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): May 13, 2004
CHINA AUTOPARTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 000-49630 13-4168913
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification No.)
Xinchang Tonglin Industrial Zone, Dayi County, Chengdu, Sichuan PRC 611337
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(Address of principal executive offices)
Registrant's telephone number, including area code: 011-135-0283-3778
Guzov Ofsink, LLC, 600 Madison Avenue, 22nd Floor
New York, New York 10022 212-371-8008
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(United States Contact)
Talram Corporation, 80 Wall Street, Suite 815, New York, New York 10005
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(Former Name and Address if Changed since the last Report)
ITEM 1. and ITEM 2. CHANGES IN CONTROL OF REGISTRANT and
ACQUISITION OR DISPOSITION OF ASSETS
THE RHOHAN REVERSE ACQUISITION.
On May 13, 2004, China Autoparts, Inc. (formerly known as Talram
Corporation)(the "Company"), a Delaware corporation, completed a "reverse
acquisition" transaction in which it acquired all the outstanding stock of
Rhohan Holdings Limited ("Rhohan") a British Virgin Islands ("BVI")
corporation, in consideration for the issuance of a majority of Talram's shares.
Rhohan is a holding company for Chengdu Tonglin Casting Industrial Co., Ltd.
("Tonglin"), a PRC company that is classified as a wholly foreign owned
enterprise under PRC law.
Tonglin is a manufacturer of engine blocks for cars and light trucks.
Engine blocks are cast iron metal blocks in which the cylinders are bored and
the engine components reside.
The reverse acquisition was completed pursuant to a Capital Stock
Exchange Agreement, dated as of April 22, 2004. Concurrently with the closing of
the reverse acquisition, the Company's shareholders changed its name to China
Autoparts, Inc., its directors appointed Double Unity's designees as directors
and then resigned as directors. In addition, the Company changed its address to
Xinchang Tonglin Industrial Zone, Dayi County, Chengdu, Sichuan PRC 611337
pending its acquisition of an office in the United States.
The directors who resigned were: Joel Schonfeld, Andrea I. Weinstein
and Noam Kenig. The directors who were appointed by them are set forth below:
Name Age
- ---- ---
Li, Yungao 62
Li, Jing 34
Ding, Ke 40
LI YUNGAO is currently the sole Director and shareholder of Double Unity, and a
Director of Rhohan and has served as the Chairman and CEO of Tonglin since its
formation in 2000. During the past five years Mr. Li has served as Chairman and
CEO of Chengdu Begin Pipeline Co., Ltd., a company which produces metal pipes
and pipeline products, and Chengdu Rongxin Industrial Co., Ltd. and Chengdu
Rongxin Ruigao Machinery Co., Ltd. which are holding companies for Mr. Li's
interests in machinery manufacturing companies. Mr. Li started his career as a
farmer and, after receiving training in manufacturing in a valve factory,
started his own metal and pipe casting companies.
LI JING. For the past five years, Mr. Li Jing has served as the CEO of Chengdu
Taichang Metals Co., Ltd., a steel trading company. Mr. Li Jing has a degree
from Chengdu Economic Management College and is the son of Mr. Li Yungao.
DING KE is currently a Director of Rhohan and a Director of Tonglin since 2000.
During the past five years, Mr. Ding has served as the Executive VP for Hua Tai
Enterprise Management Co., Ltd. (1999-2002), an investment management company,
and the Chairman and owner of Shenzhen Significant Value Industrial Co., Ltd.
(2002 through present), a company that owns coffee shops.
At the closing of the Agreement, the Company acquired all of the
outstanding stock of Rhohan in exchange for 8,590,910 shares of the Company's
$.001 par value per share common stock issued to Double Unity and six of its
designees. These shareholders now hold 94.5% of the Company's outstanding common
stock. The Company has no other classes of stock outstanding.
Under the terms of the Agreement, the Company agreed to file a "resale"
registration statement with the U.S. Securities and Exchange Commission ("SEC")
covering the shares of common stock issued pursuant to the Agreement upon the
demand of the holders of at least 33% of such shares.
DESCRIPTION OF BUSINESS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
The disclosure and analysis in this report contain some forward-looking
statements. Certain of the matters discussed concerning the Company's
operations, cash flows, financial position, economic performance and financial
condition, including, in particular, future sales, product demand growth, the
automobile market in the PRC, competition, exchange rate fluctuations and the
effect of economic conditions include forward-looking statements within the
meaning of section 27A of the Securities Act of 1933, referred to herein as the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, referred
to herein as the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to
future events or conditions or that include words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions are forward-looking statements. Although the Company believes that
these statements are based upon reasonable assumptions and information, they are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Investors are cautioned that forward-looking statements are not
guarantees of future performance and the actual results or developments may
differ materially from the expectations expressed in the forward-looking
statements.
As for the forward-looking statements that relate to future financial
results and other projections, actual results will be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than projected. Given these uncertainties, you should not place any
reliance on these forward-looking statements. These forward-looking statements
also represent our estimates and assumptions only as of the date that they were
made. The Company expressly disclaims a duty to provide updates to these
forward-looking statements, and the estimates and assumptions associated with
them, after the date of this filing to reflect events or changes in
circumstances or changes in expectations or the occurrence of anticipated
events.
The Company undertakes no obligation to publicly update any
forward-looking statement, whether as a result of new information, future events
or otherwise. You are advised, however, to consult any additional disclosures
the Company makes in its Form 10-KSB, Form 10-QSB and Form 8-K reports to the
SEC. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
Information regarding market and industry statistics contained in this
Report is included based on information available to the Company which it
believes is accurate. The Company has not reviewed or included data from all
sources, and cannot assure stockholders of the accuracy or completeness of the
data included in this Report. Forecasts and other forward-looking information
obtained from these sources are subject to the same qualifications and the
additional uncertainties accompanying any estimates of future market size,
revenue and market acceptance of products and services.
Unless otherwise noted, all currency figures in this filing are in U.S.
dollars. References to "yuan" or "RMB" are to the Chinese yuan (also known as
the renminbi). According to Xe.com as of May 12, 2004, $1 = 8.28250 yuan.
OVERVIEW
China Autoparts, Inc. (the "Company") is a holding company for a
British Virgin Islands company called Rhohan Holdings Limited ("Rhohan"), which
is a holding company for, and owns 100% of Chengdu Tonglin Industrial Casting
Co., Ltd. ("Tonglin"), a People's Republic of China ("PRC") corporation. Tonglin
is a manufacturer of engine blocks. Tonglin currently manufactures and is
developing a total of 20 different engine blocks which accommodate three or four
cylinders for cars, mini vans and light trucks. Currently Tonglin's sales are
made solely to companies located with the PRC.
Both the Company and Tonglin are located outside of the city of Chengdu
in the Sichuan Province of the PRC at Xinchang Tonglin Industrial Zone, Dayi
County, Chengdu, Sichuan PRC 611337. The Company plans to open an office in the
United States. Tonglin uses a factory facility in Chengdu with over 9.5 acres of
production, warehouse and office space (see "Description of Property") and
currently has approximately 1200 employees.
Organizational History
The Company was formed on May 1, 2001 under the laws of the State of
Delaware to engage in any lawful corporate undertaking, including, but not
limited to, selected mergers and acquisitions. From that date, until May 12,
2004, the Company remained in the business of seeking a merger or acquisition
candidate. Its only other activities during that time were filing its required
reports under the Securities Exchange Act of 1934, as amended, and issuing
shares to its initial shareholders.
On April 22, 2004, the Company entered into a Capital Stock Exchange
Agreement pursuant to which it acquired 100% of the outstanding stock of Rhohan,
a British Virgin Islands ("BVI") company, from Double Unity Investments,
Limited, also a BVI company. Rhohan's only asset is 100% of the stock of
Tonglin, a PRC corporation that is classified as a wholly foreign owned
enterprise under PRC law by virtue of its ownership by Rhohan.
The result of the above transactions, as set forth in the following
diagram, is that Rhohan is now a wholly owned subsidiary of the Company and
Tonglin remains a wholly owned subsidiary of Rhohan.
China Autoparts, Inc.
| 100%
Rhohan Holdings Limited
| 100%
Chengdu Tonglin Casting
Industrial Co., Ltd.
Neither the Company nor Rhohan have any operations or plan to have any
operations in the future other than acting as a holding company and management
company for Tonglin and raining capital for its operations.
TONGLIN COMPANY OVERVIEW
Tonglin Organizational History
Tonglin began in approximately 1990 as a workshop of Chengdu Rongxin
Enterprises Co., Ltd. ("Rongxin"), a PRC casting company owned by Li Yungao.
Tonglin was incorporated on January 21, 2000 in the PRC as a sino-foreign joint
venture company. At that time, Rongxin was the PRC joint venture partner owning
40% of the company and Rhohan was the foreign joint venture partner owning 60%
of the company. Beginning in July, 2001, Rhohan increased its ownership interest
in the joint venture by purchasing additional interests with monies obtained
from the distribution of dividends from the joint venture.
On November 20, 2003, Rhohan's purchase of the final 25% of the joint
venture owned by Rongxin was approved by the State Administration for Industry
and Commerce for the PRC and Tonglin became a wholly foreign owned enterprise
("WFOE") by virtue of its status as a wholly owned subsidiary of a BVI company,
Rhohan. There are no restrictions on Tonglin's operations under PRC law, or
otherwise, that result from its status as a WFOE.
Tonglin's Business
Tonglin is a manufacturer of engine blocks which are sometimes referred
to as cylinder blocks. An engine block is a cast iron block to which other
engine parts are attached. It is usually a casting and includes the housing for
the engine cylinders and the upper part of the crankcase.
Tonglin's production of engine blocks over the past three fiscal years
has been increasing as Tonglin has been able to add additional capacity to
accommodate orders. Tonglin began with two casting workshops in 2000, and now
has five workshops which allow for annual production capacity of approximately
700,000 engine blocks. Tonglin plans further production capacity increases as
needed and if the necessary capital is available. Tonglin's production for the
past three fiscal years is set forth below:
Year Units Increase from Prior Year
- ---- ----- ------------------------
2003 438,984 27.9%
2002 343,334 57.3%
2001 218,313 --
Tonglin believes that there are currently approximately 100 automobile
manufacturers in the PRC. Tonglin sells its engine blocks directly to 13
different automobile manufacturers and engine assembly companies within the PRC.
Of those 13, for the fiscal year ended December 31, 2003, approximately 94.0% of
sales were to five customers and approximately 68.0% of sales were to three
customers. For the fiscal year ended December 31, 2002, approximately 93.5% of
sales were to five customers and approximately 72.8% of sales were to three
customers.
Tonglin's top five customers during the fiscal year ended December 31,
2003, by sales, were: Chengdu Zhengheng Engine Parts Co., Ltd., Chongqing
Chang'an Automobile Co., Ltd., Shanghai Wulong Automobile Parts Co., Zhejiang
Geely Automobile Manufacture Co., Ltd. and Baoding Great Wall
Internal-combustion Engine Manufacturing Co. Chengdu Zhengheng is an engine
assembler which sells most of its engines to Chongqing Chang'an Automobile Co.,
Ltd..
The loss of any of Tonglin's largest customers could have a material
adverse effect on the Company's business.
Tonglin's Products
Tonglin either produces or has under development 20 different gasoline
and diesel engine block models which accommodate three or four cylinders and are
used in cars, mini vans and light trucks. The following is a complete listing of
the models and their specifications:
- --------------------------- ----------------------------------------------------
Product Model Product Descriptions
- --------------------------- ----------------------------------------------------
CA20 Sedan Gasoline Engine Block, 2.0L
V4, Integrated Casting Block, 50 Kg
- --------------------------- ----------------------------------------------------
4JB1 Truck Diesel Engine Block, 2.0L
V4, Studded Block, 63 Kg
- --------------------------- ----------------------------------------------------
4JA1 Truck Diesel Engine Block, 2.0L
V4, Studded Block, 60.5 Kg
- --------------------------- ----------------------------------------------------
372Q Sedan Gasoline Engine Block, 1.0L
V3, Integrated Casting Block, 25 Kg
- --------------------------- ----------------------------------------------------
490Q Sedan Gasoline Engine Block, 1.6L
V4, Integrated Casting Block, 40.5 Kg
- --------------------------- ----------------------------------------------------
F8C Mini Sedan Gasoline Engine Block, 0.8L
V3, Integrated Casting Block, 23 Kg
- --------------------------- ----------------------------------------------------
GL18 Sedan Gasoline Engine Block, 1.8L
V4, Integrated Casting Block, 41.5 Kg
- --------------------------- ----------------------------------------------------
474Q Sedan Gasoline Engine Block, 1.3L
V4, Integrated Casting Block, 42 Kg
- --------------------------- ----------------------------------------------------
465-1ANE1 Mini Sedan Gasoline Engine Block, 1.1L
V4, Integrated Casting Block, 31 Kg
- --------------------------- ----------------------------------------------------
GL16 Sedan Gasoline Engine Block, 1.6L
V4, Integrated Casting Block, 38 Kg
- --------------------------- ----------------------------------------------------
482Q Sedan Gasoline Engine Block, 1.6L
V4, Integrated Casting Block, 40 Kg
- --------------------------- ----------------------------------------------------
465QF Mini Sedan Gasoline Engine Block, 1.0L
V4, Integrated Casting Block, 30 Kg
- --------------------------- ----------------------------------------------------
368Q Mini Sedan Gasoline Engine Block, 0.8L
V3, Integrated Casting Block, 22.5 Kg
- --------------------------- ----------------------------------------------------
479Q Sedan Gasoline Engine Block, 1.3/1.5L
V4, Integrated Casting Block, 38 Kg
- --------------------------- ----------------------------------------------------
465Q Mini Sedan Gasoline Engine Block, 0.9L
V4, Integrated Casting Block, 28 Kg
- --------------------------- ----------------------------------------------------
462Q Mini Sedan Gasoline Engine Block, 0.8L
V4, Integrated Casting Block, 28 Kg
- --------------------------- ----------------------------------------------------
491Q Light Truck Gasoline Engine Block, 2.2L
V4, Integrated Casting Block, 55 Kg
- --------------------------- ----------------------------------------------------
3RZ Light Truck Gasoline Engine Block, 2.8L
V4, Integrated Casting Block, 61 Kg
- --------------------------- ----------------------------------------------------
2RZ Light Truck Gasoline Engine Block, 2.8L
V4, Integrated Casting Block, 55 Kg
- --------------------------- ----------------------------------------------------
276 Mini Vehicle Diesel Engine Block, 1.0L
V4, Integrated Casting Block, 26 Kg
- --------------------------- ----------------------------------------------------
The 491Q and 465Q have been, and continue to be Tonglin's best selling
products accounting for approximately 72.0%, 73.9% and 67.5% of Tonglin's
revenues for the fiscal years ended December 31, 2003, 2002 and 2001
respectively. Together with the 462Q and 479Q, these models have accounted for
approximately 90.8%, 95.0 and 96.9% of Tonglin's revenues in the fiscal years
ended December 31, 2003, 2002 and 2001, respectively. While Tonglin's product
sales are currently concentrated, it is making efforts to market its other
models as its production capacity has expanded. See "Marketing."
One of the areas which Tonglin believes sets it apart from other engine
block manufacturers is its emphasis on quality, beginning with its purchase of
raw materials and through the production process, and low cost. Tonglin chooses
its suppliers of raw materials through rigorous quality assurance testing,
interviews, site visits and, secondarily, based on price. Tonglin considers
hundreds of raw material suppliers in order to have at least three acceptable
sources available at all times for each raw material.
Tonglin has obtained International Organization for Standardization
("ISO") TS16949 Certification with respect to its production processes. ISO
TS16949 is a quality assurance standard specific to automotive production and
service part companies. It aligns existing U.S., German, French and Italian
automotive quality system standards within the global automotive industry and
specifies the quality system requirements for the design, development,
production, installation and servicing of automotive-related products. ISO
TS16949 was written by the International Automotive Task Force which consists of
the following group of vehicle manufacturers: BMW Group, DaimlerChrysler, Fiat
Auto, Ford Motor Company, General Motors Corporation, PSA Peugeot-Citroen,
Renault S.A. and Volkswagen, as well as several trade associations.
Tonglin believes that its emphasis on quality has not only resulted in
increased orders for its products, but has also resulted in a low percentage of
engine blocks which do not pass inspection prior to shipping or are returned by
customers. For the fiscal year ended December 31, 2003, only 1.75% of Tonglin's
engine blocks were rejected upon inspection by Tonglin or by customers. Tonglin
also believes that in the future, its quality, and compliance with international
standards may assist it in marketing engine blocks in countries other than the
PRC.
Raw Materials
Tonglin's low cost structure is dependent on its ability to procure raw
materials, which are generally available, at prices which allow it to compete
with other engine block manufacturers. The raw materials purchased by Tonglin
consist primarily of iron and resin sand used in the casting process. See
"Tonglin's Production Processes." Tonglin does not have any long-term contracts
or arrangements with any suppliers and therefore, there is no guarantee that
necessary materials will continue to be procured at the prices or delivery terms
currently available or acceptable to Tonglin. However, as set forth above,
Tonglin evaluates numerous suppliers each year and always has at least three
that are approved for purchases for each raw material.
During the fiscal year ended December 31, 2003, Tonglin purchased raw
materials from the following suppliers totaling 35.3% of its total raw material
purchases: Xu Yundong, Jinan Shengquan and Xinjin Financial Commerce and Trading
Co., Inc.
During the fiscal year ended December 31, 2002, Tonglin purchased raw
materials from the following suppliers totaling 40.3% of its total raw material
purchases: Xu Yundong, Lu County Sand Factory and Chenghua District Recycled
Resources Company.
To date, Tonglin has not experienced any significant difficulty in
obtaining raw materials other than fluctuation in prices between 2002 and 2003
for iron. Tonglin believes that the raw materials it requires will continue to
be generally available in the future.
Tonglin's Production Processes
Tonglin's production of engine blocks is accomplished almost entirely
through the use of manual labor with approximately 1030 workers working three
shifts six days per week. At Tonglin's current production levels, Tonglin is
able to take advantage of low cost labor in the Chengdu area, which are
estimated to be approximately 50% lower than in the Beijing or Shanghai areas.
Tonglin has experienced minimal worker turnover because its wages are better
than average in its region and Tonglin retains the flexibility to add or
subtract workers as needed. However, once production levels increase beyond
Tonglin's current capacity of 700,000 engine blocks, Tonglin's management
believes that it will become feasible to automate certain of its production
processes. In order to automate Tonglin's production processes, the Company will
likely seek to raise capital from outside sources. However, there can be no
assurance that such capital will be available, and if available, that it will be
available on satisfactory terms.
Tonglin's engine blocks are produced using a sand casting process.
Casting is a process in which liquid molten metal is poured into a hollow cavity
or mold. After the molten metal cools, it has the shape of the mold cavity. In a
sand casting process, the mold is made from sand by packing the sand onto wood
or metal pattern halves, removing it from the pattern halves and assembling the
two halves.
Tonglin believes that the sand casting process is currently the best
available for iron engine blocks because die casting, which is used for aluminum
and lighter metals, cannot be used with iron. In a die casting process, molten
metal is injected into a steel mold at high pressure. The mold separates and
ejects the casting as the metal cools.
Tonglin uses a dry resin sand (sand mixed with clay) which allows for
production with little capital investment, short production cycles and
approximately 90% of the sand used in the process is reclaimed and reused. Many
cast-iron engine block companies, and most in the PRC, use a green sand casting
method utilizing wet sand. While the sand used in this method can be cheaper,
the molding machinery can be more expensive and wet molds deform easily and
result in lower quality products.
Prior to production, raw materials, primarily iron, are inspected and
tested for purity and then melted. Once the mold is made from the resin sand,
molten iron is poured into the mold and allowed to cool. When the metal cools,
the engine block is removed from the mold by breaking it. The engine block is
then machined to remove any excess metal, and polished to a smooth finish and
painted with an anti-rust paint.
Random samples are taken from each batch of finished engine blocks for
quality control inspection and testing using physical, chemical and
spectrographic analysis.
The PRC Automobile Market
The PRC automobile market has been characterized by steady growth
beginning in the mid-1990s and continuing today. In the six years since 1998,
domestic automobile production has increased from approximately 1.6 million
vehicles to approximately 4.4 million vehicles, or approximately 275%. Private
automobile ownership and the number of licensed driver in the PRC showed similar
increases during the same period. Private vehicle ownership reached more than 10
million in calendar 2003 according to the PRC National Bureau of Statistics and
the number of licensed drivers increased from 16,734,000 in 1995 to 48,271,000
in 2002, according to FOURIN China Auto Weekly.
The growth in the PRC automobile market has been greatly assisted by
the PRC government which has imposed tariffs and import quotas on foreign made
vehicles, limited foreign ownership of automobile manufacturers to 50%,
encouraged foreign investment and assisted in infrastructure development.
According to FOURIN China Auto Weekly, the length of roadways in the PRC
increased from 1,157,009 kilometers in 1995 to 1,765,222 kilometers in 2002. In
addition, there are numerous new and continuing road improvement and expansion
projects, mostly centering around the PRC's major urban areas.
While the Company believes that the assistance of the PRC government
will continue, the PRC has agreed, in connection with its entry into the World
Trade Organization ("WTO"), to eliminate quotas and substantially lower tariffs
on imported automobiles. This is already beginning to lead to increased
competition, lower prices and lower profits to PRC automakers. It is also
likely, in turn, to lead to lower prices and margins for automobile parts and
components, including engine blocks.
Nevertheless, the PRC is currently the fifth largest producer of
automobiles in the world and the Company believes that PRC automobile production
and sales will continue to grow in the future. The Company's beliefs are based
on the continuing and rapid growth being experienced by the PRC economy as well
as the following PRC government and industry forecasts made during 2003. While
there is some disagreement over the rate of growth that the market will
experience, many forecasters agree that growth will be strong.
Prediction of PRC Automakers
----------------------------
Source Production
- ------ ----------
Shen Ningwu 10 million by 2010
Vice Chairman
China Association of Automobile Manufacturers
Feng Fei 5.89 million cars
Deputy Director-General 3.48 million trucks/buses
State Council of PRC Industrial Economics by 2010
Research Development
Huang Yong He 7.5-8.2 million by 2010
China Automotive Technical Research Center
Atsuyoshi Hyogo 7 million cars
CEO 3 million trucks/buses
Honda Motor China Investment Co. by 2010
Miao Wei 20% annual growth to 2009
Chairman of the Board of Directors
Donfeng Motors
Li Wenyong 5.11 million card
Deputy Chief Economist 4.01 million trucks/buses
FAW
Source of data: FORIN China Auto Weekly, March 1, 2004 Edition
Like the market for automobiles, the market in the PRC for auto parts
has shown similar growth. Although consistent and reliable data with respect to
the PRC auto parts market is often unavailable, according to FORIN China Auto
Weekly, many sectors of the auto parts market in the PRC have shown substantial
growth between 1997 and 2002, and engine related parts have shown particularly
strong growth. The Company believes that this growth is likely to continue as
long as automobile production continues to grow.
Marketing, Sales and Sales Contracts
Based on its own sales of engine blocks and the total number of PRC
manufactured automobiles in 2003, Tonglin estimates that its engine blocks were
in approximately 11% of all automobiles produced in PRC in 2003 and 30% of light
trucks and mini class automobiles during the same period.
Tonglin markets its products directly to its customers through its 11
member sales department. Each member of the sales department receives three to
five months of training in both business and technical matters relating to
engine blocks and their design, function and manufacturing.
The sales department performs several functions. First, the sales
department is responsible for business development. In order to develop
business, Tonglin employees contact auto manufacturers directly and attend trade
shows and exhibitions for the casting and auto parts industries in the PRC.
While Tonglin has also started to place advertisements in trade journals and
papers, most of its business has been developed by direct solicitation of
customers and referrals from other customers.
Second, the sales department is responsible for after-sales service.
Tonglin has one employee on-site at each of its major customers who provide
technical assistance and support for Tonglin's products, ensure customer
satisfaction, collect data as to how Tonglin's products can be improved and
better integrated into its customers' production lines and monitor the quality
of Tonglin's products from the customer's prospective. Tonglin has received a
favorable response to its on-site support and plans to add additional on-site
support personnel.
Third, the sales department is responsible for studying and analyzing
market trends and data in order to recommend new products or an emphasis on
particular products.
Because Tonglin has additional capacity of approximately 250,000 engine
blocks per year, the sales department plans to increase Tonglin's market share
by improving customer service by adding more on-site service personnel at its
customers, taking a more active role in developing product specifications with
customers, improving market and competition research in order to respond quickly
to changes and new developments, increasing advertising in trade journals and
other publications and marketing Tonglin's products to automobile manufacturers
and engine assemblers in provinces where Tonglin does not now have a significant
presence.
Most of Tonglin's sales are made through contracts with its
customers. The contracts tend to be short term - less than one year - and
specify a number of engine blocks to be delivered and dates or months of
delivery. Prior to entering into a contract, Tonglin usually receives a letter
of intent from the customer. Upon receipt of the letter of intent, the managers
of the Sales, Accounting and Production departments convene to discuss the
manpower, raw material and other requirements for the contract and then set
forth definitive contract terms using Tonglin's standard contract form. A
contract is then drafted which must be approved by Tonglin's Chairman.
Because the sales contracts specify numbers of engine blocks needed and
when, Tonglin usually has ample time to plan for production and does not
experience significant backlogs of orders.
Seasonality of Tonglin's Business
Tonglin's production tends to peak in February and March of each year
and slow down in July and August. The slowdown in July and August is due to a
general slowdown in production in the auto industry in the PRC as a whole at
this time due to higher summer temperatures which make it difficult to produce
automobile in non-air conditioned factories. Production tends to increase in the
PRC auto industry in February and March as may people and businesses in the PRC
begin looking to purchase cars after the Chinese new year in late January or
early February.
Competition
The automobile parts market in the PRC generally is competitive with
approximately 100 PRC automakers to supply. With the PRC's entry into the WTO
and the PRC's agreements to lift many of the barriers to foreign competition,
the Company believes that competition will increase in the PRC auto parts market
as a whole with the entry of foreign companies to the market. However, with
respect to engine blocks, the Company believes that Tonglin can continue to
increase its market share within the PRC because of its ability to manufacture
at a low cost and because engine blocks are heavy and expensive to ship from
other countries.
Tonglin's current competition is primarily from the following
companies:
------------------- ------------
Competitor Model(s)
------------------- ------------
Chongqing Aoli 462Q, 368Q
and 465Q
------------------- ------------
Kunshan Toyota 491Q
------------------- ------------
Shenyang Futian 491Q
------------------- ------------
Nanjing Teksid 480Q
and
372Q
------------------- ------------
Tonglin's primary direct competitor is Chongqing Aoli which, like
Tonglin, sells a large percentage of its engine blocks to Chongqing Chang'an
Automobile Co., Ltd.. The Company believes that Chongqing Chang'an Automobile
Co., Ltd. currently purchases approximately 45% of its engine blocks from
Chongqing Aoli and that Chongqing Aoli has approximately the same production
capacity as Tonglin. However, Tonglin believes that its quality and customer
satisfaction are better than Chongqing Aoli and that Tonglin has recently been
gaining market share from it.
Shenyang Futian is larger and better capitalized than Tonglin and the
quality of its products is comparable to that of Tonglin. However, Tonglin's
prices are lower which the Company believes gives it a substantial advantage.
In addition to the above, there are several large automobile
manufacturers in the PRC which, to some extent, are vertically integrated and
manufacture their own engine blocks. Tonglin plans to market to these
manufacturers in the future because Tonglin believes it can offer lower costs
and comparable quality.
Research and Development Activities
Tonglin has 42 employees engaged in research and development
activities. Research and development activities encompass the development of new
products, as well as the improvement of existing products and manufacturing
processes. Tonglin selects research and development projects based upon
automobile market production trends and requests from its customers for
additional products.
Tonglin currently has nine products under development, five of which
have been sent out to customers for testing and analysis. For full year 2004 and
2005, Tonglin currently plans to introduce two additional products each year.
Intellectual Property
Tonglin does not own any intellectual property.
Government Regulation
Tonglin does not face any significant government regulation of its
business or production and does not require any government permits or approvals
to conduct its business, other than those required of all corporation in the
PRC.
Employees
The Company, through Tonglin, currently has approximately 1200
employees, of which approximately 1030 are manufacturing workers. Tonglin's
manufacturing workers work in three shifts, six days per week.
Tonglin requires each employee to enter into a standard employment
agreement. Employees in the Research and Development, Sales and Accounting
Departments are also required to sign a confidentiality agreement protecting
Tonglin's corporate and production information and processes.
Risk of Loss and Liability Issues
Pursuant to the shipping terms in Tonglin's standard customer contract,
Tonglin bears the risk of loss in shipment which it does not insure. While,
Tonglin believes that the shipping companies it uses carry adequate insurance or
are sufficiently solvent to cover any loss in shipping, there can be no
assurance that Tonglin can be adequately reimbursed upon the loss of an engine
block shipment.
Tonglin does not carry any product liability or other similar
insurance. While product liability lawsuits in the PRC are rare and Tonglin has
never experienced significant failures of its products, there can be no
assurance that Tonglin would not face liability in the event of the failure of
any of its products.
Related Parties and Conflicts of Interest
As set forth above, Tonglin began as a workshop of Chengdu Rongxin
Enterprises Co., Ltd. ("Rongxin") which is owned by Li Yungao, the Company's
principal shareholder and Tonglin's former principal shareholder. There are a
number of other companies which have common shareholders and management with the
Company and Tonglin which also had started as part of Rongxin, as listed below.
To the extent that the persons listed below have positions with either
Tonglin or the Company and positions with other entities, they may not be able
to devote their full business time to the Company, Tonglin and their operations.
Name of Related Entity Related Persons/Positions with the Company or Tonglin
- ---------------------- -----------------------------------------------------
Chengdu Rongxin Industrial Li Yungao - CEO and Chairman.
Co., Ltd. Also, General Manager and Chairman of Tonglin,
principal shareholder of the Company.
Wang Wenquan - General Manager.
Also a member of the Tonglin Board.
Chen Weisheng - Vice General Manager and
General Accountant. Also, Vice General Manager,
CFO and Board member of Tonglin.
Wang Xin - Vice General Manager and Director.
Also, a member of the Tonglin Board.
Song Ronghui - Vice General Manager and
Director. Also, a Vice General Manager for
Sales with Tonglin.
Liu Zenglin - Vice General Manager. Also, the
Chief Engineer for Tonglin.
Chengdu Rongxin Ruigao Machinery Li Yungao - 70% owner, General Manager and Co.,
Co., Ltd. Chairman. Also, General Manager and Chairman
of Tonglin, principal shareholder of the Company.
Wang Wenquan - Shareholder, Vice General
Manager and Director. Also a member of the
Tonglin Board.
Chen Weisheng - Shareholder, Vice General
Manager and Director. Also, Vice General
Manager, CFO and Board member of Tonglin.
Wang Xin - Shareholder, Vice General Manager
and Director. Also, a member of the Tonglin
Board.
Song Ronghui - Shareholder, Vice General
Manager and Director. Also, a Vice General
Manager for Sales with Tonglin.
Liu Zenglin - Shareholder, Vice General Manager.
Also, the Chief Engineer for Tonglin.
Chengdu Begin Pipeline Co., Ltd. Li Yungao - Owner and Chairman of the Board.
Also, General Manager and Chairman of Tonglin,
principal shareholder of the Company.
Chen Weisheng - Director. Also, Vice General
Manager, CFO and Board member of Tonglin.
Wang Xin - General Manager. Also, a member of
the Tonglin Board.
Song Ronghui - Director. Also, a Vice General
Manager for Sales with Tonglin.
Chengdu High Pressure Valve Plant Owned collectively by a number of Tonglin
officers and directors.
Chengdu Taichang Metals Co., Ltd. Li Jing - Principal owner and Chairman. Also a
Director of the Company and the son of Li Yungao.
MANAGEMENT'S DISCUSSIONS AND ANALYSIS
Overview
The Company was formed in 2000 and is a holding company for Rhohan,
which is a holding company for, and owns 100% of Tonglin. Tonglin is a
manufacturer of engine blocks which currently manufactures and is developing a
total of 20 different engine blocks which accommodate three or four cylinders
for cars, mini vans and light trucks.
Tonglin sells its products through an internal sales staff, primarily
to five customers which for the fiscal years ended December 31, 2003 and
December 31, 2002, accounted for 94.0% and 93.5% of total sales, respectively.
The loss of any of these customers and Tonglin's lack of a very large customer
base could adversely impact its business.
Tonglin does not recognize sales until its products are accepted by its
customers. This is because, pursuant to the terms of its contracts with
customers, Tonglin is responsible for shipment of its products, and the risk of
loss during shipment, and customers and a Tonglin employee inspect the shipment
once it arrives at the customer's facility, reject any defective or unusable
engine blocks and agree on how many units will be invoiced to the customer. An
invoice is subsequently generated and sent to the customer.
Products that are rejected by customers are repaired and returned to
inventory. Tonglin has not experienced returns of material quantities of any of
the products it sells during the fiscal years ended December 31, 2003 or 2002,
and therefore, does not believe that it is subject to material risk of inventory
buildup attributable to returns.
Over the previous two fiscal years, Tonglin has expanded its operations
and production facilities in order to meet increased demand from its existing
customers which have expressed satisfaction with its products. Accordingly, in
the fiscal years ended December 31, 2003 and December 31, 2002, Tonglin invested
approximately $1.8 million and $.3 million , respectively in improvements to its
production facilities and new equipment. These expenditures resulted in an
increase in Tonglin's production capacity from approximately 400,000 to
approximately 700,000 engine blocks during the same period.
The market for Tonglin's products is competitive and it expected to
become more competitive as foreign products enter the PRC market with the PRC's
entry into the World Trade Organization. Tonglin believes that the selling
prices for its products may decrease in future periods, although the timing and
amounts of these decreases cannot be predicted with any certainty. These
decreases may be offset by the introduction of new products and increasing sales
volumes.
Results of Operations
Sales and Gross Profit
Net sales for the fiscal year ended December 31, 2003 were
approximately $16.2 million compared to approximately $14.2 million for the
fiscal year ended December 31, 2002, an increase of approximately 14.8%. The
increase in net sales resulted primarily from Tonglin's expansion and ability to
produce more engine blocks. The increase in net sales was not attributable to
any change in prices which, for all products in Tonglin's product line, remained
stable from the fiscal year ended December 31, 2002 to the year ended December
31, 2003.
Gross profit for the year ended December 31, 2003 was approximately
$6.3 million, a decrease of approximately 5.1% or approximately $.4 million from
$6.7 million for the prior year. The decrease in gross profits was primarily due
to an increase in the cost or iron from an average of approximately $179 per ton
for the fiscal year ended December 31, 2002 to an average of approximately $213
per ton for the fiscal year ended December 31, 2003.
During the fiscal years ended December 31, 2003 and December 31, 2002,
there was a substantial concentration of sales. During the year ended December
31, 2003, approximately 94.0% of sales were to five customers and approximately
68.0% of sales were to three customers. For the fiscal year ended December 31,
2002, approximately 93.5% of sales were to five customers and approximately
72.8% of sales were to three customers.
Cost of Sales
Cost of sales increased to approximately $9.9 million in the fiscal
year ended December 31, 2003, or approximately 32.3% from approximately $7.5
million in the prior year primarily due to (i) increased production of
approximately 27.9% from 343,334 engine blocks to 438,984 engine blocks and (ii)
the increase in the cost of iron in the fiscal year ended December 31, 2003
noted above.
Tonglin's increase in production resulted from increased orders from
certain existing customers and increased sales of Tonglin's 465Q product from
127,345 units during the fiscal year ended December 31, 2002 to 187,413 units
for the fiscal year ended December 31, 2003.
Selling, General and Administrative
Selling, general and administrative expenses were approximately $2.1
million, in the fiscal year ended December 31, 2003, or approximately 12.8% of
net sales, compared to approximately $2.5 million, or approximately 17.4% of net
sales, for the fiscal year ended December 31, 2002.
Selling, general and administrative expenses for the fiscal year ended
December 31, 2003 were primarily made up of salaries and wages ($686,450) and
engine block assembly and delivery charges ($394,512). The decrease in selling,
general and administrative expenses primarily resulted from a reduction of
non-production support staff and a decrease in office, entertainment and other
expenses.
Income Taxes
The Company did not carry on any business and did not maintain any
branch office in the United States during the fiscal years ended December 31,
2003 and December 31, 2002. Therefore, no provision for withholding or U.S.
federal income taxes or tax benefits on the undistributed earnings and/or losses
of the Company has been made.
Pursuant to the relevant laws and regulations in the PRC, Tonglin, as a
wholly foreign owned investment enterprise in the PRC, was entitled to an
exemption from the PRC enterprise income tax for two years commencing from its
first profit-making year, after the losses carry-forward from the immediate
previous five years being recovered. Tonglin was profitable and all losses were
recovered as of January 1, 2002. Beginning on that date, Tonglin, as a wholly
foreign owned enterprise, became entitled to 50% relief from the PRC enterprise
income tax for the following three years.
Because Tonglin is located in a Special Economic Zone designated by the
PRC government, it is subject to a special discounted enterprise income tax rate
of 15%. Therefore, Tonglin's income tax rate for the fiscal years ended December
31, 2003 and December 31, 2002 was 50% of that amount or 7.5%. The income tax
rate will remain 7.5% until December 31, 2004 and will then rise to the full
15%.
Tonglin is also exempt from local income taxes of 3% until January 1,
2005.
Plan of Operation
Over the 12-month period beginning April 1, 2004, Tonglin's plan of
operation centers on continuing to increase its sales and production. Tonglin
has already made capital investments which allow it to produce an additional
250,000 engine blocks more than production in the fiscal year ended December 31,
2003. Now, it is focusing on marketing additional products to its existing
customers and adding new customers through increased advertising and calls on
potential customers in Shenyang Xinguang and SAIC-Chery Qirui where Tonglin does
not currently have a presence.
In order to increase its sales to existing customers, Tonglin plans to
increase its sales and service personnel, particularly personnel who are on site
at Tonglin's customers. In addition, Tonglin plans to continue working on its
nine new products under development, including five products which have already
been sent to customers for testing, and also plans to put at least two more
products into its development pipeline prior to the end of fiscal 2004.
Tonglin believes that it will be able to execute its plan of operation
over the next 12 months using its existing income, earnings and credit
facilities without having to raise capital from outside sources.
Liquidity and Capital Resources
Since Tonglin's inception, it has financed its operations and met
capital expenditure requirements primarily through cash flows from operations,
bank loans and lines of credit and capital from its shareholders and related
parties. Although Tonglin is, and has been profitable, it currently needs to use
short-term loans to finance its operations. Because of the seasonal nature of
Tonglin's and the automobile business in the PRC, which tends to be slow in the
summer months and then peaks in February and March, when PRC automobile
purchases tend to be made, and a slower payment cycle than in the U.S., Tonglin
extends unsecured credit to its customers during the fiscal year and finances
its operations with short term bank loans and loans from related parties.
Tonglin believes that over the next 12 months it will continue to rely
on short term bank loans to finance its operations. As of December 31, 2003,
Tonglin had the following short term loans outstanding with the following terms:
Lender and Terms Amount Due
Chengdu Dity Commercial Bank, $1,210,000
Dayi Branch
Due January 29, 2004
Monthly interest-only payments
at .57525%
Guaranteed by Chengdu High
Pressure Valve Plant
Shanghai Pu Dong Development Bank, $3,630,000
Chengdu Branch
Due March 9, 2004
Monthly interest-only payments at
..48675%
Guaranteed by Chengdu Rongxin
Ruigao Machinery Co., Ltd.
The above loans have been refinanced into short-term
loans due within one year during 2004.
Tonglin has, in the past, loaned monies to Chengdu Taichang Metals Co.,
Ltd., a company principally owned by Li Jing, an officer and director of the
Company, and the son of Li Yungao, the Company's Chairman and CEO, as well as
Tonglin's and Rhohan's Chairman and CEO. All such loans were repaid by Chengdu
Taichang Metals Co., Ltd. on April 1, 2004 with no further liability to Tonglin.
As of December 31, 2003, Tonglin had the following lines of credit outstanding
for the benefit of Chengdu Taichang Metals Co., Ltd.:
Lender and Terms Amount Due
Shanghai Pu Dong $1,210,000
Development Bank,
Chengdu Branch
Due June, 2004
Transaction fee at .05%
and a restricted cash deposit
of 30% of the loan or $363,000
and Chengdu Rongxin Ruigao Machinery
Co., Ltd. guaranteed the difference
between the cash deposit and the credit
line amount.
Chengdu City Commercial Bank, $1,815,000
Dayi Branch
Due May, 2004
Transaction fee at .05%
Restricted cash deposit
of 40% of the loan or $726,000
and Chengdu Rongxin Industrial Co., Ltd.
guaranteed the difference between the
crash deposit and the credit line amount.
Chengdu City Commercial Bank, $2,420,000
Dayi Branch
Transaction fee at .05%
Due June, 2004
Restricted cash deposit
of 40% of the loan or $968,000
and Chengdu Rongxin Industrial Co., Ltd.
guaranteed the difference between the cash
deposit and the credit line amount.
Because of Tonglin's borrowing activities, during the fiscal years
ended December 31, 2003 and December 31, 2002, cash flows from operating
activities were $(6,566,988) and $(1,460,163) respectively. In addition, net
cash provided by financing activities during the fiscal years ended December 31,
2003 and December 31, 2002 was $9,055,383 and $1,229,617, respectively.
Net cash used in investing activities for the fiscal years ended
December 31, 2003 and December 31, 2002 was $(2,000,394) and $(256,167),
respectively. These monies were used for the purchase of automobiles and
equipment.
Accounts Receivable
The decrease in trade accounts receivable from December 31, 2002 to
December 31, 2003 is primarily attributable to faster collections in fiscal year
2003 and the transfer of more receivables into arrangements where the customer's
bank guarantees payment of the receivables within a three to six month period as
explained in Note 1 to the Company's Consolidated Financial Statements. The
accounts receivable turnover for the fiscal years ending December 31, 2003 and
December 31, 2002 averaged 160 days and 152 days, respectively.
The increase in Other Related Party Receivable to approximately $5.5
million for the fiscal year ended December 31, 2003 from approximately $1.9
million for the fiscal year ended December 31, 2002, was due to the increase in
monies loaned to Chengdu Taichang Metals Co., Ltd., a related party.
Inventory
Inventories of both raw materials and finished products increased
between the fiscal years ended December 31, 2003 and December 31, 2002.
Inventories of raw materials increased from approximately $0.7 million to $0.9
million and inventories of finished products increased from approximately $0.5
million to approximately $1.2 million. The increase in raw material and finished
product inventories was primarily due to increased production levels to meet
increased demand for Tonglin's products.
Inventory turnover for the fiscal year ended December 31, 2003 was 61
days and for the fiscal year ended December 31, 2002 was 62 days.
Accounts Payable and Short Term Loans
The accounts payable, accrued expenses, other payables and short term
loans increase from December 31, 2002 to December 31, 2003 is primarily
attributable to the increase in short term loans to finance production and
relating to monies loaned to Chengdu Taichang Metals Co., Ltd., a company owned
by Li Jing, a Company officer and director and the son of Li Yungao, as
described above.
Cash
The increase in cash from December 31, 2002 to December 31, 2003 of
approximately $2.2 million is primarily attributable to increased sales as well
as increased borrowings on Tonglin's short-term credit arrangements.
Critical Accounting Policies
Management's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The Company's financial statements
reflect the selection and application of accounting policies which require
management to make significant estimates and judgments. See note 1 to the
Company's consolidated financial statements, "Summary of Significant Accounting
Policies." Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes that the following reflect the
more critical accounting policies that currently affect the Company's financial
condition and results of operations.
Revenue recognition
Product sales are recognized when the products are delivered and title
has passed. The Company offers no warranties on its products. However the
customers have 3-5 days to inspect the goods and to notify the Company if there
are any products that do not meet the quality standards set forth in their
contract. The Company at this time replaces the goods with new products and the
defective goods are returned to Tonglin and are reworked and returned to
inventory.
Sales revenue represents the invoiced value of goods, net of a
value-added tax (VAT). All of the Company's products that are sold in the PRC
are subject to a Chinese value-added tax at a rate of 17% of the gross sales
price. This VAT may be offset by VAT paid by the Company on raw materials and
other materials included in the cost of producing their finished product.
Accounting for long-lived assets
Plant and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Depreciation is recorded utilizing the straight-line method over the estimated
original useful life ranging from 5-30 years.
Long-term assets of the Company are reviewed annually as to whether
their carrying value has become impaired. The Company considers assets to be
impaired if the carrying value exceeds the future projected cash flows from
related operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of December 31, 2003, the Company expects these assets to be
fully recoverable.
Bad debts
The Company's business operations are conducted in the People's
Republic of China. During the normal course of business, the Company extends
unsecured credit to its customers. Management reviews its accounts receivable on
a regular basis to determine if the bad debt allowance is adequate at each
year-end. However, the Company records a provision for accounts receivable trade
which ranges from 0.3% to 1.0% of the outstanding accounts receivable balance in
accordance with generally accepted accounting principles in the PRC.
DESCRIPTION OF PROPERTY
Tonglin operates through five factory plants, a warehouse and a
separate office building, which occupy approximately 9.5 acres.
All land in the PRC is owned by the government and cannot be sold to
any individual or entity. Instead, the government grants landholders a "land use
right." In 2003, Tonglin purchased the land use right for the land
occupied by Plant 5 and the warehouse from the government for $171,358. This
land is currently held in the name of Chengdu Rongxin Industrial Co., Ltd. which
is currently in the process of applying for a name change for the land use
right.
Plants 1 through 4 were contributed to Tonglin by Chengdu Rongxin
Enterprises Co., Ltd. upon its formation and Plant 5 and the warehouse used by
Tonglin were constructed by Tonglin. Chengdu Rongxin Enterprises Co., Ltd. was
dissolved in October, 2002 and its assets and liabilities were assumed by
Chengdu Rongxin Ruigao Machinery Co., Ltd.
Tonglin is in the process of obtaining the necessary certificates to
evidence ownership of the buildings for Plants 1 through 4 under PRC law.
Tonglin's PRC counsel has advised that without the certificates, Tonglin does
not have the legal right to use these buildings and that Chengdu Rongxin
Machinery Co., Ltd. can take possession of them at any time. Plants 1 through 4
are also currently subject to a mortgage payable by Chengdu Rongxin Industrial
Co., Ltd. and therefore, a default in payment would give the mortgagee the right
to take possession of Plants 1 through 4.
The right to use the land on which plants 1 through 4 are situated is
also owned by Chengdu Rongxin Industrial Co., Ltd. Chengdu Rongxin Industrial
Co., Ltd. is currently in the process of replacing Plants 1 through 4 with
certain of its own assets as collateral for the mortgage so that Tonglin can
apply for transfer of title to Plants 1 through 4 and procure the necessary
certificates.
Pursuant to a January 1, 2000 agreement, Tonglin leases the following
from Chengdu Rongxin Ruigao Machinery Co., Ltd. for the following amounts:
office space and employee living quarters - RMB 600,000 per year
vehicles - RMB 300,000 per year; and
computer equipment and office furniture - RMB 100,000 per year.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth as of May 12, 2004, certain information
with respect to the beneficial ownership of the voting securities by (i) any
person or group with more than 5% of the Company's securities, (ii) each
director, (iii) each executive officer and (iv) all executive officers and
directors as a group.
Name and Amount and
Address of Title of Nature of Beneficial Percent of
Beneficial Owner Class Ownership Class (1)
---------------- ----- --------- ---------
Li Yungao/Double Unity Investments Limited
Director and CEO (2)(3) Common Stock 6,636,366 73%
4009 Gloucester Tower
11 Pedder Street
Central
Hong Kong
Li Jing, Director and COO Common Stock 0 0%
Xinchang Tonglin Industrial Zone,
Dayi County, Chengdu, Sichuan PRC 611337
Ding Ke, Director and EVP, Business Development Common Stock 272,727 3%
Flat 26A, Block A Lihu Garden
Hongli Road, Shenzen, Guandong PRC
Liu Zenglin, Vice General Manager for
Production - Tonglin Common Stock 272,727 3%
Xinchang Tonglin Industrial Zone,
Dayi County, Chengdu, Sichuan PRC 611337
Chen Weisheng - CFO - Tonglin Common Stock 272,727 3%
Xinchang Tonglin Industrial Zone,
Dayi County, Chengdu, Sichuan PRC 611337
Song Ronghui - Vice General Manager, Sales -
Tonglin Common Stock 272,727 3%
Xinchang Tonglin Industrial Zone,
Dayi County, Chengdu, Sichuan PRC 611337
Wang Xin - Director - Tonglin Common Stock 272,727 3%
Xinchang Tonglin Industrial Zone,
Dayi County, Chengdu, Sichuan PRC 611337
Wang Wenquan Common Stock 272,727 3%
Xinchang Tonglin Industrial Zone,
Dayi County, Chengdu, Sichuan PRC 611337
All Directors and Officers of the Company 8,272,728 91%
as a group (3 persons)
(1) Computed based upon a total of 9,090,910 shares of common stock
outstanding as of May 12, 2004.
(2) The sole shareholder of Double Unity Investments, Ltd. is Li Yungao,
the Chairman of the Board of Directors and CEO of the Company, Rhohan
and Tonglin.
(3) Each of Ding Ke, Liu Zenglin, Chen Weisheng, Song Ronghui, Wang Xin and
Wang Wenquan were granted shares of common stock in the Company are a
single group holding a total of 18% of the Company's outstanding common
stock because each was granted their common stock by Double Unity
Investments, Ltd. and, as a condition of the grant, agreed to any
reasonable restriction on sale of the common stock as may be suggested
by the Company or Double Unity Investments Limited
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS
The following are the current officers and directors of the Company.
The Company plans to add additional officers and directors in the next several
months, during which time the Board of Directors will interview suitable
candidates. Each of the Company's current officers and directors are residents
of the PRC. As a result, it may be difficult for investors to effect service of
process within the United States upon them or to enforce in the United States
court judgments obtained against them in the United States courts.
Name Positions Age
---- --------- ---
Li, Yungao CEO and Chairman of the 62
Board of Directors
Li, Jing COO and Director 34
Ding, Ke EVP, Business Development 40
and Director
LI YUNGAO is currently the sole Director and shareholder of Double Unity, a
Director of Rhohan and has served as the Chairman and CEO of Tonglin since its
formation in 2000. During the past five years Mr. Li Yungao has served as
Chairman and CEO of Chengdu Begin Pipeline Co., Ltd., a company which produces
metal pipes and pipeline products, and Chengdu Rongxin Industrial Co., Ltd. and
Chengdu Rongxin Ruigao Machinery Co., Ltd. which are holding companies for Mr.
Li Yungao's interests in machinery manufacturing companies. Mr. Li Yungao
started his career as a farmer and, after receiving training in manufacturing in
a valve factory, started his own metal and pipe casting companies. Mr. Li Yungao
is the father of Mr. Li Jing.
LI JING. For the past five years, Mr. Li Jing has served as the CEO of Chengdu
Taichang Metals Co., Ltd., a steel trading company. Mr. Li Jing has a degree
from Chengdu Economic Management College and is the son of Mr. Li Yungao.
DING KE is currently a Director of Rhohan and has been a Director of Tonglin
since 2000. During the past five years, Mr. Ding has served as the Executive
Vice President for Hua Tai Enterprise Management Co., Ltd. (1999-2002), an
investment management company.
Mr. Ding has a Bachelor of Material Engineering degree from Donghua University
and a Master of Management Science degree from Shanghai Jiaotong University.
FAMILY RELATIONSHIPS
Li Yungao is the father of Mr. Li Jing.
AUDIT COMMITTEE FINANCIAL EXPERT
The full Board of Directors of the Company currently serves as its
audit committee. The Board of Directors does not currently have an audit
committee "financial expert" as defined under Rule 401(e) of Regulation S-B
because the Company only recently consummated its transaction with Rhohan and
the Board of Directors is in the process of searching for a suitable candidate
for this Board position as well as others.
EXECUTIVE COMPENSATION
Neither the Company nor Rhohan currently pays any compensation to their
executive officers or directors. The following is a summary of the compensation
paid by Tonglin to its CEO and four most highly compensated officers.
ANNUAL COMPENSATION LONG TERM COMPENSATION
Awards Payouts
Other Restricted Securities
Annual Stock Underlying All
Year Compen- Awards Options/ LTIP Other
Name Position Ended Salary($) Bonus($) sation($) $ SARS Payouts Compensation
---- --------- ----- --------- -------- --------- - ---- ------- ------------
Li Yungao CEO 12/31/2003 $73,000 0 0 0 0 0 0
12/31/2002 $60,000 0 0 0 0 0 0
12/31/2001 $54,000 0 0 0 0 0 0
Chen Tonglin CFO 12/31/2003 $36,000 0 0 0 0 0 0
Weisheng
12/31/2002 $30,000 0 0 0 0 0 0
12/31/2001 $22,000 0 0 0 0 0 0
Wang Tonglin 12/31/2003 $36,000 0 0 0 0 0 0
Wenquan Director
12/31/2002 $30,000 0 0 0 0 0 0
12/31/2001 $22,000 0 0 0 0 0 0
Liu Zenglin Tonglin 12/31/2003 $36,000 0 0 0 0 0 0
Chief
Engineer
12/31/2002 $30,000 0 0 0 0 0 0
12/31/2001 $22,000 0 0 0 0 0 0
Song Ronghui Tonglin 12/31/2003 $36,000 0 0 0 0 0 0
Vice
General
Manager for
Sales
12/31/2002 $30,000 0 0 0 0 0 0
12/31/2001 $22,000 0 0 0 0 0 0
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During the fiscal years ended December 31, 2003 and December 31, 2002,
Tonglin entered into the following transactions with related parties:
During the fiscal year ended December 31, 2002, Chengdu Rongxin
Enterprises Co., Ltd. made a number of short term loans to Tonglin which totaled
$544,500, the proceeds of which were used by Tonglin to purchase equipment. All
of the loans were repaid by Tonglin during the fiscal year ended December 31,
2003. The total interest paid by Tonglin was $39,277 and $58,915 in the fiscal
years ended December 31, 2003 and December 31, 2002, respectively and the
interest rates on the loans ranged from 7.49% to 12.10%.
During the fiscal year ended December 31, 2002, Tonglin loaned
$1,210,000 to Chengdu Taichang Metals Co., Ltd. from the proceeds of Tonglin's
lines of credit.
On May 20, 2003, Tonglin entered into a loan agreement with Chengdu
Taichang Metals Co., Ltd. to loan it $3,025,000 of the proceeds from Tonglin's
credit lines for a period of 12 months. The loan agreement provided for the
payment of interest to Tonglin at maturity of the loan, calculated based on the
amount of restricted cash deposits using the bank's monthly interest rate of
0.4425%, plus a $121,000 consulting fee. Chengdu Taichang Metals Co., Ltd.
posted a deposit with Tonglin to partially guarantee repayment. All amounts due
were paid by Chengdu Taichang Metals Co., Ltd. prior to maturity on April 1,
2004.
On May 29, 2003, Tonglin entered into a loan agreement with Chengdu
Taichang Metals Co., Ltd. to loan it $2,420,000 of the proceeds from Tonglin's
credit lines for a period of 12 months. The loan agreement provided for the
payment of interest to Tonglin at maturity of the loan calculated based on the
amount of restricted cash deposits using the bank's monthly interest rate of
0.4425%, plus a $77,101 consulting fee. Chengdu Taichang Metals Co., Ltd. posted
a deposit with Tonglin to partially guarantee repayment. All amounts due were
paid by Chengdu Taichang Metals Co., Ltd. prior to maturity on April 1, 2004.
On November 4, 2003, Tonglin provided a guarantee to the Industrial and
Commercial Bank of China with respect to a $1,089,000 credit line for Chengdu
Rongxin Ruigao Machinery Co., Ltd. The line of credit and guarantee expired on
April 29, 2004.
During the fiscal years ended December 31, 2003 and December 31, 2002,
various cash advances and short term loans were made by and among Tonglin and
the companies listed under the heading "Related Parties and Conflicts of
Interest," above. These items were paid within each fiscal year and no interest
was charged.
During the fiscal years ended December 31, 2003 and December 31, 2002,
Tonglin made sales of $80,776 and $37,886, respectively, to Chengdu Rongxin
Ruigao Machinery Co., Ltd. and made purchases of $78,423 and $36,382,
respectively, from Chengdu Rongxin Ruigao Machinery Co., Ltd.
Pursuant to a January 1, 2000 agreement, Tonglin leases the following
from Chengdu Rongxin Ruigao Machinery Co., Ltd. for the following amounts:
office space and employee living quarters - RMB 600,000 per year
vehicles - RMB 300,000 per year; and
computer equipment and office furniture - 100,000 per year.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000
shares of common stock, par value $.0001 per share, of which there are 9,090,910
shares issued and outstanding, and 1,000,000 shares of preferred stock, par
value $.0001 per share, of which no shares have been designated or issued.
Common Stock
Holders of shares of common stock are entitled to one vote for each
share on all matters to be voted on by the stockholders. Holders of common stock
do not have cumulative voting rights. Holders of common stock are entitled to
share ratably in dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion from funds legally available therefore. In
the event of a liquidation, dissolution or winding up of the Company, the
holders of the Company's common stock are entitled to share pro rata all assets
remaining after payment in full of all liabilities.
Holders of the Company's common stock have no preemptive rights. There
are no conversion or redemption rights or sinking fund provisions with respect
to the Company's common stock.
Preferred Stock
The Company's Board of Directors is authorized to provide for the
issuance of shares of preferred stock in series and, by filing a certificate of
designations, preferences and rights pursuant under Delaware law, to establish
from time to time the number of shares to be included in each such series, and
to fix the designation, powers, preferences and rights of the shares of each
such series and the qualifications, limitations or restrictions thereof without
any further vote or action by the shareholders. Any shares of preferred stock so
issued are likely to have priority over the Company's common stock with respect
to dividend or liquidation rights. Any future issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of the
Company without further action by the shareholders and may adversely affect the
voting and other rights of the holders of common stock. At present, the Company
has no plans to neither issue any preferred stock nor adopt any series,
preferences or other classification of preferred stock.
The issuance of shares of preferred stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of preferred stock might impede
a business combination by including class voting rights that would enable the
holder to block such a transaction, or facilitate a business combination by
including voting rights that would provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power of the holders of the
common stock. Although the Board of Directors is required to make any
determination to issue such stock based on its judgment as to the best interests
of the stockholders of the Company, the Board of Directors could act in a manner
that would discourage an acquisition attempt or other transaction that some, or
a majority, of the stockholders might believe to be in their best interests or
in which stockholders might receive a premium for their stock over the then
market price of such stock. The Board of Directors does not at present intend to
seek stockholder approval prior to any issuance of currently authorized
preferred stock, unless otherwise required by law.
MARKET PRICE OF AND DIVIDENDS ON THE
REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of the date of this report, there is no trading market for the
Company's securities. The Company plans to conduct a public offering of its
securities in the future with the goal of having its securities traded on an
exchange. However, there can be no assurance that the Company will meet
applicable exchange listing requirements.
As of May 12, 2004, there are 10 holders of the Company's common stock.
Dividends
The payment of dividends, if any, is to be within the discretion of the
Company's Board of Directors. The Company presently intends to retain all
earnings, if any, for use in its business operations and accordingly, the Board
of Directors does not anticipate declaring any dividends in the near future.
Dividends, if any, will be contingent upon the Company's revenues and
earnings, capital requirements, financial conditions and the ability of Tonglin
to obtain approval to get monies out of the PRC. The PRC's national currency,
the Yuan, is not a freely convertible currency. Effective January 1, 1994, the
PRC foreign exchange system underwent fundamental changes. This reform was
stated to be in line with the PRC's commitment to establish a socialist market
economy and to lay the foundation for making the Yuan convertible in the future.
The currency reform is designed to turn the dual exchange rate system into a
unified and managed floating exchange rate system.
A China Foreign Exchange Trading Centre was formed in April, 1994 to
provide an interbank foreign exchange trading market whose main function is to
facilitate the matching of long and short term foreign exchange positions of the
state-designated banks, and to provide clearing and settlement services. The
People's Bank of China publishes the state managed exchange rate daily based on
the daily average rate from the previous day's inter-bank trading market, after
considering fluctuations in the international foreign exchange markets. Based on
these floating exchange rates, the state-designated banks list their own
exchange rates within permitted margins, and purchase or sell foreign exchange
with their customers.
The State Administration of Foreign Exchange of the PRC ("SAFE")
administers foreign exchange dealings and requires that they be transacted
through designated financial institutions. All Foreign Investment Enterprises
("FIEs") may buy and sell foreign currency from designated financial
institutions in connection with current account transactions, including, but not
limited to, profit repatriation. With respect to foreign exchange needed for
capital account transactions, such as equity investments, all enterprises in the
PRC (including FIEs) are required to seek approval of the SAFE to exchange Yuan
into foreign currency. When applying for approval, such enterprises will be
subject to review by the SAFE as to the source and nature of the Yuan funds.
There can be no assurance that the Yuan relative to other currencies
will not be volatile or that there will be no devaluation of the Yuan against
other foreign currencies, including the U.S.dollar.
Equity Compensation Plan Information
As of the date of this Report, the Company does not have any equity
compensation plans.
Transfer Agent
The Company currently acts as its own transfer agent, but plans to
engage a transfer agent when, and if, a trading market for its common stock
develops.
Penny Stock Regulations
The SEC has adopted regulations which generally define "penny stock" to
be an equity security that has a market price of less than $5.00 per share. The
Company's common stock, when and if a trading market develops, may fall within
the definition of penny stock and subject to rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000, or annual incomes exceeding $200,000 or
$300,000, together with their spouse).
For transactions covered by these rules, the broker-dealer must make a
special suitability determination for the purchase of such securities and have
received the purchaser's prior written consent to the transaction. Additionally,
for any transaction, other than exempt transactions, involving a penny stock,
the rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's common stock and
may affect the ability of investors to sell our common stock in the secondary
market.
LEGAL PROCEEDINGS
Neither the Company, nor Rhohan nor Tonglin is currently a party to any
pending legal proceeding.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
During the fiscal years ended December 31, 2003 and December 31, 2002,
and the subsequent interim period, the principal independent accountant of the
Company and its subsidiaries has not resigned or declined to stand for
re-election, and was not dismissed.
On January 24, 2004, Tonglin engaged as its independent auditor, Moore
Stephens Wurth Frazer and Torbet, LLP, 1199 S. Fairway Drive, Suite 200 Walnut,
California 91789, (909) 594-2713, which audited its December 31, 2003 and 2002
financial statements.
RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company sold the following securities
without registration under the Securities Act of 1933, as amended:
Upon its incorporation on May 1, 2001, the Company issued a total of
500,000 shares to two entities pursuant to Section 4(2) of the Securities Act of
1933, as amended.
On April 22, 2004, pursuant to the closing of a Capital Stock Exchange
Agreement among The Company, Rhohan and Double Unity, the Company issued a total
of 8,590,910 shares of its common stock to the following holders in the
following denominations:
Name Number of Shares
- ---- ----------------
Double Unity 6,636,366
Chen Weisheng 272,727
Liu Zenglin 272,727
Song Ronghui 272,727
Wang Xin 272,727
Wang Wenquan 272,727
Ding Ke 272,727
Ascend Venture Management Limited 318,182
The issuance was accomplished in reliance upon Regulation S promulgated
under the Securities Act of 1933, as amended on the basis that because each of
the recipients of the shares was a non-U.S. Person as defined under Regulation
S.
FINANCIAL STATEMENTS
The Company's consolidated financial statements, including the notes
thereto, together with the report of independent certified public accountants
thereon, are presented beginning at page F-1.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rhohan Holdings Limited and Subsidiary
We have audited the accompanying consolidated balance sheets of Rhohan Holdings
Limited and Subsidiary as of December 31, 2003 and 2002, and the related
consolidated statements of income and other comprehensive income (loss),
shareholders' equity and cash flows for years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Rhohan Holdings
Limited and Subsidiary as of December 31, 2003 and 2002, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
/s/ Moore Stephens Worth Frazer and Torbert, LLP
- ------------------------------------------------
Moore Stephens Worth Frazer and Torbert, LLP
February 25, 2004, except for Note 14,
as to which the date is April 24, 2004
Walnut, California
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
ASSETS
2003 2002
---------------- ---------------
CURRENT ASSETS:
Cash $ 488,001 $ -
Cash - restricted 2,057,000 363,000
Accounts receivable, trade, net of allowance for doubtful
accounts of $20,430 and $22,678 as of December 31, 2003 and 2002,
respectively 6,789,525 7,532,780
Accounts receivable, trade special 943,800 375,100
Other receivables, net of allowance for doubtful accounts of $278,300
and $0 as of December 31, 2003 and 2002, respectively 407,470 205,773
Other receivables - related party 5,462,785 1,942,620
Prepaid expense 1,030,156 711,655
Inventories 2,136,674 1,205,040
---------------- ---------------
Total current assets 19,315,411 12,335,968
---------------- ---------------
PLANT AND EQUIPMENT, net 2,554,007 969,869
---------------- ---------------
OTHER ASSETS:
Intangible asset, net 162,790 -
Employee advances 333,247 70,798
---------------- ---------------
Total other assets 496,037 70,798
---------------- ---------------
Total assets $ 22,365,455 $ 13,376,635
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,854,084 $ 1,518,042
Accounts payable - related party 15,675 -
Bank overdraft -- 19,617
Advances from customers 54,934 40,585
Wages and benefits payable 689,225 785,944
Income and other taxes payable 527,011 188,331
Accrued liabilities 379,689 251,028
Other payables 1,333,471 2,101,009
Other payables - related party 242,000 545,450
Notes payable - bank 5,445,000 1,210,000
Short term loans payable - bank 4,840,000 -
---------------- ---------------
Total current liabilities 15,381,089 6,660,006
---------------- ---------------
CONTINGENCIES -- --
---------------- ---------------
SHAREHOLDERS' EQUITY:
Common stock, $1.00 par value, authorized 50,000 shares,
100 shares issued and outstanding 100 100
Paid-in-capital 312,971 280,624
Statutory reserve 1,561,222 1,174,549
Retained earnings 5,101,798 5,253,143
Accumulated other comprehensive income 8,275 8,213
---------------- ---------------
Total shareholders' equity 6,984,366 6,716,629
---------------- ---------------
Total liabilities and shareholders' equity $ 22,365,455 $ 13,376,635
================ ===============
The accompanying notes are an integral part of this statement.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
-------------------- -------------------
GROSS REVENUES $ 16,248,926 $ 14,159,153
COST OF SALES 9,937,435 7,508,709
-------------------- -------------------
GROSS PROFIT 6,311,491 6,650,444
OTHER OPERATING INCOME 423,206 204,854
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,087,038 2,457,578
-------------------- -------------------
INCOME FROM OPERATIONS 4,647,659 4,397,720
OTHER EXPENSE, net of other income 434,941 69,202
-------------------- -------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 4,212,718 4,328,518
PROVISION FOR INCOME TAXES 339,300 318,351
-------------------- -------------------
INCOME BEFORE MINORITY INTEREST 3,873,418 4,010,167
MINORITY INTEREST -- 840,322
-------------------- -------------------
NET INCOME 3,873,418 3,169,845
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment 62 (4,025)
-------------------- -------------------
COMPREHENSIVE INCOME (LOSS) $ 3,873,480 $ 3,165,820
==================== ===================
The accompanying notes are an integral part of this statement.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Number Common Paid in Statutory
of shares stock capital reserves
------------- ---------- -------------- ---------------
BALANCE, January 1, 2002 100 $ 100 $ 256,364 $ 872,033
Net income
Land use right 24,260
Adjustment to statutory reserve 302,516
Dividend distributions
Foreign currency translation adjustments
------------- ---------- -------------- ---------------
BALANCE, December 31, 2002 100 100 280,624 1,174,549
Net income
Land use right 32,347
Adjustment to statutory reserve 386,673
Dividend distributions
Foreign currency translation adjustments
------------- ---------- -------------- ---------------
BALANCE, December 31, 2003 100 $ 100 $ 312,971 $ 1,561,222
============= ========== ============== ===============
Accumulated
other
Retained comprehensive
earnings income (loss) Totals
------------ ---------------- ----------------
BALANCE, January 1, 2002 $ 3,218,812 $ 12,238 $ 4,359,547
Net income 3,169,845 3,169,845
Land use right 24,260
Adjustment to statutory reserve (302,516) --
Dividend distributions (832,998) (832,998)
Foreign currency translation adjustments (4,025) (4,025)
------------ ---------------- ----------------
BALANCE, December 31, 2002 5,253,143 8,213 6,716,629
Net income 3,873,418 3,873,418
Land use right 32,347
Adjustment to statutory reserve (386,673) -
Dividend distributions (3,638,090) (3,638,090)
Foreign currency translation adjustments 62 62
------------ ---------------- ----------------
BALANCE, December 31, 2003 $ 5,101,798 $ 8,275 $ 6,984,366
============ ================ ================
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,873,418 $ 3,169,845
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Foreign currency translation adjustments 62 (4,025)
Minority interest -- 840,322
Depreciation 160,490 115,970
Amortization 8,568 -
Land use right 32,347 32,347
Loss on disposal of fixed assets 84,408 31,259
(Increase) decrease in assets:
Change in restricted cash (1,694,000) (363,000)
Accounts receivable - trade 743,255 (3,243,526)
Accounts receivable - trade special (568,700) (193,600)
Other receivables (201,697) (147,802)
Other receivables - related party (8,358,255) (1,388,835)
Inventories (931,634) 157,041
Employee advances (262,449) (55,965)
Prepaid expenses (318,501) (466,185)
Increase (decrease) in liabilities:
Accounts payable 336,042 31,477
Accounts payable - related party 15,675 --
Advances from customers 14,349 31,994
Wages and benefits payable (96,719) 574,714
Other taxes payable 338,680 188,331
Accrued liabilities 128,661 (44,495)
Other payables 432,462 (218,490)
Other payables - related party (303,450) (507,540)
------------------ ------------------
Net cash used in operating activities (6,566,988) (1,460,163)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible asset - land use right (171,358) --
Purchase of equipment and automobiles (1,829,036) (256,167)
------------------ ------------------
Net cash used in investing activities (2,000,394) (256,167)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings net of payments on short term notes payable 9,075,000 1,210,000
(Decrease) increase in bank overdraft (19,617) 19,617
------------------ ------------------
Net cash provided by financing activities 9,055,383 1,229,617
------------------ ------------------
INCREASE (DECREASE) IN CASH 488,001 (486,713)
CASH, beginning of year -- 486,713
------------------ ------------------
CASH, end of year $ 488,001 $ --
================== ===================
The accompany notes are an integral part of this statement.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
Rhohan Holdings Limited (referred to as the Company) was incorporated on
September 9, 1999 in the territory of the British Virgin Islands. The Company
through its wholly owned subsidiary Chengdu Tonglin Casting Industrial Co., Ltd.
(referred to as Tonglin) principally engages in the development, production,
sales and related technical service provision of various types of petrol engine
cylinder body and other casting products in the People's Republic of China
(referred to as PRC).
Chengdu Tonglin Casting Industrial Co., Ltd. was established in Dayi County of
Chengdu by Chengdu Rongxin Enterprises Co., Ltd. (Rongxin) and Rhohan Holdings
Limited (Rhohan) as a Sino-foreign equity joint venture on January 21, 2000.
Tonglin was classified as a Foreign Invested Enterprise (FIE) in the PRC and is
subject to the FIE laws of the PRC. Tonglin is a Chinese registered limited
liability company with a legal structure similar to a regular corporation and a
limited liability company organized under state laws in the United States of
America. The Articles of Association provides for a 50 year term with original
registered capital of approximately $2,005,000. Rhohan is 100% owned by Double
Unity Investments Limited (referred to as Double Unity), a British Virgin
Islands corporation. Double Unity Investments Limited is 100% owned by Mr. Li
Yungao. Rongxin is 100% owned by the Company's shareholder, Mr. Li Yungao.
Originally Rongxin owned 40% and Rhohan owned 60% of Tonglin. On July 5, 2001,
the registered capital of Tonglin was increased to approximately $3,214,000 and
Rhohan's ownership in Tonglin increased to 75% and Rongxin's ownership was
reduced to 25%. Rhohan paid for its increase in capital through its portion of
undistributed earnings. In October 2002, Rongxin agreed to transfer its
remaining 25% ownership in Tonglin to Rhohan for approximately $2,178,000 which
would be paid from dividends distributed by Tonglin. On November 20, 2003, this
transfer was approved by the State Administration for Industry and Commerce of
the PRC. As a result of this transfer Tonglin became a wholly foreign owned
enterprise (WFOE). As of December 31, 2003, Rhohan Holdings Limited owns 100% of
Chengdu Tonglin Casting Industrial Co., Ltd.
Basis of presentation
The consolidated financial statements represent the activities of the Company
and its wholly owned subsidiary. The Company's financial statements are prepared
in conformity with accounting principles generally accepted in the United States
of America.
Foreign currency translation
The reporting currency of the Company is US dollar. The Company uses their local
currency, Renminbi, as their functional currency. Results of operations and cash
flow are translated at average exchange rates during the period, and assets and
liabilities are translated at the end of period exchange rates. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the statement of shareholders' equity. Transaction gains
and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. These amounts are not material to the
financial statements.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
Revenue recognition
Product sales are recognized when the products are delivered and title has
passed. The Company offers no warranties on its products. However the customers
have 3-5 days to inspect the goods and to notify the Company if there are any
products that do not meet the quality standards set forth in their contract. The
Company at this time replaces the goods with new products and the defective
goods are returned to Tonglin and are reworked and returned to inventory.
Sales revenue represents the invoiced value of goods, net of a value-added tax
(VAT). All of the Company's products that are sold in the PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price. This VAT may
be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing their finished product.
Plant and equipment, net
Plant and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Depreciation
expense for the years ended December 31, 2003 and 2002 amounted to $160,490 and
$115,970, respectively. Estimated useful lives of the assets are as follows:
Estimated Useful Life
---------------------
Buildings 20-30 years
Machinery and equipment 10-15 years
Furniture and fixtures 5-10 years
Construction in progress includes engineering costs, insurance costs, wages,
interest and other costs relating to construction in progress. Construction in
progress balances are transferred to equipment when the related assets are ready
for their intended use. No depreciation is provided for on construction in
progress.
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Major additions and betterment to property and equipment are
capitalized.
Long-term assets of the Company are reviewed annually as to whether their
carrying value has become impaired. The Company considers assets to be impaired
if the carrying value exceeds projected future cash flows from related
operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of December 31, 2003, the Company expects these assets to be
fully recoverable.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
Plant and equipment, net (continued)
Plant and equipment consist of the following at December 31:
2003 2002
-------------- -------------
Buildings and improvements $ 1,187,128 $ 602,991
Machinery and equipment 2,064,257 925,042
Construction in progress 64,850 123,747
-------------- -------------
Totals 3,316,235 1,651,780
Accumulated depreciation (762,228) (681,911)
-------------- -------------
Property and equipment, net $ 2,554,007 $ 969,869
============== =============
In the year 2000, Rongxin, as part of their original capital contribution,
contributed certain buildings, machinery, and equipment in the amount of RMB
5,111,248, or approximately $618,500. The buildings, machinery, and equipment
were originally purchased by Rongxin through financing provided by Rongxin's
banking institution and were pledged as collateral for this loan. The term of
this loan commenced on August 31, 1999 and will expire on August 30, 2004. The
titles of the buildings, machinery, and equipment are still in the name of
Rongxin and will be transferred to Tonglin once the loan is paid off (and
consequently the buildings, machinery, and equipment will be released as
collateral). As of the date of this report, the titles of the said buildings,
machinery, and equipment (net book value of $156,159) have not been transferred
to Tonglin.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Management believes
that the estimates utilized in preparing its financial statements are reasonable
and prudent. Actual results could differ from these estimates.
Recently issued accounting pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143 changes
the recorded amount of liabilities associated with asset retirements and
requires the accretion of interest expense over the remaining life of the asset.
FAS 143 also requires additional disclosure regarding asset retirement
obligations. This Statement is effective for fiscal years beginning after June
15, 2002. The adoption of this statement is not expected to have a significant
impact on the financial condition or results of operations of the Company.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"). FAS 144 retains the existing requirements to recognize and measure the
impairment of long-lived assets to be held and used or to be disposed of by
sale.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently issued accounting pronouncements (continued)
However, FAS 144 changes the scope and certain measurement requirements of
existing accounting guidance. FAS 144 also changes the requirements relating to
reporting the effects of a disposal or discontinuation of a segment of a
business. This Statement is effective for fiscal years beginning after December
15, 2001.
The adoption of this statement did not have a significant impact on the
financial condition or results of operations of the Company.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145 "Rescission of Statements No. 4, 14 and 64, Amendment of FASB Statement No.
13 and Technical Corrections." (FAS 145). This Statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment of
that Statement, SFAS No. 64, and "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers." This Statement amends SFAS
No. 13, "Accounting for Leases," to eliminate any inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions.
FAS 145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. This Statement is effective for fiscal years beginning after
May 15, 2002. The Company has adopted this Statement in 2003. The adoption of
this statement did not have a significant impact on the financial condition or
results of operations of the Company.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires the recognition of certain
guarantees as liabilities at fair market value and is effective for guarantees
issued or modified after December 31, 2002. The Company has adopted the
disclosure requirement of FIN 45 and does not expect the impact of the fair
market value requirement to have a material impact on its financial condition or
results of operations of the Company.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure".
The statement allows for the Company's current method of accounting for stock
options to continue. Effective for interim periods beginning after December 15,
2002, disclosure will be required for information on the fair value of stock
options and the effect on earnings per share (in tabular form) for both interim
and annual reports. The Company has adopted this statement in 2003. The adoption
of this statement did not have a significant impact on the financial condition
or results of operations of the Company.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 (FIN No. 46), which
requires the consolidation of certain variable interest entities, as defined.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently issued accounting pronouncements (continued)
FIN No. 46 is effective immediately for variable interest entities created after
January 31, 2003, and on July 1, 2003 for investments in variable interest
entities acquired before February 1, 2003; however, disclosures are required
currently if a company expects to consolidate any variable interest entities. As
the Company has no such variable interest entities, the adoption of FIN No. 46
did not have an impact on the Company's results of operations, financial
position or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of this statement did
not have a significant impact on the financial condition or results of
operations of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
changes the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. FASB No. 150 requires that those
instruments entered into or modified after May 31, 2002, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this statement is not expected to have a material impact
on the financial condition or results of operations of the Company.
Cash and concentration of risk
Cash includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People's Republic of China. Total cash in
state-owned banks at December 31, 2003 and 2002 amounted to $2,500,000 and
$232,000 respectively, of which no deposits are covered by insurance. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any risks on its cash in bank accounts.
The Company has a concentration of sales risk where five customers represents
94% or $15,266,786 of total sales for the year ended December 31, 2003 as
compared to 93% or $13,234,620 for five customers in the year ending 2002. Total
outstanding accounts receivable for these customers amounted to $4,959,943 and
$6,713,531 as of December 31, 2003 and 2002, respectively.
Cash-restricted
The Company through its bank agreements is required to keep certain amounts on
deposit that are subject to withdrawal restrictions and these amounts are
$2,057,000 and $363,000 as of December 31, 2003 and 2002, respectively.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market on the first in first out
method of accounting and consist of the following at December 31:
2003 2002
---------------- --------------
Raw materials $ 936,619 $ 737,211
Finished goods 1,200,055 467,829
---------------- --------------
Totals $ 2,136,674 $ 1,205,040
================ ==============
Financial instruments
Statement of Financial Accounting Standards No. 107 (SFAS 107), "Disclosures
About Fair Value of Financial Instruments" requires disclosure of the fair value
of financial instruments held by the Company. SFAS 107 defines the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable, accrued liabilities and other payables to approximate their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest.
Accounts receivable, trade
The Company's business operations are conducted in the People's Republic of
China. During the normal course of business, the Company extends unsecured
credit to its customers. Management reviews its accounts receivable on a regular
basis to determine if the bad debt allowance is adequate at each year-end.
However, the Company records a provision for accounts receivable trade which
ranges from 0.3% to 1.0% of the outstanding accounts receivable balance in
accordance with generally accepted accounting principles in the PRC. The
allowance for doubtful accounts as of December 31, 2003 and 2002 amounted to
$20,430 and $22,678, respectively.
Accounts receivable, trade special
This amount represents trade accounts receivable due from various customers
which the customers' bank has guaranteed payment of the receivable. This amount
is non-interest bearing and is normally paid within three to six months. The
Company has the ability to submit their request for payment to the customer's
bank earlier than the scheduled payment date; however, the Company incurs
interest and processing fee in such instances.
Intangible assets
All land in the People's Republic of China is owned by the government and cannot
be sold to any individual or company. However, the government grants the user a
"land use right" (the Right) to use the land. In 2003, Tonglin purchased the
Right to use the land for 50 years from the government for a fee in the amount
of $171,358.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
Intangible assets (continued)
The Right is being amortized over a minimum life of 10 years in accordance with
PRC generally accepted accounting principles. The expense for the year ended
December 31, 2003 amounted to $8,568. However, the Certificate of Land Use Right
for this land is held in the name of Chengdu Rongxin Industrial Co., Ltd., a
related party. Tonglin is in the process of applying for a name change on the
Certificate of the land Use Right. As of the date of this report this process
has not been finalized.
The Certificates of Land Use Rights of approximately 57,347 Chinese acres of
land are occupied by buildings operated by Tonglin, which are held in the name
of Chengdu Rongxin Industrial Co., Ltd., a related party. The land use rights
have been acquired from 1998 through 2000 for a life of 50 years. Chengdu
Rongxin Industrial Co., Ltd. has verbally agreed to let Tonglin use the property
for agreed upon purpose through the life of the Land Use Rights. However, the
Land Use Rights remains in the name of Chengdu Rongxin Industrial Co., Ltd.
Tonglin is not charged for the use of the land nor has an asset been reflected
on balance sheet of Tonglin for these rights. The original cost of the land use
rights amounted to $324,076. In order to better report the actual expenses of
the operations the Company has recognized in the accompanying income statement
an expense for the use of the land with a corresponding entry to paid in
capital. The Rights are being amortized over 10 years based upon the original
cost of the rights and the expense for the years ended December 31, 2003 and
2002 amounted to $32,347 and $32,347, respectively.
Chengdu Rongxin Industrial Co., Ltd. has not indicated to Tonglin that they will
need the use of the land within the next year. However, Chengdu Rongxin
Industrial Co., Ltd. has the right to occupy the land once notification is given
to Tonglin.
Income taxes
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of
deferred income tax liabilities and assets for the expected future tax
consequences of temporary differences between income tax basis and financial
reporting basis of assets and liabilities. Provision for income taxes consist of
taxes currently due plus deferred taxes. There are no deferred tax amounts at
December 31, 2003 and 2002.
The charge for taxation is based on the results for the year as adjusted for
items, which are non-assessable or disallowed. It is calculated using tax rates
that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in
respect of temporary differences arising from differences between the carrying
amount of assets and liabilities in the financial statements and the
corresponding tax basis used in the computation of assessable tax profit.
In principle, deferred tax liabilities are recognized for all taxable temporary
differences, and deferred tax assets are recognized to the extent that it is
probably that taxable profit will be available against which deductible
temporary differences can be utilized.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
Income taxes, continued
Deferred tax is calculated at the tax rates that are expected to apply to the
period when the asset is realized or the liability is settled. Deferred tax is
charged or credited in the income statement, except when it related to items
credited or charged directly to equity, in which case the deferred tax is also
dealt with in equity. Deferred tax assets and liabilities are offset when they
relate to income taxes levied by the same taxation authority and the Company
intends to settle its current tax assets and liabilities on a net basis.
The Company through its subsidiary, Tonglin, is governed by the Income Tax Law
of the People's Republic of China (PRC) concerning Foreign Investment
Enterprises and Foreign Enterprises and various local income tax laws (the
Income Tax Laws). Income Tax Law of the People's Republic of China for
Enterprises with Foreign Investments and Foreign Enterprises states, "Any
enterprise with foreign investments of a production nature scheduled to operate
for a period of not less than ten years shall, upon examination and verification
by the tax authorities in the year the company begins to make a profit, will be
exempted from income taxes in the first and second years and allowed a fifty
percent reduction in the standard tax rates in the third to fifth years."
Under the Income Tax Laws, foreign investment enterprises (FIE) are generally
subject to an income tax at an effective rate of 33% (30% state income taxes
plus 3% local income taxes) on incomes reported in the statutory financial
statements after appropriate tax adjustments, unless the enterprise is located
in a specially designated region for which more favorable effective tax rates
are applicable.
The Company is exempt from income tax from 2000 to 2001. Tonglin is located in a
Special Economic Zone and the PRC tax authorities have approved a special income
tax rate of 15% for this area. In addition, Tonglin in accordance with the
Circular of Transmission the State Administration of Taxation of Sichuan
Province on Implementing the Relevant Tax Policies of Development of the West
Regions and Implement of the Suggestion Concretely of State Administration of
Taxation, "the enterprise income tax of the foreign investment enterprises in
the legal tax reduction period shall be reduced by 7.5%." Tonglin generated
profits in the year ended December 31, 2000. Effective January 1, 2002, the
two-year 100% exemption for income taxes had expired for Tonglin and it became
subject to income tax at a reduced rate of 7.5 % for 2002, 2003 and 2004. The
Company is not subject to any local income tax of 3% until its exemption and
reduction periods expire in 2005.
The provision for income taxes at December 31 consisted of the following:
2003 2002
------------- ------------
Provision for China Income tax $ 339,300 $ 318,351
Provision for China local tax - -
Deferred taxes - -
------------- ------------
Total provision for income taxes $ 339,300 $ 318,351
============= ============
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
Income taxes, (continued)
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate:
2003 2002
------------- ------------
U.S. Statutory rates 34.0% 34.0%
Foreign income not recognized in USA (34.0) (34.0)
China income taxes 7.5 7.5
------------- ------------
Totals 7.5% 7.5%
============= ============
The Company has recorded an allowance for bad debts in the amount of $278,300 as
further described in note 3. This amount has been recorded as an expense for
financial statement purposes. However, the ultimate deduction for Chinese income
tax purposes has not been determined and the amount to be deducted must be
approved by the appropriate Chinese taxing authority. A valuation allowance for
the entire amount has been established due to the uncertainty of realizing the
deduction of this expense for income tax purposes as a result of this
uncertainty no deferred taxes has been provided in the accompanying financial
statements.
Value Added Tax
Enterprises or individuals who sell commodities, engage in repair and
maintenance or import and export goods in the PRC are subject to a value added
tax in accordance with Chinese laws. The value added tax standard rate is 17% of
the gross sales price. A credit is available whereby VAT paid on the purchases
of semi-finished products or raw materials used in the production of the
Company's finished products can be used to offset the VAT due on sales of the
finished product.
From Tonglin's inception in the year 2000 through the year 2002, Tonglin adopted
the Tax Package Policy issued by the Dayi County Government, which requires
Tonglin to pay its tax to the appropriate taxing authority based upon the annual
fixed amount set forth by the Dayi County Government. The fixed tax amount set
forth for Tonglin in 2002 amounted to RMB 8,000,000. The Tax Package Policy was
terminated starting January 1, 2003. The Company is subject to the value added
tax at the standard rate of 17% on the gross sales price of all products sold
within the PRC.
On August 14, 2003, a certificate issued by the State Taxation Administration of
Dayi County Sichuan Province, stated that the income tax and valued added tax of
Tonglin from inception through the year ending December 31, 2002 have been fully
paid.
NOTE 2 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid amounted to $244,045 and $272,088 for the years ended December
31, 2003 and 2002, respectively. Interest paid for the years ended December 31,
2003 and 2002 amounted to $355,923 and $217,123 respectively.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
In 2002, the Company made a non-cash shareholders' distribution of $832,998 to
offset other receivables/payables due from/to related parties. In addition
during 2002, the Company purchased the remaining 25% minority interest in
Tonglin for approximately $2,178,000 which would be paid from shareholder
dividends distributed by Tonglin.
In 2003, the Company made a non-cash shareholders' distribution of $3,638,090 to
offset other receivables/payables due from/to related parties.
NOTE 3 - OTHER RECEIVABLES
In 2003 the Company made a prepayment of $278,300 to purchase several molds to
be used in their operations. As of December 31, 2003, the molds were never
delivered by the vendor. The Company is currently in litigation with the vendor.
Management intends to pursue collection of this receivable; however, management
is uncertain that they will prevail in collecting the entire amount. As of
December 31, 2003, management has decided to fully reserve this amount as
uncollectible.
NOTE 4 - EMPLOYEE ADVANCES
Other non-current assets represents cash advances to officers and employees for
cash based business transactions incurred for the payment of operating expenses
and purchases from various vendors.
NOTE 5 - LINES OF CREDIT
The Company has the following lines of credit outstanding at December 31:
2003 2002
----------------- -----------------
Shanghai Pu Dong Development Bank, Chengdu Branch
due June 2004, transaction fee at 0.05%
restricted cash requirement of 30% or $363,000
and Chengdu Rongxin Ruigao Machinery Co., Ltd.
guaranteed the difference between the cash
amount deposited and the credit line amount $ 1,210,000 $ --
Chengdu City Commercial Bank, Dayi Branch
due May 2004, transaction fee at 0.05%
restricted cash requirement of 40% or $726,000
Chengdu Rongxin Industrial Co., Ltd. guaranteed the
difference between the cash amount deposited
and the credit line amount 1,815,000 --
Chengdu City Commercial Bank, Dayi Branch
due June 2004, transaction fee at 0.05%
restricted cash requirement of 40% or $968,000
Chengdu Rongxin Industrial Co., Ltd. guaranteed the
difference between the cash amount deposited 2,420,000 --
and the credit line amount
--------------- --------------
Total $ 5,445,000 $ --
=============== ==============
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - LINES OF CREDIT (CONTINUED)
The proceeds of the above debt were loaned to Chengdu Taichang Metals Co., Ltd.,
a related party. In return for this loan Chengdu Taichang Metals Co. Ltd.
deposited $242,000 of cash with Tonglin as a partial guarantee for the loan
repayment. The amount loaned to Chengdu Taichang Metals Co. Ltd. is recorded in
other receivables-related parties on the accompanying balance sheet and is
further explained in note 9.
This amount is non interest bearing and due and payable in May 2004. On April 1,
2004, Chengdu Taichang Metals Co., Ltd. repaid these amounts in full.
NOTE 6 - SHORT-TERM LOANS PAYABLE - BANK
The Company has the following short-term loans payable at December 31:
2003 2002
---------------- --------------
ChengduCity Commercial Bank, Dayi Branch due January 29,
2004, monthly interest only payment at 0.57525%,
guaranteed by Chengdu High Pressure Valve Plant,
a related party $ 1,210,000 $ --
Shanghai Pu Dong Development Bank, Chengdu Branch due
March 9, 2004, monthly interest only payment at
0.48675%, guaranteed by Chengdu Rongxin Ruigao
Machinery Co., Ltd., a related party 3,630,000 --
--------------- --------------
Total $ 4,840,000 $ --
=============== ==============
The above loans have been refinanced into short-term loans due within one year
during 2004 in the amount of $4,840,000.
Total interest expense on all bank debt for the years ending December 31, 2003
and 2002 amounted to $355,923 and $217,123 respectively.
NOTE 7 - RESERVES AND DIVIDENDS
The laws and regulations of the People's Republic of China require that before a
Sino-foreign cooperative joint venture enterprise distributes profits to its
partners, it must first satisfy all tax liabilities, provide for losses in
previous years and make allocations, in proportions determined at the discretion
of the board of directors, after the statutory reserve.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - RESERVES AND DIVIDENDS (CONTINUED)
Pursuant to the board of directors' resolution, the Company transferred 10% of
its net income, as determined in accordance with the PRC accounting rules and
regulations, to a statutory surplus reserve fund until such reserve balance
reaches 50% of the Company's registered capital.
The transfer to this reserve must be made before distributions of any dividends
to shareholders. For the years ending December 31, 2003 and 2002, the Company
transferred $302,516 and $386,673, respectively which represents 10% of the
years' net income determined in accordance with PRC accounting rules and
regulations to this surplus reserve.
The surplus reserve fund is non-distributable other than during liquidation and
can be used to fund previous years' losses, if any, and may be utilized for
business expansion or converted into share capital by issuing new shares to
existing shareholders in proportion to their shareholding or by increasing the
par value of the shares currently held by them, provided that the remaining
reserve balance after such issue is not less than 25% of the registered capital.
The Chinese government restricts distributions of registered capital and the
additional investment amounts required by the Chinese joint ventures. Approval
by the Chinese government must be obtained before distributions of these amounts
can be returned to the shareholders.
Pursuant to the board of directors' resolution, total dividends of $3,638,090
and $832,998 for the years ended of December 31, 2003 and 2002 respectively,
were declared to be paid to the shareholders, Rongxin and Rhohan, of which
$2,178,000 of the dividend owed to Rhohan was paid to Rongxin to fully satisfy
the purchase price of Rhohan's purchase of Rongxin's 25% interest in Tonglin as
described in note 11.
NOTE 8 - RETIREMENT BENEFIT PLANS
Regulations in the People's Republic of China require the Company to contribute
to a defined contribution retirement plan for all permanent employees. All
permanent employees are entitled to an annual pension equal to their basic
salary at retirement. The PRC government is responsible for the benefit
liability to these retired employees. The Company is required to make
contributions to the state retirement plan at 17% of the monthly basic salaries
of the current employees. For the years ended December 31, 2003 and 2002, the
Company made pension contributions in the amount of $307,279 and $245,789,
respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS AND CONTINGENCIES
The following are related parties described in the accompanying financial
statements:
Chengdu Rongxin Enterprises Co., Ltd. is owned 100% by Mr. Li Yungao.
Chengdu Rongxin Industrial Co., Ltd. is owned by Mr. Li Yungao and a number of
managers and directors of Tonglin.
Chengdu Rongxin Ruigao Machinery Co., Ltd. is owned 70% by Mr. Li Yungao with
the remaining 30% owned by a number of managers and directors of Tonglin.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY TRANSACTIONS AND CONTINGENCIES (CONTINUED)
Chengdu Begin Pipeline Co., Ltd. is owned 75% by Chengdu Rongxin Industrial Co.,
Ltd. and 25% by Chengdu Begin Technology Development Co., Ltd.
Chengdu High Pressure Valve Plant is owned by Mr. Li Yungao and a number of
managers and directors of Tonglin.
Chengdu Taichang Metals Co., Ltd. is 95% owned by Mr. Li Jing, who is the son of
Mr. Li Yungao.
During the years ended December 31, 2003 and 2002, the Company entered into the
following transactions with related parties:
Sales, purchases and other expenses
2003 2002
------------------- -----------------
Sales
Chengdu Rongxin Ruigao Machinery Co., Ltd. $ 80,776 $ 37,886
=================== =================
Cost of sales
Chengdu Rongxin Ruigao Machinery Co., Ltd. $ 78,423 $ 36,382
=================== =================
Interest expense
Chengdu Rongxin Ruigao Machinery Co., Ltd. $ 39,277 $ 58,915
=================== =================
Lease expense
Chengdu Rongxin Ruigao Machinery Co., Ltd. $ 121,000 $ 121,000
=================== =================
Amounts due to/from related parties
2003 2002
------------------- -----------------
Other receivables - related party:
Chengdu Taichang Metals Co., Ltd. $ 5,445,000 $ 1,942,620
Other related parties 17,785
------------------- -----------------
Totals $ 5,462,785 $ 1,942,620
=================== =================
Other payables - related party:
Chengdu Rongxin Ruigao Machinery Co., Ltd. $ -- $ 544,500
Other related parties 950
Chengdu Taichang Metals Co., Ltd. 242,000 --
------------------- -----------------
Totals $ 242,000 $ 545,450
=================== =================
On May 20, 2003, Tonglin entered into an agreement with Chengdu Taichang Metals
Co., Ltd. to make a 12-month loan in the amount of $3,025,000 to Chengdu
Taichang Metals Co., Ltd. using the proceeds from Tonglin's bank line of credit
described in note 5. In addition, Tonglin paid $1,089,000 to their bank as
restricted cash deposit as required by the loan agreement.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY TRANSACTIONS AND CONTINGENCIES (CONTINUED)
The $3,025,000 was required to be paid to Tonglin upon maturity together with
interest calculated based on the amount of restricted cash deposit using the
bank's monthly interest rate of 0.4425%. Chengdu Taichang Metals Co., Ltd.
should pay a consultation fee of $121,000 to Tonglin upon maturity of the loan.
On April 1, 2004, Chengdu Taichang Metals Co., Ltd. repaid these amounts in
full.
On May 29, 2003, Tonglin entered into an agreement with Chengdu Taichang Metals
Co., Ltd. to make a loan in the amount of $2,420,000 to Chengdu Taichang Metals
Co., Ltd. using the proceeds from Tonglin's bank line of credit described in
note 5. In addition, Tonglin paid $968,000 to their bank as restricted cash
deposit as required by the loan agreement. The $2,420,000 was required to be
paid to Tonglin upon maturity together with interest calculated based on the
amount of restricted cash deposit using the bank's monthly interest rate of
0.4425%. Chengdu Taichang Metals Co., Ltd. was required to pay a fee of $77,101
to Tonglin upon maturity of the loan. On April 1, 2004, Chengdu Taichang Metals
Co., Ltd. repaid these amounts in full.
As part of the above loan transactions Chengdu Taichang Metals Co., Ltd.
deposited $242,000 of cash with Tonglin as a partial guarantee to ensure that
the loans would be paid in full at maturity.
The other amounts due from related parties are generated from the Company making
various cash advances and short term loans and the allocation of various
expenses to related parties. These transactions are re-occurring in nature and
are generally repaid during the current year on a revolving basis. The Company
does not charge interest on these receivables.
On January 1, 2000, Tonglin and Chengdu Rongxin Enterprises Co., Ltd. entered
into a Working Ground and Transportation Equipment Leasing Agreement, under
which Tonglin leases office building space, living areas and vehicles with an
annual rent of $121,000.
Short-term loans from Chengdu Rongxin Ruigao Machinery Co., Ltd. (formerly
Chengdu Rongxin Enterprises Co., Ltd.) amounted to $544,500 during the year
ending December 31, 2002. This loan included interest at rates ranging from
7.49% to 12.10% per annum and was paid off in 2003. Interest paid for the years
ended December 31, 2003 and 2002 amounted to $39,277and $58,915, respectively.
On November 4, 2003, Tonglin and Industrial and Commercial Bank of China Dayi
County Branch entered into the "Intangible Right Security Agreement", under
which Tonglin has guaranteed a $1,089,000 bank line of credit issued to Chengdu
Rognxin Ruigao Machinery Co., Ltd. The term of this bank line of credit will
expire on April 29, 2004.
In the year 2000, Rhohan Holdings Limited (the BVI Company) was loaned
$1,200,000 from Terrific Wealth Investments Limited, a prior shareholder of
Rhohan Holdings Limited. This amount is non interest bearing and has no
repayment terms. This amount has been recorded in other payables on the
accompanying balance sheet as of December 31, 2002. During the year ending
December 31, 2003, this amount was offset against other receivables due from
relatedparties as agreed upon by the Company and Terrific Wealth Investments
Limited.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - LEASES
The Company leases office building space, living quarters, and vehicles from
Chengdu Rongxin Enterprises Co., Ltd., a related party, in the amount of
$121,000 per year (see note 9). Chengdu Rongxin Enterprises Co., Ltd. was
dissolved in October 2002. All of its assets, including the lease agreement,
were taken over by Chengdu Rongxin Ruigao Machinery Co., Ltd., a related party
as described in Note 9. This agreement has no expiration date at this time.
NOTE 11- PURCHASE OF MINORITY INTEREST
Originally Rongxin owned 40% and Rhohan owned 60% of Tonglin. On July 5, 2001,
the registered capital of Tonglin was increased to approximately $3,214,000 and
its ownership in Tonglin increased to 75% and Rongxin's ownership was reduced to
25%. Rhohan paid for its increase in capital through its portion of
undistributed earnings. In October 2002, Rongxin agreed to transfer its
remaining 25% ownership in Tonglin to Rhohan for approximately $2,178,000 which
would be paid from dividends distributed by Tonglin.
However, if the dividend amount is not sufficient to pay off the $2,178,000, the
Company would use alternative funds to make up the difference. On November 20,
2003, the approval letter from the local government transfer agency was issued
approving the transfer of shares and the $2,178,000 was required to be paid
within three months of this date. The $2,178,000 was paid in its entirety from
the dividend payable declared in 2003.
NOTE 12 - OTHER OPERATING INCOME
The Company has entered into various contractual arrangements to act as an agent
for Chengdu Zhengheng Engine Parts Co., Ltd. where the Company receives a
commission on sales of products purchased from Chengdu Zhengheng Engine Parts
Co., Ltd. For the years ending December 31, 2003 and 2002, this income amounted
to $423,206 and $204,854, respectively
NOTE 13 - SUBSEQUENT EVENT - CAPITAL STOCK EXCHANGE AGREEMENT
On April 22, 2004, the Company entered into a Capital Stock Exchange Agreement
where the Company will complete a reverse acquisition of China Autoparts, Inc.
(formerly known as Talram Corporation), a publicly traded non-operational
Delaware corporation. China Autoparts will acquire all of the outstanding shares
of Rhohan Holdings Limited's capital stock from Double Unity in exchange for
8,590,910 shares of common stock in China Autoparts, Inc. to be issued to Double
Unity or its designee(s). This new stock issuance will represent 94.5% of the
issued and outstanding stock of China Autoparts, Inc. at the time of issuance.
The accounting for this transaction is identical to that resulting from a
reverse-acquisition, except that no goodwill or other intangible assets shall be
recorded. Accordingly, the financial statements of Rhohan Holdings Limited will
be the historical financial statements of the Company and its subsidiary,
Chengdu Tonglin Casting Industrial Co., Ltd.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENT - CAPITAL STOCK EXCHANGE AGREEMENT, (CONTINUED)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2003
ASSETS
Pro forma Adjusted
China Autoparts Rohan Adjustments Pro forma
--------------- ------------- ------------- -------------
CURRENT ASSETS:
Cash $ $ 488,001 $ $ 488,001
Cash - restricted 2,057,000 2,057,000
Accounts receivable, trade 6,789,525 6,789,525
Accounts receivable, trade special 943,800 943,800
Other receivables 407,470 407,470
Other receivables - related parties 5,462,785 5,462,785
Prepaid expense 1,030,156 1,030,156
Inventories 2,136,674 2,136,674
------------- ------------- ------------- -------------
Total current assets -- 19,315,411 -- 19,315,411
------------- ------------- ------------- -------------
PLANT AND EQUIPMENT, net 2,554,007 2,554,007
------------- ------------- ------------- -------------
OTHER ASSETS:
Intangible asset, net 162,790 162,790
Employee advances 333,247 333,247
------------- ------------- ------------- -------------
Total other assets -- 496,037 -- 496,037
------------- ------------- ------------- -------------
Total assets $ -- $ 22,365,455 $ -- $ 22,365,455
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,100 $ 1,854,084 $ (1,100)(1) $ 1,854,084
Accounts payable - related party 15,675 15,675
Advances from customers 54,934 54,934
Wages and benefits payable 689,225 689,225
Income and other taxes payable 527,011 527,011
Accrued liabilities 379,689 379,689
Other payables 1,333,471 1,333,471
Other payables - related party 242,000 242,000
Notes payable - bank 5,445,000 5,445,000
Short term loans payable - bank 4,840,000 4,840,000
------------- ------------- ------------- -------------
Total current liabilities 1,100 15,381,089 (1,100) 15,381,089
------------- ------------- ------------- -------------
SHAREHOLDERS' EQUITY:
Common stock 50 100 8,591 (2) 100
(8,641)(3)
Paid-in-capital 6,650 312,971 1,100 (1) 312,971
(8,591)(2)
841 (3)
Statutory reserve 1,561,222 1,561,222
Retained earnings (7,800) 5,101,798 7,800 (3) 5,101,798
Accumulated other comprehensive income (loss) 8,275 8,275
------------- ------------- ------------- -------------
Total shareholders' equity (1,100) 6,984,366 1,100 6,984,366
------------- ------------- ------------- -------------
Total liabilities and shareholders' equity $ -- $ 22,365,455 $ -- $ 22,365,455
============= ============= ============= =============
(1) Certain accounts payable and accrued expenses were paid by China
Autoparts' original shareholders and treated as capital contribution.
(2) Reflects stock issuance by China Autoparts.
(3) Capitalization of post merger Rhohan reflects the pro forma common stock
and paid in capital.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENT - CAPITAL STOCK EXCHANGE AGREEMENT, (CONTINUED)
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2003
Pro forma Adjusted
China Autoparts Rohan Adjustments Pro forma
--------------- ------------- ------------- -------------
GROSS REVENUES $ -- $ 16,248,926 $ -- $ 16,248,926
------------- ------------- ------------- -------------
COST OF SALES -- 9,937,435 -- 9,937,435
------------- ------------- ------------- -------------
GROSS PROFIT -- 6,311,491 -- 6,311,491
OTHER OPERATING INCOME 423,206 423,206
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,383 2,087,038 1,282 2,089,703
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS (1,383) 4,647,659 (1,282) 4,644,994
OTHER EXPENSE (INCOME) (1) 434,941 -- 434,940
------------- ------------- ------------- -------------
INCOME BEFORE MINORITY INTEREST (1,382) 4,212,718 (1,282) 4,210,054
PROVISION FOR INCOME TAXES -- 339,300 -- 339,300
------------- ------------- ------------- -------------
NET INCOME (1,382) 3,873,418 (1,282) 3,870,754
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment -- 62 -- 62
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ (1,382) $ 3,873,480 $ (1,282) $ 3,870,816
============= ============= ============= =============
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENT - CAPITAL STOCK EXCHANGE AGREEMENT, (CONTINUED)
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2002
ASSETS
Pro forma Adjusted
China Autoparts Rohan Adjustments Pro forma
--------------- ------------- ------------- -------------
CURRENT ASSETS:
Cash $ 1,282 $ $ (1,282)(1) $ --
Cash - restricted 363,000 363,000
Accounts receivable, trade 7,532,780 7,532,780
Accounts receivable, trade special 375,100 375,100
Other receivables - related parties 205,773 205,773
Prepaid expense 1,942,620 1,942,620
Prepaid expense - related party 711,655 711,655
Inventories 1,205,040 1,205,040
------------- ------------- ------------- -------------
Total current assets 1,282 12,335,968 (1,282) 12,335,968
------------- ------------- ------------- -------------
PLANT AND EQUIPMENT, net 969,869 969,869
------------- ------------- ------------- -------------
OTHER ASSETS:
Intangible asset, net
Employee advances 70,798 70,798
------------- ------------- ------------- -------------
Total other assets -- 70,798 -- 70,798
------------- ------------- ------------- -------------
Total assets $ 1,282 $ 13,376,635 $ (1,282) $ 13,376,635
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,100 $ 1,518,042 $ (1,100)(2) $ 1,518,042
Bank overdraft 19,617 19,617
Advances from customers 40,585 40,585
Wages and benefits payable 785,944 785,944
Income and other taxes payable 188,331 188,331
Accrued liabilities 251,028 251,028
Other payables 2,101,009 2,101,009
Other payables - related party 545,450 545,450
Notes payable - bank 1,210,000 1,210,000
------------- ------------- ------------- -------------
Total current liabilities 1,100 6,660,006 (1,100) 6,660,006
------------- ------------- ------------- -------------
SHAREHOLDERS' EQUITY:
Common stock 50 100 8,591 (3) 100
(8,641)(4)
Paid-in-capital 6,550 280,624 1,100 280,624
(8,591)(3)
941 (4)
Statutory reserve 1,174,549 1,174,549
Retained earnings (6,418) 5,253,143 (1,282)(2) 5,253,143
7,700 (4)
Accumulated other comprehensive income (loss) 8,213 8,213
------------- ------------- ------------- -------------
Total shareholders' equity 182 6,716,629 (182) 6,716,629
------------- ------------- ------------- -------------
Total liabilities and shareholders' equity $ 1,282 $ 13,376,635 $ (1,282) $ 13,376,635
============= ============= ============= =============
(1) Cash used to pay for certain expenses.
(2) Certain accounts payable and accrued expenses were paid by China
Autoparts' original shareholders and treated as capital contribution.
(3) Reflects stock issuance by China Autoparts.
(4) Capitalization of post merger Rhohan reflects the pro forma common stock
and paid in capital.
RHOHAN HOLDINGS LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - SUBSEQUENT EVENT - CAPITAL STOCK EXCHANGE AGREEMENT, (CONTINUED)
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2002
Pro forma Adjusted
China Autoparts Rohan Adjustments Pro forma
--------------- ------------- ------------- -------------
GROSS REVENUES $ $ 14,159,153 $ $ 14,159,153
COST OF SALES 7,508,709 7,508,709
------------- ------------- ------------- -------------
GROSS PROFIT -- 6,650,444 -- 6,650,444
OTHER OPERATING INCOME 204,854 204,854
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,047 2,457,578 1,282 (1) 2,462,907
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS (4,047) 4,397,720 (1,282) 4,392,391
OTHER EXPENSE (INCOME) (11) 69,202 69,191
------------- ------------- ------------- -------------
INCOME BEFORE MINORITY INTEREST (4,036) 4,328,518 (1,282) 4,323,200
PROVISION FOR INCOME TAXES 318,351 -- 318,351
------------- ------------- ------------- -------------
INCOME BEFORE MINORITY INTEREST (4,036) 4,010,167 (1,282) 4,004,849
MINORITY INTEREST 840,322 840,322
------------- ------------- ------------- -------------
NET INCOME (4,036) 3,169,845 (1,282) 3,164,527
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment -- (4,025) (4,025)
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ (4,036) $ 3,165,820 $ (1,282) $ 3,160,502
============= ============= ============= =============
(1) Cash used to pay for certain expenses.
EXHIBITS
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
2.1 April 22, 2004 Capital Stock Exchange Agreement
3.1 Amended Certificate of Incorporation
3.2 Amended By-Laws
3.3 Specimen stock certificate
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: May 13, 2004
CHINA AUTOPARTS, INC.
By:_________________________________
Ding Ke, Executive Vice President