of significant accounting policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
F.T.Z. Sentaida, Sentaida Tires, Zhongsen Holdings and Zhongsen International.
All significant inter-company accounts and transactions have been eliminated.
Principles of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") for reporting on Form 10-Q and therefore do not include all
information and footnotes necessary for a fair presentation of financial
position, results of operations, and changes in financial position in conformity
with accounting principles generally accepted in the United States of America
(GAAP). These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2006. The results of
operations and cash flows for the nine months ended September 30, 2007 are not
necessarily indicative of the operating results and cash flows, which will be
reported for the full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all deposits with an original maturity of three months or
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
less and short-term highly liquid investments, which are readily convertible
into cash to be cash and cash equivalents in the consolidated financial
statements.
All cash in banks in China is uninsured. Although China is considered
economically stable, it is possible that unanticipated events could disrupt
banks' operations. Therefore, the Company has a credit risk exposure of
uninsured cash in banks.
Revenue Recognition
SAB 104 has four criteria that the public company has to follow: 1. Persuasive
evidence of an arrangement exists. 2. Delivery has occurred or services have
been rendered. 3. The seller's price to the buyer is fixed or determinable. 4.
Collectibility is reasonably assured. The Company recognizes revenue when title
and risk of loss passes to the customer and the above criteria have been met.
Besides the above criteria, for FTZ Sentaida and Zhongsen Trading, they also
recognizes the revenue upon shipment of products.
In general, the Company does not allow customers to return products unless there
are defects in manufacturing or workmanship. Sales returns need to go through a
strict process and have to be authorized by management. Sales returns are
continually monitored. Based on historical experience of actual returns,
management believes that the Company does not need to have a provision for sales
returns.
Concentration of Credit Risk
In the normal course of business, the Company may give credit to its customers
after performing a credit analysis based on a number of financial and other
criteria. The Company performs ongoing credit evaluations of customers'
financial condition and does not normally require collateral.
In the consolidated net sales, the concentration of risk mainly comes from the
customers of FTZ Sentaida and Zhongsen Holdings. The top ten normal customers
accounted for approximately 52% of the net sales for nine months ended September
30, 2007.
Accounts receivable
Ten of our customers accounted for 71.4% of the accounts receivable as of
September 30, 2007. The top one customer accounted for 20.4% of the accounts
receivable.
Allowance for doubtful accounts
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
The Company evaluates all receivable accounts to ensure that accounts
receivable, related party receivables and other receivables are not overstated
due to any uncollectible amounts. Based on this evaluation, management has
concluded that there is no need to set up an allowance for doubtful accounts.
Inventories
For Sentaida Tires, inventories consist primarily of automotive tires, custom
wheels, service accessories and related products. Inventories are valued at the
lower of cost (computed in accordance with the weighted average method) or
market. The Company performs periodic assessments to determine the existence of
obsolete, slow-moving and non-saleable merchandise. Based on the results of
these assessments, management believes there is no need to have an allowance for
obsolescence. The inventory of Sentaida Tires as of September 30, 2007 was
approximately $8.4 million.
For Zhongsen Holdings and FTZ Sentaida, the inventory for rubber and tires are
stated at the lower of cost (computed in accordance with the first-in-first-out
method) or market. There was no inventory kept in Zhongsen Holdings, whereas FTZ
Sentaida maintains inventory at minimum level. Management adjusts the inventory
level based on the fluctuation of the demand for rubber. FTZ Sentaida's
inventory of rubber as of September 30, 2007 was approximately $2.8 million.
As of September 30, 2007, the inventory was increased about $2.3 million
compared with the amount as of December 31, 2006. The increase was mainly due to
the inventory increase in Sentaida Tires. In the early 2007, the company carried
two new brands of tires to sales which caused the increase in inventory. In
addition, the Company has expanded its market coverage; therefore, the inventory
has to be increased in order to meet such demand.
Property and Equipment
Property and equipment are stated at cost. The Company adopts the straight-line
method of depreciation at annual rates sufficient to depreciate the cost of the
assets less estimated salvage value over the assets' estimated useful lives.
Maintenance and repair expenditures are charged to expense as incurred and
expenditures for improvements and major renewals are capitalized. When an asset
is sold or retired, the related accumulated depreciation is removed from the
account.
Impairment
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
Impairments of long-lived assets are recognized when events or changes in
circumstances indicate that the carrying amount of the asset or related groups
of assets may not be recoverable and the Company's estimate of undiscounted cash
flows over the assets' remaining estimated useful lives are less than the
assets' carrying value. Measurement of the amount of impairment may be based on
appraisals, market values of similar assets or estimated discounted future cash
flows resulting from the use and ultimate disposition of the asset.
As of September 30, 2007, management has reviewed the carrying value of
long-term fixed assets for impairment when events or circumstances indicate
possible impairment. Management has concluded that the estimated future cash
flows anticipated to be generated during the remaining life of these assets
support their current net carrying value, thus, no impairment charges have been
recorded for such periods.
Foreign currency translation
The functional currency of the Company is Chinese Yuan (RMB), and the reporting
currency is the US dollar. Consolidated balance sheet accounts are translated
into US dollars at the period-end exchange rate and all revenue and expenses are
translated into US dollars at the average exchange rate prevailing during the
period in which these items arise. Translation gains and losses are deferred and
accumulated as a component of other comprehensive income in the shareholders'
equity section of the balance sheet. Exchange transaction gains and losses that
arise from exchange rate fluctuations affecting transactions denominated in a
currency other than the functional currency are included in the statement of
operations as incurred. The foreign currency exchange gain was about $230,359
for nine months ended on September 30, 2007. It was about $8,946 loss for the
same period in 2006.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments", requires
disclosing fair value to the extent practicable for financial instruments that
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
For certain financial instruments, including cash, accounts receivables, related
party receivables and other receivables, accounts payable, other payables and
accrued expenses, and short term debt, it is assumed that the carrying amounts
approximate fair value because of the near term maturities of such obligations.
The carrying value of revolving credit facility approximates fair value due to
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
the variable rate of interest paid. For long-term debt, the carrying amount is
assumed to approximate fair value based on the current rates at which the
Company could borrow funds with similar terms.
Vendor Rebates
The Company receives rebates from its vendors under a number of different
programs. Many of the vendor programs provide for the Company to receive rebates
when any of a number of measures is achieved, generally related to the volume of
purchases. These rebates are accounted for as a reduction to the price of the
product, which reduces the carrying value of inventory until the product is
sold. Throughout the year, the amount recognized for annual rebates is based on
purchases that management considers probable for the full year. These estimates
are continually revised to reflect rebates earned based on actual purchase
level.
Customer Rebates
The Company offers rebates to its customers under a number of different
programs. The majority of these programs provide for the customers to receive
rebates, generally in the form of a reduction in the related accounts receivable
balance when certain measures are achieved, generally related to the volume of
product purchased from the Company. The amount of rebates is recorded based on
the actual level of purchases made by customers that participate in the rebate
programs.
Legal and Tax Proceedings
The Company is involved occasionally in lawsuits as well as audits and reviews
regarding its state and local tax filings, arising out of the ordinary course of
business. Although no assurances can be given, management does not expect that
any of these matters will have a material adverse effect on the Company's
financial statements. As to tax filings, the Company believes that the various
tax filings have been made timely and in accordance with applicable state and
local tax code requirements.
Warranty
The tires that FTZ Sentaida and Sentaida Tires sell are warranted directly by
the manufacturers, FTZ Sentaida and Sentaida Tires are not accountable to
customers. In respect of imported rubber, FTZ Sentaida has insurance coverage
for the quality of the product. Therefore, the Company does not make provisions
for warranty.
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
Sentaida tires, although it has no responsibility for defects in quality or
workmanship of the tires, it serves as agent for making damage claims on behalf
of its customers from manufacturers. Sentaida Tires may compensate customers
first, either by replacing the tires or by a cash refund, and then, will get
reimbursement from manufacturers or suppliers in tires or cash. Approximately
$0.35million of tires returned by customers was included in the value of
inventory as of September 30, 2007.
Related Party Transactions
Related party sales were about $45.9 million or 17.5% of the Company's net sales
for the nine months ended on September 30 2007, and related party receivables
were about $51.8 million.
One of the related parties, Qingdao Sentaida Rubber Co. Ltd. ("Sentaida Rubber")
is a wholly-owned subsidiary of Sentaida Group Ltd., which owned 51% of shares
of Sentaida Tires and F.T.Z Sentaida before the acquisitions. It accounted for
48% of the consolidated related party receivables as of September 30 2007. The
amount owed by Sentaida Rubber will be paid within one year. The debt is
guaranteed by Sentaida Group Ltd. At September 30, 2007, no payment has been
made.
LQJ Global Tire ("LQJ") is another related party. One of its shareholders is
Director Qin (one of the directors of Sentaida Group) who owns 70% of LQJ's
shares. As of September 30, 2007, LQJ accounted for about 39.1% of the
consolidated related party receivable. The sales to LQJ are normal business
transactions and the documents are released against acceptance with a maturity
of 60 days. (D/A 90 days).
The Company uses office and warehouse space free of rent from Sentaida Rubber
Co., Ltd., a related party.
3. Cash and Restricted Cash
Restricted cash is included in cash and cash equivalents. It consists of
deposits for letters of credit, deposits for notes payable and deposits for
transactions in foreign currency; usually the deposit terms are within 90 days,
although some are for up to six months. The restricted cash was $9,893,610 as of
September 30, 2007.
4. Property and Equipment
A property valued at cost of approximately $1.36 million is collateralized for a
one year loan due on November 27, 2007.
Another property valued at cost of approximately $2 million was acquired with a
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
personal mortgage of three employees of Sentaida Group Ltd. The advance payment
of about $ 1.2 million is paid by Sentaida Tires and approximately $0.76 million
of mortgage is paid monthly under the name of the three employees by Sentaida
Rubber Ltd. There are agreements between the three employees, Sentaida Tires and
Sentaida Rubber Ltd, which clearly indicate that the three employees are just
nominal owners of the property and nominal bearers of the mortgage. All the
rights and obligations related to the property are assumed by Sentaida Tires.
The property is used by Sentaida Tires with no consideration in return. It is
the real owner of the property. The advance payment is paid by Sentaida Tires;
mortgage is paid currently by Sentaida Rubber Ltd.
The mortgage bears a floating interest rate based on 130% of the annual prime
rate. Therefore, the mortgage's remaining balance has been estimated based on
the year 2007's prime rate of 6.84%, which is equivalent to the annual rate at
8.892%.
----------------------------------- -----------------------------------------
Date Total amount of principal and interest
----------------------------------- -----------------------------------------
September 30, 2008 $120,909
----------------------------------- -----------------------------------------
September 30, 2009 $120,909
----------------------------------- -----------------------------------------
September 30, 2010 $120,909
----------------------------------- -----------------------------------------
September 30, 2011 $120,909
----------------------------------- -----------------------------------------
September 30, 2012 $120,909
----------------------------------- -----------------------------------------
September 30, 2012-November 2015 $382,879
----------------------------------- -----------------------------------------
5. Other receivables and prepayments
Other receivables were approximately $ 5.3 million as of September 30, 2007 and
are mainly comprised of some miscellaneous port charges, shipping and handling
costs that the Company paid on behalf of customers, and will be reimbursed by
the customers. Those costs were about $4.4 million.
Prepayment was approximately $6.3 million as of September 30, 2007. Due to the
increase in sales, there was corresponding increase in prepayments for
purchases, especially for tires. Purchases of some brands of tires the Company
sells, such as Michelin and Yokohama, require a prepayment. About $1.4 million
was prepaid to FTZ Sentaida and Zhongsen Holdings' suppliers as of September 30,
2007. Prepayments to Sentaida Tires' suppliers were about $4.9 million.
6. Notes receivable
Notes receivable were about $2.7 million as of September 30, 2007. It mainly
came from Sentaida Tires' customers. These notes are due within six months and
no interest or additional amounts are required to be received.
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
7. Short Term Borrowings
As of September 30, 2007, the Company had about $1.26 million short term debt
for working capital turnover at average annual interest rate of about 6.4%. The
debt is due in November 2007, which is collateralized by a property of Sentaida
Tire. The property is worth about $1.36 million valued at cost.
The outstanding import bill advance, export bill purchase, consignment of
collection, documents against payment and documents against acceptance are about
$40.9 million in total as of September 30, 2007. Corresponding financial charges
are based on the interest rate defined in each individual contract between FTZ
Sentaida and the banks. In general, the interest rate for import bill advances
and export bill purchases is based on the average of three months LIBOR plus
0.8%. The finance charge for opening a letter of credit is approximately 0.1%;
finance charges for documents against payment and documents against acceptance
are at a rate fluctuating around 0.1%. The letters of credit negotiation charge
is at 0.125%.
The obligations of credit are guaranteed by Sentaida Group Ltd, Sentaida Rubber
Co. Ltd, and also bear the personal guarantee of one of the stockholders of
Sentaida Group. The contractual agreements with banks contain covenants which
restrict the Company's ability to incur additional debt, enter into guarantees,
make loans and investments, and modify certain material agreements, and other
customary covenants. The Company has not violated any of the covenants during
the period reported.
8. Notes Payable
Notes payable was approximately $16.8 million as of September 30, 2007. Most of
the notes payable were issued to FTZ Sentaida and Sentaida Tires' suppliers and
were due within six month with no interest charge. Restricted cash for notes
payable was about $5.3 million for the reported period.
9. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were about $30.4 million as of September
30, 2007. Most of these amounts were payable to FTZ Sentaida and Sentaida Tires'
normal business suppliers and usually were due within three months. In addition,
about $3.44 million were due to the original shareholders of F.T.Z Sentaida,
Sentaida Tires and Zhongsen Holdings for their equity interests in each company.
Pursuant to the acquisition agreement signed between Zhongsen International,
F.T.Z Sentaida, and Sentaida Tires, Zhongsen International should make the cash
payment to the shareholders of each company not later than November 14, 2007.
As of September 30 2007, accounts payable and accrued expenses were up about
$19.8 million compared with the amount as of December 31 2006. The Company's
purchase from South China Rubber and Tires Co, Ltd increased substantially in
2007 and its payment terms were changed to 90 days letters of credit. This
contributed to the increased account payable. The account payable to South China
Rubber and Tires Co., Ltd. was about 11.3 million as of September 30, 2007. In
addition, Zhaoyuan Liao Rubber products Co, Ltd has extended the Company a
longer credit term, which also contributed to the increase in accounts payable.
10. Other payables and accruals
As of September 30, 2007 other payables and accruals was approximately $6.8
million. Sentaida Tires borrowed about $4.5 million and $0.54 million,
respectively from two strategic business partners for working capital turnover.
The loans are due by the end of 2007.
11. Other liabilities
Other liabilities were approximately $1.7 million as of September 30, 2007.
Substantially all other liabilities were advanced by FTZ Sentaida and Sentaida
Tires' customers.
12. Taxes payable
The Company accounts for its income taxes by using the asset and liability
method of accounting for deferred income taxes. Deferred income taxes reflect
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 reporting purposes, at the applicable enacted tax rates.
According to the tax law, the Company makes provisions on taxable income at an
effective tax rate of 33%. The company makes tax provision and tax payment
quarterly, and the tax settlement for the whole year is made before the end of
April of the following year.
There are no differences between the book and tax bases of the Company's assets
and liabilities; therefore, there were no deferred tax assets or liabilities as
of September 30, 2007.
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
Taxes payable was approximately $2 million as of September 30, 2007.
13. Appropriated retained earnings
In conformity with Chinese Law and its articles of incorporation, the Company
has to make an appropriation of retained earnings. The appropriated retained
earnings is 15% of each year's net income with a maximum of 50% of paid-in
capital. Based on Chinese Law, the appropriation of retained earnings is only
made at the year end based on the net income for the year. Accordingly, the
Company did not make an appropriation of retained earnings in the accompanying
financial statements.
14. Common Stock
F.T.Z Sentaida and Sentaida Tires do not have authorized shares and never issued
any kind of stock. The two companies only have paid-in capital, which equals the
registered capital. For Zhongsen Holdings (BVI), it has 50,000 authorized
shares, which were never issued and it has no paid-in capital either. In
addition, Zhongsen International has 10,000 authorized shares, which have not
been issued yet. It does not have paid-in capital.
15. Freight Charges
Freight charges were about $4.4 million and $4.1 million for the nine months
ended September 30, 2007 and 2006. Miscellaneous charges such as port fees,
goods handling charges, customs duty and goods loading and unloading charges,
etc. were all included in the freight charges.
16. Selling Expenses
Selling expenses were about $2 million and $1.8 million for the nine months
ended September 30, 2007 and 2006. Salary and wages, depreciation, traveling
expenses, auto & fuel expenses and insurance premiums accounted for
substantially all of the selling expenses.
17. Interest Expense
Interest expense for discounting notes, short term debt for working capital
turnover, and trading finance are all included in interest expense. For the nine
months ended September 30, 2007, interest expense was about $2 million;
miscellaneous financial charges were about $0.9 million. Interest expense was
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
about $1.7 million and miscellaneous financial charges were about $0.6 million
for the same period in 2006.
18. Subsequent Events
1. On November 27, 2007 the short term debt for about $1.26 million was paid
off.
2. Zhongsen International Co. Group Ltd is under the process of getting finance
from the capital market outside China. It was acquired by a company listed in
OTCBB. The acquisition agreement has been signed in October 2007 and the reverse
merger agreement has not been completed yet. The negotiation with potential
investors is under process. The whole process is intended to be completed by the
early of 2008.
3. On November 8, 2007, a total of $3,389,324.73 cash was paid to the original
owners of F.T.Z. Sentaida and Sentaida Tires.
19. Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return, and also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company does not believe adoption of this statement will have a
material impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value and requires enhanced disclosures about fair value measurements. SFAS
157 requires companies to disclose the fair value of its financial instruments
according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined).
Additionally, companies are required to provide enhanced disclosure regarding
instruments in the level 3 categories, including a reconciliation of the
beginning and ending balances separately for each major category of assets and
liabilities. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007 and interim periods within those fiscal
years. The Company does not believe adoption of this statement will have a
material impact on the Company's financial statements.
ZHONGSEN INTERNATIONAL COMPANY GROUP LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30 2007 and 2006
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 "Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements" ("SAB 108"). SAB 108 provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The SEC staff believes that registrants should quantify errors using both a
balance sheet and income statement approach and evaluate whether either approach
results in quantifying misstatement that, when all relevant quantitative and
qualitative factors considered, is material. SAB 108 is effective for fiscal
years ending on or after November 15, 2006, with early application encouraged.
The Company does not believe that SAB 108 will have a material impact on its
financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 expands opportunities
to use fair value measurement in financial reporting and permits entities to
choose to measure many financial instruments and certain other items at fair
value. This statement is effective for fiscal years beginning after November 15,
2007. The Company does not expect the adoption of SFAS No. 159 to have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
Rub A Dub Soap, Inc.
Unaudited Condensed Consolidated Pro Forma Balance Sheet
and Statements of Operations
For the Nine months ended September 30 2007 and the year ended
December 31, 2006
On October 26, 2007, Rub A Dub Soap, Inc., ("Parent") signed an acquisition
agreement with Zhongsen International company group Ltd.( "The Company").
Pursuant this agreement all shares of the Common Stock of the Company issued and
outstanding prior to the closing will be exchanged for the right to receive
25,090,000 shares of the Common Stock of Parent representing 96.5% of shares
outstanding after the sale hereby.
The accompanying unaudited condensed pro forma consolidated balance sheet
represents the consolidated financial position of Parent and the Company as
though the reorganization of the Company into Parent and the acquisition of the
Company had occurred on September 30, 2007. The accompanying unaudited condensed
pro forma consolidated statements of operations for the nine months ended on
September 30 2007 and for the year ended December 31, 2006 present the
operations of the combined entities as though the reorganization and acquisition
had occurred at the beginning of each of those periods.
The unaudited condensed pro forma consolidated financial information is for
illustrative purposes and is not necessarily the financial position and results
of operations that would have occurred had the reorganization and acquisition
actually occurred on those days or for any other period.
On October 31, 2007, Parent effected a forward stock split of its authorized and
issued common stock on a 2.12 for one share basis. All references in these
unaudited condensed pro forma consolidated statements to the number of shares
outstanding per share amounts of parent and the Company's common stock have been
restated to reflect the effect of the forward stock split for all period
presented. The Company adjusted common stock by $26,000 (26,000,000 at $0.001
par value) and eliminated the accumulated loss of the parent with the additional
paid-in-capital.
Rub A Dub Soap, Inc.
Unaudited Condensed Consolidating Pro Forma Balance Sheets
As of September 30, 2007
Zhongsen Pro Forma
International Rub A Dub Adjustment Results
------------- ------------- ------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 1,271,948 -- -- $ 1,271,948
Restricted cash 9,893,610 -- -- 9,893,610
Notes receivable 2,719,339 -- -- 2,719,339
Accounts receivable 23,224,402 -- -- 23,224,402
Related parties receivable 51,804,471 -- -- 51,804,471
Inventories 11,152,359 -- -- 11,152,359
Others receivable and
prepayment 11,627,710 -- -- 11,627,710
Prepaid expenses 3,070 -- -- 3,070
Other assests 100,899 -- -- 100,899
------------- ------------- ------------- -------------
Total Current Assets $ 111,797,809 -- -- $ 111,797,809
------------- ------------- ------------- -------------
PROPERTY, PLANT & EQUIPMENT, net 5,228,926 -- -- 5,228,926
INVESTMENT -- -- -- --
CONSTRUCTION IN PROGRESS -- -- -- --
INTANGIBLE ASSETS -- -- -- --
------------- ------------- ------------- -------------
5,228,926 -- 5,228,926
------------- ------------- ------------- -------------
$ 117,026,735 -- -- $ 117,026,735
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings $ 42,197,485 -- -- $ 42,197,485
Notes payable 16,768,650 -- -- 16,768,650
Accounts payable and
accrued expenses 30,381,301 -- -- 30,381,301
Related parties payable ------------- ------------- ------------- -------------
Others payable and accruals 6,762,182 -- -- 6,762,182
Taxes payable 2,006,767 -- -- 2,006,767
Other liabiltities 1,736,758 -- -- 1,736,758
Advance from customers ------------- ------------- ------------- -------------
Total Current Liabilities $ 99,853,142 -- -- $ 99,853,142
------------- ------------- ------------- -------------
LONG TERM LIABILITIES
STOCKHOLDERS' EQUITY
Common stock par value
$ 0.001 per share; 26,000 26,000
authorized 100,000,000
shares; issued 26,000,000
Paid in capital -- 430 (430) --
Additional paid in capital (388,769) 270,531 (296,531) (414,769)
Appropriation of retained
earnings 1,143,165 -- -- 1,143,165
Unappropriation of retained
earnings 14,780,452 (270,961) 270,961 14,780,452
Accumulated other
comprehensive income 1,638,745 -- -- 1,638,745
------------- ------------- ------------- -------------
Total Stockholders' Equity 17,173,593 17,173,593
------------- ------------- ------------- -------------
$ 117,026,735 $ 117,026,735
============= ============= ============= =============
0 0
Rub A Dub Soap, Inc.
Unaudited Condensed Consolidated Pro Forma Statements of Operations
and Comprehensive Income
For the Periods Ended September 30, 2007
Zhongsen Pro Forma
International Rub A Dub Adjustment Results
------------- ------------- ------------- -------------
SALES $ 262,834,994 -- -- $ 262,834,994
COST OF SALES 248,564,259 -- -- 248,564,259
------------- ------------- ------------- -------------
GROSS PROFIT 14,270,736 -- -- 14,270,736
------------- ------------- ------------- -------------
OPERATING EXPENSES
Freight charges 4,369,457 -- -- 4,369,457
Commissions and rebates 54,253 -- -- 54,253
Insurance 215,543 -- -- 215,543
Selling Expenses 2,007,341 -- -- 2,007,341
General and Administrative
Expenses 582,805 19,986 -- 602,791
------------- ------------- ------------- -------------
7,229,399 19,986 -- 7,249,385
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 7,041,337 (19,986) -- 7,021,351
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES)
Miscellaneous income 602,398 -- -- 602,398
Interest expense (2,918,971) -- -- (2,918,971)
------------- ------------- ------------- -------------
(2,316,574) -- -- (2,316,574)
------------- ------------- ------------- -------------
INCOME BEFORE TAXES AND
MINORITY INTEREST 4,724,763 (19,986) -- 4,704,777
------------- ------------- ------------- -------------
PROVISION FOR TAXES
Current 427,679 -- -- 427,679
------------- ------------- ------------- -------------
NET INCOME 4,297,084 (19,986) -- 4,277,098
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME
Foreign currency
translation gain (loss) 230,359 -- -- 230,359
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME 4,527,443 (19,986) -- 4,507,457
============= ============= ============= =============
EARNINGS PER COMMON SHARE:
Basid and Diluted 26,000,000.00
=============
AVERAGE COMMON SHARES OUTSTANDING 0.173
=============
Rub A Dub Soap, Inc.
Unaudited Condensed Consolidated Pro Forma Statements of Operations
and Comprehensive Income
For the Year Ended Dedember 31, 2006
Zhongsen Pro Forma
International Rub A Dub Adjustment Results
------------- ------------- ------------- -------------
SALES $ 332,535,270 -- -- $ 332,535,270
COST OF SALES 315,093,435 -- -- 315,093,435
------------- ------------- ------------- -------------
GROSS PROFIT 17,441,835 -- -- 17,441,835
------------- ------------- ------------- -------------
OPERATING EXPENSES
Freight charges 5,847,439 -- -- 5,847,439
Commissions and rebates 145,621 -- -- 145,621
Insurance 270,079 -- -- 270,079
Selling Expenses 2,319,384 -- -- 2,319,384
General and Administrative
Expenses 482,299 30,710 -- 513,009
------------- ------------- ------------- -------------
9,064,821 30,710 -- 9,095,531
------------- ------------- ------------- ------------
INCOME (LOSS) FROM OPERATIONS 8,377,014 (30,710) -- 8,346,304
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES)
Miscellaneous income 265,535 -- -- 265,535
Interest expense (3,474,729) -- -- (3,474,729)
------------- ------------- ------------- -------------
(3,209,194) -- -- (3,209,194)
------------- ------------- ------------- -------------
INCOME BEFORE TAXES AND
MINORITY INTEREST 5,167,819 (30,710) -- 5,137,109
------------- ------------- ------------- -------------
PROVISION FOR TAXES
Current 572,682 -- -- 572,682
------------- ------------- ------------- -------------
NET INCOME 4,595,137 (30,710) -- 4,564,427
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME
Foreign currency
translation gain (loSS) 96,322 -- -- 96,322
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME 4,691,459 (30,710) -- 4,660,749
============= ============= ============= =============
AVERAGE COMMON SHARES
OUTSTANDING NA NA -- 26,000,000.00
============= ============= ============= =============
EARNINGS PER COMMON SHARE -- -- -- 0.1793
Basic and Diluted ============= ============= ============= =============