As filed with the Securities and Exchange Commission on November 4, 2004
Registration No. _____________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA AUTOPARTS, INC.
(Name of small business issuer in its charter)
Delaware 3714 13-4168913
(State or (Primary Standard Industrial (IRS Employer Identification
Jurisdiction of Incorporation or Classification Code Number) Number)
Organization)
276 Fifth Avenue, Suite 703
New York, New York 10001
212-684-3760
(Address and telephone number of principal executive offices)
Xinchang Tonglin Industrial Zone, Dayi County
Chengdu, Sichuan PRC 611337
(Address of principal place of business or intended principal place of business)
276 Fifth Avenue, Suite 703
New York, New York 10001
212-684-3760
(Name, address and telephone number of agent for service)
Copies of communications to:
Darren Ofsink, Esq.
Guzov Ofsink Flink, LLC
600 Madison Avenue, 14th Floor
New York, New York 10022
(212) 371-8008
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Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the offering. |_|
If this Form is post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. |_|
If this Form is post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
Calculation of Registration Fee
=================================================================================================================
Title of each class Proposed Proposed
of securities to Amount to be maximum offering maximum aggregate Amount of
be registered registered price per unit offering price registration fee
=================================================================================================================
$.0001 par value per 1,000,000 $3.00 $3,000,000 $380.10
share common
stock (1)
- ----------
(1) This registration statement relates to the resale by the selling stockholder
identified herein of up to 1,000,000 shares of our common stock issued in a
private placement transaction.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457. There is currently no trading market for our common stock.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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China Autoparts, Inc.
Common Stock
----------------
This prospectus relates to the resale of 1,000,000 shares of our common
stock by Double Unity Investments Limited ("Double Unity"), the selling
stockholder.
The selling stockholder, by itself or through brokers and dealers, may
offer and sell the shares at prevailing market prices or in transactions at
negotiated prices. We will not receive any proceeds from the selling
stockholder's resale of the shares of common stock. The selling stockholder will
receive all proceeds from such sales. It is not possible to determine the price
to the public in any sale of the shares of common stock by the selling
stockholder and the selling stockholder reserves the right to accept or reject,
in whole or in part, any proposed purchase of shares. Accordingly, the selling
stockholder will determine the public offering price, the amount of any
applicable underwriting discounts and commissions and the net proceeds at the
time of any sale. The selling stockholder will pay any underwriting discounts
and commissions. The selling stockholder, and the brokers through whom sales of
the securities are made, will be "underwriters" within the meaning of Section
2(11) of the Securities Act of 1933, as amended, referred to herein as the
"Securities Act".
There presently is no public trading market for our common stock.
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page ____.
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information from that
contained in this prospectus. The selling security holder is offering to sell
and seeking offers to buy shares of our common stock and share warrants only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of our common stock or
share warrants.
The date of this prospectus is ____________.
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No person is authorized in connection with this prospectus to give any
information or to make any representations about us, the selling stockholder,
the securities or any matter discussed in this prospectus, other than the
information and representations contained in this prospectus. If any other
information or representation is given or made, such information or
representation may not be relied upon as having been authorized by us or any
selling stockholder. This prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy the securities in any circumstances under which
the offer or solicitation is unlawful. Neither the delivery of this prospectus
nor any distribution of securities in accordance with this prospectus shall,
under any circumstances, imply that there has been no change in our affairs
since the date of this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, a registration statement on Form SB-2, as
amended, under the Securities Act for the common stock offered by this
prospectus. We have not included in this prospectus all the information
contained in the registration statement and you should refer to the registration
statement and its exhibits for further information.
Any statement in this prospectus about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
The registration statement and other information may be read and copied at
the Commission's Public Reference Room at 450 Fifth Street N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The SEC maintains a
web site (HTTP://WWW.SEC.GOV.) that contains the registration statements,
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC such as us.
You may also read and copy any reports, statements or other information
that we have filed with the SEC at the addresses indicated above and you may
also access them electronically at the web site set forth above. These SEC
filings are also available to the public from commercial document retrieval
services.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this prospectus contain some
forward-looking statements. Certain of the matters discussed concerning our
operations, cash flows, financial position, economic performance and financial
condition, including, in particular, future sales, product demand, the
automobile market in the Peoples Republic of China, 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 we believe that these
statements are based upon reasonable assumptions, including projections of
orders, sales, operating margins, earnings, cash flow, research and development
costs, working capital, capital expenditures and other projections, they are
subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
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Investors are cautioned that our 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. We expressly disclaim 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.
We undertake 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 we make in our
Form 10-KSB, Form 10-QSB and Form 8-K reports to the SEC. Also note that we
provide a cautionary discussion of risk and uncertainties under the caption
"Risk Factors" in this prospectus. These are factors that we think could cause
our actual results to differ materially from expected results. Other factors
besides those listed here could also adversely affect us. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.
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Table of contents
Prospectus Summary
Risk Factors
Use of Proceeds
Determination of Offering Price
Selling Stockholder
Business
Description of Property
Selected Financial Data
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Security Ownership of Certain Beneficial Owners and Management
Directors and Executive Officers, Promoters and Control Persons
Executive Compensation
Certain Relationships and Related Party Transactions
Plan of Distribution
Description of Securities
Market Price of and Dividends on our Common Equity and
Related Stockholder Matters
Legal Proceedings
Changes in and Disagreements with Accountants
Indemnification of Directors and Officers
Legal Matters
Experts
Financial Statements
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our common stock. You should read the entire
prospectus, including "Risk Factors" and the consolidated financial statements
and the related notes before making an investment decision.
In this prospectus, the "Company", "we," "us," and "our" refer to (i)
China Autoparts, Inc., (ii) our 100% owned British Virgin Islands subsidiary,
Rhohan Holdings Limited.("Rhohan") and (iii) our indirectly held subsidiary,
Chengdu Tonglin Casting Industrial Co., Ltd. ("Tonglin"), which is 100% owned by
Rhohan.
OUR COMPANY
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 Casting Industrial 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 within the PRC.
The Company's executive offices are located at 276 Fifth Avenue, Suite
703, New York, New York 10001 and its telephone number is 212-684-3760. Tonglin
is 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.
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 1,200 employees.
The Company was formed under the name Talram Corporation 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 (the "Exchange Agreement") pursuant to which on May 13, 2004 it
acquired 100% of the outstanding stock of Rhohan, a British Virgin Islands
("BVI") company, from Double Unity , also a BVI company. Rhohan's only asset is
100% of the stock of Tonglin, a PRC corporation that is classified as a wholly
owned foreign 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.
----------------------
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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 raising capital for its operations.
THE OFFERING
This prospectus relates to the resale by Double Unity of 1,000,000 shares
of our common stock. Such shares were part of the shares acquired by Double
Unity pursuant to a Capital Stock Exchange Agreement dated as of April 22, 2004
which was closed on May 13, 2004. Pursuant to the agreement, Double Unity
transferred to the Company all of the capital stock of Rhohan, in exchange for
94.5% of the common stock of the Company which were issued to Double Unity and 7
of its designees. We issued all 1,000,000 of the shares which are being offered
hereby in reliance upon an exemption from the registration requirements of the
Securities Act provided by Section 4(2) of the Securities Act for private
transactions.
SALES BY SELLING STOCKHOLDER
Double Unity may offer the common stock pursuant to this prospectus in
varying amounts and transactions so long as this prospectus is then current
under the rules of the SEC and we have not withdrawn the registration statement.
The offering of common stock may be through the facilities of the
over-the-counter Bulletin Board or such other exchange or reporting system where
the common stock may be traded. Brokerage commissions may be paid or discounts
allowed in connection with such sales; however, it is anticipated that the
discounts allowed or commissions paid will be no more than the ordinary
brokerage commissions paid on sales effected through brokers or dealers. To our
knowledge, as of the date hereof, no one has made any arrangements with a broker
or dealer concerning the offer or sale of the common stock. See "Plan of
Distribution."
Our common stock is not listed for trading on any securities exchange or
quotation system and there presently is no public market for our common stock.
OUTSTANDING SECURITIES
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As of August 31, 2004, there were 9,090,910 shares of our common stock
outstanding.
An investment in the shares of our company is subject to a number of
risks. We have set forth these risk factors below under the heading "Risk
Factors" which you should carefully review.
SUMMARY FINANCIAL DATA
The following table presents summary financial data for us as at June 30,
2004 and for the two previous fiscal years ended December 31, 2003. We derived
the summary financial data set forth below with respect to our statements of
operations for the six months ended June 30, 2004 and the two fiscal years ended
December 31, 2003 and December 31, 2002 and our balance sheets as at June 30,
2004, December 31, 2003 and December 31, 2002, from our consolidated financial
statements that are included elsewhere in this prospectus. We derived the
summary financial data for us at December 31, 2001 and for the year then ended
from our consolidated financial statements which are not included in this
prospectus. You should read the following summary financial data in conjunction
with the consolidated financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this prospectus.
For Six Months For the Fiscal Year Ended December 31,
Ended --------------------------------------
June 30, 2004 2003 2002 2001
(unaudited) (unaudited)
Gross revenues $9,384,218 $16,248,926 $14,159,153 $9,867,955
Income from operations $2,437,858 4,647,659 4,397,720 2,987,874
Net income $2,138,082 3,873,418 3,169,845 1,959,016
Total assets $18,229,485 (1) 22,365,455 (2) 13,376,635 (3) 11,746,964 (4)
Total liabilities $10,086,721 (1) 15,381,089 (2) 6,660,006 (3) 5,374,392 (4)
- ----------
(1) As at June 30, 2004
(2) As at December 31, 2003
(3) As at December 31, 2002
(4) As at December 31, 2001
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The reporting currency of the Company is the U.S. dollar. The Company uses the
local currency in the PRC, the Renminbi, as its 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.
10
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks described below, in conjunction with other information and
our consolidated financial statements and related notes included elsewhere in
this prospectus, before making an investment decision. You should pay particular
attention to the fact that we conduct our operations in China and are governed
by a legal and regulatory environment that in some respects differs
significantly from the environment that may prevail in other countries that you
may be familiar with. Our business, financial condition or results of operations
could be affected materially and adversely by any or all of these risks.
We face competition in each of our lines of businesses.
Our current competitors include Chongqing Aoli, Kunshan Toyota, Shenyang
Futian and Nanjing Teksid. While we believe that our price and quality are
superior to other manufacturers, many of our competitors are better capitalized,
more experienced, and have deeper ties in the Chinese marketplace. We may be
unsuccessful in our attempts to compete, which would have a material adverse
impact on our business and financial condition. The automobile parts market in
the People's Republic of China ("PRC") generally is competitive with
approximately 100 PRC automakers to supply. With the PRC's entry into the World
Trade Organization 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.
We face the risk that changes in the policies of the Chinese government
could have significant impacts upon the business we may be able to conduct in
China and the profitability of such business.
The economy of China is at a transmission from a planned economy to a
market oriented economy subject to five-year and annual plans adopted by the
government that set down national economic development goals. Policies of the
Chinese government can have significant effects on the economic conditions of
China. The Chinese government has confirmed that economic development will
follow a model of market economy under socialism. Under this direction, we
believe that the PRC will continue to strengthen its economic and trading
relationships with foreign countries and business development in China will
follow market forces. While we believe that this trend will continue, there can
be no assurance that such will be the case. A change in policies by the Chinese
government could adversely affect our interests in by, among other factors:
changes in laws, regulations or the interpretation thereof; confiscatory
taxation; restrictions on currency conversion, imports or sources of supplies;
or the expropriation or nationalization of private enterprises. Although the
Chinese government has been pursuing economic reform policies for approximately
two decades, there is no assurance that the government will continue to pursue
such policies or that such policies may not be significantly altered, especially
in the event of a change in leadership, social or political disruption, or other
circumstances affecting China's political, economic and social life.
The PRC laws and regulations governing our current business operations and
contractual arrangements are uncertain, and if we are found to be in violation,
we could be subject to sanctions. In addition, any changes in such PRC laws and
regulations may have a material and adverse effect on our business.
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There are substantial uncertainties regarding the interpretation and
application of PRC laws and regulations, including but not limited to the laws
and regulations governing our business, or the enforcement and performance of
our arrangements with customers in the event of the imposition of statutory
liens, death, bankruptcy and criminal proceedings. We and our subsidiaries are
considered foreign persons or foreign funded enterprises under PRC laws, and as
a result, we are required to comply with PRC laws and regulations. These laws
and regulations are relatively new and may be subject to future changes, and
their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses may also be
applied retroactively. In addition, the PRC authorities retain broad discretion
in dealing with violations of laws and regulations, including levying fines,
revoking business licenses and requiring actions necessary for compliance. In
particular, licenses, permits and beneficial treatments issued or granted to us
by relevant governmental bodies may be revoked at a later time under contrary
findings of higher regulatory bodies. We cannot predict what effect the
interpretation of existing or new PRC laws or regulations may have on our
businesses. We cannot assure you that any such restructuring would be effective
or would not result in similar or other difficulties. We may be subject to
sanctions, including fines, and could be required to restructure our operations.
As a result of these substantial uncertainties, we cannot assure you that we
will not be found in violation of any current or future PRC laws or regulations.
A slowdown or other adverse developments in the PRC economy may materially
and adversely affect our customers, demand for our services and our business.
All of our operations are conducted in the PRC and all of our revenues are
generated from sales in the PRC to business operating in the PRC. Although the
PRC economy has grown significantly in recent years, we cannot assure you that
such growth will continue. The automotive industry in the PRC is relatively new
and growing, but we do not know how sensitive we are to a slowdown in economic
growth or other adverse changes in the PRC economy which may affect demand for
cars and trucks, and therefore, auto parts. A slowdown in overall economic
growth, an economic downturn or recession or other adverse economic developments
in the PRC may materially reduce the demand for our products and materially and
adversely affect our business.
We are dependent upon key personnel, the loss of which could harm our
prospects.
We depend, to a large extent, on the abilities and participation of our
current management team, including Li Yungao. The loss of the services of any of
our key personnel, for any reason, may have a material adverse effect on our
prospects. There can be no assurance in this regard nor any assurance that we
will be able to find a suitable replacement for such persons. We do not carry
key man life insurance for any key personnel.
Inflation in China could negatively affect our profitability and growth.
While the Chinese economy has experienced rapid growth, such growth has
been uneven among various sectors of the economy and in different geographical
areas of the country. Rapid economic growth can lead to growth in the money
supply and rising inflation. If prices for our products rise at a rate that is
insufficient to compensate for the rise in the costs of supplies, it may have an
adverse effect on profitability. In order to control inflation in the past, the
Chinese government has imposed controls on bank credits, limits on loans for
fixed assets and restrictions on state bank lending. Such an austerity policy
can lead to a slowing of economic growth.
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Governmental control of currency conversion may affect the value of your
investment.
The PRC government imposes controls on the convertibility of Renminbi into
foreign currencies and, in certain cases, the remittance of currency out of the
PRC. We receive substantially all of our revenues in Renminbi, which is
currently not a freely convertible currency. Shortages in the availability of
foreign currency may restrict our ability to remit sufficient foreign currency
to pay dividends, or otherwise satisfy foreign currency dominated obligations.
Under existing PRC foreign exchange regulations, payments of current account
items, including profit distributions, interest payments and expenditures from
the transaction, can be made in foreign currencies without prior approval from
the PRC State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate governmental
authorities is required where Renminbi is to be converted into foreign currency
and remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the
future to foreign currencies for current account transactions. If the foreign
exchange control system prevents us from obtaining sufficient foreign currency
to satisfy our currency demands, we may not be able to pay certain of our
expenses as they come due.
The fluctuation of the Renminbi may materially and adversely affect your
investment.
The value of the Renminbi against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in the PRC's political
and economic conditions. As we rely entirely on revenues earned in the PRC, any
significant revaluation of the Renminbi may materially and adversely affect our
cash flows, revenues and financial condition. For example, to the extent that we
need to convert U.S. dollars we receive from an offering of our securities into
Renminbi for our operations, appreciation of the Renminbi against the U.S.
dollar could have a material adverse effect on our business, financial condition
and results of operations. Conversely, if we decide to convert our Renminbi into
U.S. dollars for the purpose of making payments for dividends on our common
shares or for other business purposes and the U.S. dollar appreciates against
the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be
reduced. In addition, the depreciation of significant U.S. dollar denominated
assets could result in a charge to our income statement and a reduction in the
value of these assets.
Our inability to fund our capital expenditure requirements may adversely
affect our growth and profitability.
Our continued growth is dependent upon our ability to raise capital from
outside sources. We believe that in order to continue to capture additional
market share, we will have to increase our production capacity through the
purchase of machinery and equipment with a value of approximately $7 million. In
the future we may be unable to obtain the necessary financing on a timely basis
13
and on acceptable terms, and our failure to do so may adversely affect our
financial position, competitive position, growth and profitability. Our ability
to obtain acceptable financing at any time may depend on a number of factors,
including:
- our financial condition and results of operations,
- the condition of the PRC economy and the auto industry in the PRC,
and
- conditions in relevant financial markets in the U.S., the PRC and
elsewhere in the world.
We may not be able to effectively control and manage our growth.
If our business and markets grow and develop, it will be necessary for us
to finance and manage expansion in an orderly fashion. This growth will lead to
an increase in the responsibilities of existing personnel, the hiring of
additional personnel and expansion of our scope of operations. There can be no
assurance that we will be able to raise the required financing or control and
manage this future growth.
We do not presently maintain fire, theft, liability or any other
insurance.
We do not maintain fire, theft, liability (including product liability) or
other insurance of any kind. We bear the economic risk with respect to loss of
or damage or destruction to our property and to the interruption of our business
as well as liability to third parties for damage or destruction to them or their
property that may be caused by our personnel or products. Such liability could
be substantial and the occurrence of such loss or liability may have a material
adverse effect on our business, financial condition and prospects. 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.
Environmental liability could have a material adverse effect on our
operations; potential litigation arising from our operations could have a
material adverse effect on our financial condition.
From time to time claims of various types may be asserted against us
arising out of our operations in the normal course of business, including claims
relating to land use and permits, safety, health and environmental matters.
Although we have never had such claims up to now, such matters are subject to
many uncertainties and it is not possible to determine the probable outcome of,
or the amount of liability, if any, from these matters.
In the opinion of our management (which opinion is based in part upon
consideration of the opinion of counsel), it is unlikely that the outcome of
these claims will have a material adverse effect on our operations or financial
condition. However, there can be no assurance that an adverse outcome in any of
such litigation would not have a material adverse effect on us or our operating
segments.
We depend on large contracts and a concentration of customers.
Our revenue is dependent, in large part, on significant contracts from a
limited number of customers. During the fiscal year ended December 31, 2003
approximately 94.0% of sales were to five customers and approximately 68.0% of
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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. We believe that revenue derived from current and
future large customers will continue to represent a significant portion of our
total revenue. Our inability to continue to secure and maintain a sufficient
number of large contracts would have a material adverse effect on our business,
operating results and financial condition. Moreover, our success will depend in
part upon our ability to obtain orders from new customers, as well as the
financial condition and success of our customers and general economic
conditions.
We bear the risk of loss in shipment of our products and have no insurance
to cover such loss.
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.
We do not own some of the real property on which our plants are located
and we do not have the land use rights for certain of the land we use.
All land in the PRC is owned by the government and cannot be sold to any
individual or entity. Instead, the PRC government grants landholders a "land use
right." In 2003, Tonglin purchased the land use right for the land occupied by
our Plant 5 and our warehouse from the government for $171,358. This land is
currently held in the name of Chengdu Rongxin Industrial Co., Ltd. (a related
party controlled by Li Yungao as explained in "Business," below) which is
currently in the process of applying for a name change for the land use right.
Our Plants 1 through 4 were contributed to Tonglin by Chengdu Rongxin
Enterprises Co., Ltd. (a related party controlled by Li Yungao as explained in
"Business," below) upon its formation and Plant 5 and the warehouse used by
Tonglin were constructed by it. 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 us that such property was contributed by
Chengdu Rongxin Enterprises Co., Ltd when setting up Tonglin, therefore, Tonglin
has the right to use the property. However, without the certificates, Tonglin
may not be able to protect its rights to the property if challenged in a PRC
court. 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. Chengdu
Rongxin Industrial Co., Ltd is currently in the process of releasing the
mortgage by applying for replacing the collateral (Plants 1 through 4) with
certain of its other assets.
The right to use the land on which plants 1 through 4 are situated is also
owned by Chengdu Rongxin Industrial Co., Ltd. which is in the process of
obtaining a land use right certificate in the name of Tonglin subject to the
releasing of the mortgage held by Chengdu Rongxin Industrial Co., Ltd..
15
While we believe that Tonglin will obtain the necessary land use right
certificates and building ownership certificates from the above named entities,
each of which is controlled by Li Yungao, the Chairman of our Board of
Directors, Chief Executive Officer and principal shareholder, and Tonglin has
the right to use the land and building at the present time, the failure by
Tonglin to obtain certificates evidencing ownership of buildings and land use
rights could have a material adverse effect upon the Company's operations in the
event there is a legal dispute over use of the land or buildings.
We may not be able to pass on to customers increases in the costs of our
raw materials, particularly iron and steel.
The major raw materials that we purchase for production are iron and
steel. The price and availability of these raw materials are subject to market
conditions affecting supply and demand. Our gross profits for the fiscal year
ended June 30, 2004 declined from the prior year primarily due to an increase in
the price of iron from $217 per ton during the six months ended June 30, 2003 to
$310 per ton during the six months ended June 30, 2004 which could not be fully
passed on to customers. Our financial condition or results of operations may be
impaired by further increases in raw material costs to the extent we are unable
to pass those higher costs to our customers. In addition, if these materials are
not available on a timely basis or at all, we may not be able to produce our
products and our sales may decline.
Our officers, directors and affiliates control us through their positions
and stock ownership and their interests may differ from other stockholders.
Our officers, directors and affiliates beneficially own approximately 91%
of our common stock. Double Unity Investments Limited, a company beneficially
owned by Li Yungao, the Chairman of our Board of Directors and our Chief
Executive Officer, beneficially owns approximately 91% of our common stock and
is the selling stockholder herein. Mr. Li can effectively control us and his
interests may differ from other stockholders.
16
Because some of our directors and officers reside outside of the United
States, it may be difficult for you to enforce your rights against them or
enforce U.S. court judgments against them in the PRC.
All of our directors and officers reside outside of the United States and
substantially all of our assets will be located outside of the United States. It
may therefore be difficult for investors in the United States to enforce their
legal rights, to effect service of process upon our directors or officers or to
enforce judgments of United States courts predicated upon civil liabilities and
criminal penalties of our directors and officers under United States Federal
securities laws. Further, it is unclear if extradition treaties now in effect
between the United States and the PRC would permit effective enforcement of
criminal penalties of the United States Federal securities laws.
Our limited operating history may not serve as an adequate basis to judge
our future prospects and results of operations.
We began operations in 2000. Our limited operating history may not provide
a meaningful basis on which to evaluate our business. Although our revenues have
grown rapidly since inception, we cannot assure you that we will maintain our
profitability or that we will not incur net losses in the future. We expect that
our operating expenses will increase as we expand. Any significant failure to
realize anticipated revenue growth could result in significant operating losses.
We will continue to encounter risks and difficulties frequently experienced by
companies at a similar stage of development, including our potential failure to:
- implement our business model and strategy and adapt and modify them
as needed;
- increase awareness of our brands, protect our reputation and develop
customer loyalty;
- manage our expanding operations and service offerings, including the
integration of any future acquisitions;
- maintain adequate control of our expenses;
- anticipate and adapt to changing conditions in the autoparts markets
in which we operate as well as the impact of any changes in
government regulation, mergers and acquisitions involving our
competitors, technological developments and other significant
competitive and market dynamics.
If we are not successful in addressing any or all of these risks, our
business may be materially and adversely affected.
The PRC legal system has inherent uncertainties that could materially and
adversely affect us.
17
The PRC legal system is based upon written statutes. Prior court decisions
may be cited for reference but are not binding on subsequent cases and have
limited value as precedents. Since 1979, the PRC legislative bodies have
promulgated laws and regulations dealing with economic matters such as foreign
investment, corporate organization and governance, commerce, taxation and trade.
However, the PRC has not developed a fully integrated legal system and the array
of new laws and regulations may not be sufficient to cover all aspects of
economic activities in the PRC. In particular, because these laws and
regulations are relatively new, and because of the limited volume of published
decisions and their non-binding nature, the interpretation and enforcement of
these laws and regulations involve uncertainties. In addition, published
government policies and internal rules may have retroactive effects and, in some
cases, the policies and rules are not published at all. As a result, we may be
unaware of our violation of these policies and rules until some time later. Our
contractual arrangements with our affiliated entities are governed by the laws
of the PRC. The enforcement of these contracts and the interpretation of the
laws governing these relationships is subject to uncertainty.
The preferential tax treatment of our Tonglin subsidiary will expire in
2005, which will result in higher tax rates and could adversely affect our
overall results of operations.
Pursuant to the relevant laws, regulations and policies in the PRC,
Tonglin, as a wholly foreign owned enterprise ("WFOE") in the PRC, located in a
Special Economic Zone in the Sichuan Province, is entitled to an exemption from
the PRC enterprise income tax for two years commencing from its first profitable
year and special discount at income tax rate of 7.5% in the following three
years by virtue of the special policy of the State Administration of Taxation of
Sichuan Province. 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% and an exemption from local income taxes of 3% for 2002, 2003 and 2004.
Beginning on January 1, 2005, Tonglin's tax benefits will expire, except for a
50% discount in its enterprise income tax which will rise to only 15% instead of
30%, which will continue indefinitely.
We have never paid cash dividends and are not likely to do so in the
foreseeable future.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future but will review this policy as circumstances dictate.
There is only a limited trading market for our common stock.
Our common stock is not listed on any stock exchange nor quoted on the
over-the-counter Bulletin Board or any quotation service. There is currently no
trading market for our common stock and we do not know if any trading market
will ever develop. You may be unable to sell your shares due to the absence of a
trading market.
In addition, broker-dealers who recommend our common stock to people who
are not established customers or qualifying investors must follow special sales
procedures, including getting the purchaser's written consent prior to the sale.
Our common stock is also subject to the "penny stock" rules, which require
delivery of a schedule explaining the penny stock market and the associated
risks before any sale. See "MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS." These requirements may further
limit your ability to sell your shares.
18
Our common stock is illiquid and subject to price volatility unrelated to
our operations.
The market price of our common stock could fluctuate substantially due to
a variety of factors, including market perception of our ability to achieve our
planned growth, quarterly operating results of other auto parts makers, trading
volume in our common stock, changes in general conditions in the economy and the
financial markets or other developments affecting our competitors or us. In
addition, the stock market is subject to extreme price and volume fluctuations.
This volatility has had a significant effect on the market price of securities
issued by many companies for reasons unrelated to their operating performance
and could have the same effect on our common stock.
USE OF PROCEEDS
We will not receive any of the proceeds from the selling stockholder's
sale of the shares offered under this prospectus.
DETERMINATION OF OFFERING PRICE
We are not selling any of the common stock that we are registering. The
common stock will be sold by the selling stockholder listed in this prospectus.
The selling security holder may therefore sell the common stock at the market
price as of the date of sale or a price negotiated in a private sale. There is
presently no public market for our common stock.
SELLING STOCKHOLDER
This prospectus relates to the offer and sale of our common stock by the
selling stockholder identified below. The selling stockholder will determine
when it will sell its common stock and in all cases, will sell its common stock
at the current market price or at negotiated prices at the time of the sale. We
will not receive any proceeds from the sale of the common stock shares by the
selling stockholder. The following table sets forth certain information
regarding the beneficial ownership of our securities as of the date of this
prospectus by the selling stockholder.
- --------------------------------------- ------------- -------------------- --------------- ----------------- ---------------
Name and Relationship to Us Securities Percentage Securities to Amount of Percentage of
- --------------------------------------- ------------- -------------------- --------------- ----------------- ---------------
Beneficially Ownership be Offered Securities to be Securities to
- --------------------------------------- ------------- -------------------- --------------- ----------------- ---------------
Owned Before Offering (1) for Selling Held After be Held After
- --------------------------------------- ------------- -------------------- --------------- ----------------- ---------------
Stockholder's Offering (2) Offering (2)
- --------------------------------------- ------------- -------------------- --------------- ----------------- ---------------
Account
- --------------------------------------- ------------- -------------------- --------------- ----------------- ---------------
- --------------------------------------- ------------- -------------------- --------------- ----------------- ---------------
Double Unity Investments Limited. (3) 8,272,728 (4) 91.0% 1,000,000 7,272,728 (4) 80.0%
- --------------------------------------- ---------------------------------- --------------- ----------------- ---------------
- --------------------------------------- ------------- -------------------- --------------- ----------------- ---------------
- ----------
(1) Based on 9,090,910 shares outstanding as of August 31, 2004.
(2) Assumes the sale of all shares offered by the selling stockholder.
(3) Li Yungao, the Chairman and Chief Executive Officer of the Company, is the
sole director and shareholder of Double Unity Investments Limited., a British
Virgin Islands company ("Double Unity") and may be deemed to beneficially own
all of the securities of the Company owned directly by Double Unity.
19
(4) On May 13, 2004 Double Unity assigned to 7 persons certain of the shares
that Double Unity was entitled to receive under the Exchange Agreement. In
connection with the assignments, 7 of the assignees, entered into Share Lock-Up
Agreements with Double Unity pursuant to which they have agreed to comply with
any reasonable restriction on their sale of the shares determined by Double
Unity or the Company. Such selling stockholders have agreed that without the
written consent of Double Unity, they will not pledge sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant for the sale of, or otherwise dispose
of the shares, or any securities convertible into or exchangeable or
exerciseable for common stock of the Company. As a result of the foregoing, the
shares beneficially owned by Double Unity includes an aggregate of 1,954,544
shares owned by 7 of the other selling stockholders.
BUSINESS
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 owned foreign enterprise
("WOFE") 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 WOFE.
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 --
20
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.
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
- --------------------------------------------------------------------------------
21
- --------------------------------------------------------------------------------
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
22
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.
Production Processes
Tonglin's production of engine blocks is accomplished almost entirely
through the use of manual labor with approximately 1,030 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.
23
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 54,206,819
in 2003, 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 1,809,800 kilometers in 2003. In
addition, there are numerous new and continuing road improvement and expansion
projects, mostly centering around the PRC's major urban areas.
While we believe 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.
24
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, recent statistics from FORIN China
Auto Weekly indicate revenue for 2003 for this market is RMB248.803 billion,
which represents an increase of 34.85% compared with 2002. Profits reported by
FORIN were RMB23.903 billion, which represents an increase of 46.86% compared
with 2002. Therefore, we believe that the auto parts market in the PRC has shown
recent and substantial growth, 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.
25
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
the time they are required, 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 many people and businesses in the PRC
begin looking to purchase cars after the Chinese new year in late January or
early February.
26
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 462Q,
368Q
Aoli and
465Q
--------------------------------
Kunshan 491Q
Toyota
--------------------------------
Shenyang 491Q
Futian
--------------------------------
Nanjing 480Q
and
Teksid 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 for the 462Q and 465Q products. However, Chongqing Aoli does not have
the same production capacity as Tonglin for its other products. In addition,
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.
27
Research and Development Activities
Tonglin has 43 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 eleven products under development, five of which
have been sent out to customers for testing and analysis. For full year 2005,
Tonglin plans to introduce two additional products.
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 1,200 employees
of whom approximately 1,030 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.
28
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.
Chengdu Rongxin Ruigao Machinery Li Yungao - 70% owner, General Manager and
Co, Ltd. Chairman. Also, General Manager and
Chairman of Tonglin, principal shareholder
of the Company.
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.
Chengdu High Pressure Valve Plant Owned principally by Mr. Li Yun Gao.
Chengdu Taichang Metals Co., Ltd. Li Jing - Principal owner and Chairman.
Also, a Director of the Company and the son
of Li Yungao.
DESCRIPTION OF PROPERTY
The Company leases an executive office at 276 Fifth Avenue, Suite 703, New
York, New York 10001 at a monthly rental of $500.00. Pursuant to the terms of
our lease, the rent is to be adjusted each year and is to be paid every 3
months. Either party may unilaterally terminate the lease upon 30 days written
notice.
29
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 it. 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 such property was contributed by Chengdu
Rongxin Enterprises Co., Ltd when setting up Tonglin, therefore, Tonglin has the
right to use the property. However, without the certificates, Tonglin may not be
able to protect its rights to the property if challenged in a PRC court. 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. Chengdu Rongxin
Industrial Co., Ltd is currently in the process of releasing the mortgage by
applying for replacing the collateral (Plants 1 through 4) with certain of its
other assets.
The right to use the land on which plants 1 through 4 are situated is also
owned by Chengdu Rongxin Industrial Co., Ltd. which is in the process of
obtaining a land use right certificate in the name of Tonglin subject to the
releasing of the mortgage held by Chengdu Rongxin Industrial 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 - RMB 100,000 per year.
SELECTED FINANCIAL DATA
The following table presents selected financial data for us as at June 30, 2004
and for the two previous fiscal years ended December 31, 2003. We derived the
selected financial data set forth below with respect to our statements of
operations for the six months ended June 30, 2004 and the two fiscal years ended
30
December 31, 2003 and our balance sheets as at June 30, 2004, December 31, 2003
and December 31, 2002, from our consolidated financial statements that are
included elsewhere in this prospectus. We derived the selected financial data
for us at December 31, 2001 and for the year then ended from our consolidated
financial statements which are not included in this prospectus. You should read
the following summary financial data in conjunction with the consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this prospectus.
For Six Months For the Fiscal Year Ended December 31,
Ended --------------------------------------
June 30, 2004 2003 2002 2001
(unaudited) (unaudited)
Gross revenues $9,384,218 $16,248,926 $14,159,153 $9,867,955
Income from operations $2,437,858 4,647,659 4,397,720 2,987,874
Net income $2,138,082 3,873,418 3,169,845 1,959,016
Total assets $18,229,485(1) 22,365,455 (2) 13,376,635 (3) 11,746,964 (4)
Total liabilities $10,086,721(1) 15,381,089 (2) 6,660,006 (3) 5,374,397 (4)
- ----------
(1) As at June 30, 2004
(2) As at December 31, 2003
(3) As at December 31, 2002
(4) As at December 31, 2001
31
The reporting currency of the Company is the U.S. dollar. The Company uses the
local currency in the PRC, the Renminbi, as its 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the consolidated financial
condition and results of operations should be read with "Selected Financial
Data" and our consolidated financial statements and related notes appearing
elsewhere in this prospectus. This discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
The actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under "Risk Factors" and elsewhere in this
prospectus.
Overview
China Autoparts, Inc. (the "Company") was incorporated in the State of
Delaware on May 1, 2001 and it is a holding company for, and owns 100% of,
Rhohan Holdings Limited, a British Virgin Islands company ("Rhohan"). Rhohan is
a holding company for, and owns 100% of, Chengdu Tonglin Casting Industrial Co.,
Ltd. ("Tonglin"). Tonglin is a manufacturer of engine blocks in the People's
Republic of China ("PRC") 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 manufactured in the PRC.
On May 13, 2004, the Company acquired 100% of Rhohan pursuant to an April
22, 2004 Capital Stock Exchange Agreement in exchange for 8,590,910 shares of
the Company's $.0001 par value per share common stock.
Tonglin sells its products through an internal sales staff and primarily
to five customers. For the six months ended June 30, 2004 and June 30, 2003,
those five customers accounted for 93.2% and 92.9% of total sales. The loss of
any of these customers and Tonglin's lack of a very large customer base could
adversely impact its business.
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.
Products that are rejected by customers are repaired and returned to
inventory. Tonglin has never experienced returns in material quantities for any
of its products, and therefore does not believe that it is subject to material
risk of inventory buildup attributable to returns.
32
Over the previous two years, Tonglin has expanded its operations and
production facilities in order to meet increased demands from existing
customers, who have expressed satisfaction with Tonglin's products. Accordingly,
in the fiscal years ended December 31, 2003 and December 31, 2002, Tonglin
invested approximately $1.8 million and $.3 million, respectively, on
improvements of existing production facilities and acquiring new equipment.
During the six months ended June 30, 2004, Tonglin invested $47,868 in 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.
Tonglin operates in a highly competitive environment. The competition is
expected to intensify with PRC's admission into the World Trade Organization. We
believe there will be an influx of foreign products and further dilution of the
autoparts market in PRC. Tonglin believes that the selling price for its
products may decrease in future periods, although the timing and amounts of
these decreases cannot be predicted with any certainty at the present time.
These decreases may be offset by the introduction of new products and the
increasing sales volume.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2004 and June 30, 2003
Sales and Gross Profit
Net sales for the six months ended June 30, 2004 were approximately $9.4
million compared to approximately $8.7 million for the six months ended June 30,
2003, an increase of approximately 7.3%. The increase in net sales resulted
primarily from the increased sales to existing customers and increased sales of
the 465Q product.
Gross profit for the six months ended June 30, 2004 was approximately $3.2
million, a decrease of approximately 17.5% or approximately $0.7 million from
approximately $3.9 million for the prior period. The decrease in gross profit
was primarily due to an increase in the cost of iron used in the production of
Tonglin's engine blocks, which has increased from $217 per ton during the six
months ended June 30, 2003 to $310 per ton during the six months ended June 30,
2004.
During the six months ended June 30, 2004 and June 30, 2003 there was a
substantial concentration of sales. During the six months ended June 30, 2004,
approximately 93.2% of sales were sales to the top five customers and
approximately 79.9% of sales were sales to the top three customers. For the six
months ended June 30, 2003, approximately 92.9% of sales were sales to the top
five customers and approximately 64.6% of sales were sales to the top three
customers.
Cost of Sales
Cost of sales increased to approximately $6.2 million in the six months
ended June 30, 2004, or approximately 27.2% from approximately $4.9 million in
the prior year, primarily due to the increase in the cost of iron noted above.
33
Tonglin's increase in production resulted from increased orders from
certain existing customers and increased sales of Tonglin's 465Q product from
88,846 units during the six months ended June 30, 2003 to 104,109 units for the
six months ended June 30, 2004.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were approximately $0.86
million, in the six months ended June 30, 2004, or approximately 9.2% of net
sales, compared to approximately $0.9 million, or approximately 10.2% of net
sales, for the six months ended June 30, 2003.
Selling, general and administrative expenses for the six months ended June
30, 2004 were primarily made up of salaries and wages ($306,881) and engine
block assembly and delivery charges ($235,980). Other expenses remained constant
between periods due to better cost controls by management which involved
pre-approval of certain expenditures and negotiation of a reduction in delivery
charges with suppliers.
Fiscal Years Ended December 31, 2003 and December 31, 2002
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 which resulted in an increase in production from 343,334 engine blocks in
2002 to 438,984 engine blocks in 2003. 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.
34
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 Expenses
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 six months ended June 30, 2004 or the six
months ended June 30, 2003. 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 enterprise in the PRC, is entitled to an exemption from the
PRC enterprise income tax for two years commencing from its first profitable
year, after loss carry-forwards from the previous five years have been
recovered. Tonglin generated profits in the year ended December 31, 2000.
Effective January 1, 2002 the two-year 100% exemption for income taxes had
expired and Tonglin, as a wholly foreign owned enterprise located in a Special
Economic Zone designated by the PRC government, became entitled to 50% relief
from the PRC enterprise income tax for the following years of the operation of
the entity.
In addition, 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 Implementation of the Suggested
Policies of State Administration of Taxation, Tonglin is entitled to reduce its
income tax rate to 7.5%. Therefore Tonglin's income tax rate for the six months
ended June 30, 2004 and June 30, 2003 was 7.5%. Tonglin's income tax rate will
remain 7.5% until December 31, 2004, at which time the full rate of 15% will
come into effect.
Tonglin is also exempt from local income taxes of 3% until January 1,
2005.
Plan of Operation
Starting on April 1, 2004 and over the next 12-month period, Tonglin's
plan of operation centers on continuing to increase its sales and production.
35
Tonglin has already made capital investments which allow it to produce an
additional 250,000 more engine blocks 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. For instance, Tonglin has become the supplier of
Shenyang Xinguang and SAIC-Chery where Tonglin did not previously 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.
Currently there are two new products in the process of development.
Tonglin believes that it will be able to execute its plan of operation
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 fluctuation
of the automobile market 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.
In April, 2004, Rhohan declared a $1,000,000 dividend distribution to its
sole shareholder, Double Unity.
Tonglin believes that over the next 12 months it will continue to rely on
short term bank loans to finance its operations. As of June 30, 2004, Tonglin
had the following short term loans outstanding with the following terms:
Lender and Terms Amount Due
- ------------------------------------------------ ------------
Chengdu City Commercial Bank, Dayi Branch $1,210,000
Due January 15, 2005
Monthly interest only payment at 0.57525%.
Guaranteed by Chengdu High Pressure Valve
Plant, a related party
Shanghai Pu Dong Development Bank, Chengdu Branch $3,630,000
Due March 29, 2005
Monthly interest only payment at 0.48675%
Guaranteed by Chengdu Rongxin Ruigao
Machinery Co., Ltd, a related party
36
In the past Tonglin has loaned monies to Chengdu Taichang Metals Co., Ltd.
("Taichang"), 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.
Accounts Receivable
The decrease in trade accounts receivable from December 31, 2003 to June
30, 2004 is primarily attributable to faster collections 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 decrease in Other Receivables to approximately $4.7 million as of June
30, 2004 from approximately $5.5 million as of December 31, 2003, was primarily
due to the repayment from our related party - Chengdu Taichang Metals Co., Ltd.
Inventory
Inventories of finished goods decreased between December 31, 2003 and June
30, 2004 from approximately $1.2 million to approximately $1.1 million.
Inventories of raw materials decreased between December 31, 2003 and June 30,
2004 from approximately $0.9 million to approximately $0.46 million. The
decrease in finished goods and raw materials was primarily to reduce inventory
levels because of the increase in the cost of iron.
Accounts Payable
Accounts payable, accrued expenses and other payables decreased from
December 31, 2003 to June 30, 2004 primarily as a result of the Company paying
its suppliers and employee bonuses and repayment of notes payable to banks in
the first six months of 2004.
Cash
The decrease in cash from December 31, 2003 to June 30, 2004 was primarily
attributable to the repayment of approximately $2,057,000 outstanding notes
payable to banks.
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
37
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 valueexceeds 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 June 30, 2004, 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
38
The following table sets forth as of August 31, 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. Common
Director and CEO (2) Stock 8,272,728 (3) 91.0%
4009 Gloucester Tower
11 Pedder Street
Central
Hong Kong
LR Investment Holdings, Ltd. Common
c/o Harney Westwood & Riegels Stock 470,000 5.2%
Craigmuir Chambers
P.O. Box 71
Road Town, Tortola
British Virgin Islands
Ding Ke, Director and EVP, Business Development Common
Flat 26A, Block A Lihu Garden Stock 272,727 3.0%
Hongli Road, Shenzen, Guandong PRC
Liu Zenglin, Vice General Manager for Production - Tonglin Common
Xinchang Tonglin Industrial Zone, Stock 272,727 3.0%
Dayi County, Chengdu, Sichuan PRC 611337
Chen Weisheng - CFO - Tonglin Common
Xinchang Tonglin Industrial Zone, Stock 272,727 3.0%
Dayi County, Chengdu, Sichuan PRC 611337
Song Ronghui - Vice General Manager, Sales - Tonglin Common
Xinchang Tonglin Industrial Zone, Stock 272,727 3.0%
Dayi County, Chengdu, Sichuan PRC 611337
Wang Xin - Director - Tonglin Common
Xinchang Tonglin Industrial Zone, Stock 272,727 3.0%
Dayi County, Chengdu, Sichuan PRC 611337
Wang Wenquan Common
Xinchang Tonglin Industrial Zone, Stock 272,727 3.0%
Dayi County, Chengdu, Sichuan PRC 611337
Li Jing, Director and COO Common
Xinchang Tonglin Industrial Zone, Stock 0 0.0%
Dayi County, Chengdu, Sichuan PRC 611337
All Directors and Officers of the Company Common
as a group (3 persons) Stock 8,272,728 (3) 91.0%
- ----------
(1) Computed based upon a total of 9,090,910 shares of common stock
outstanding as of August 31 , 2004.
(2) The sole shareholder of Double Unity Investments Limited. 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 their common stock by Double Unity Investments
Limited. 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. As a result, Double Unity Investments
Limited. And Li Yungao may be deemed to beneficially own an aggregate of
1,636,362 shares of the common stock owned by such persons.
39
DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS
The following are the officers and directors of the Company as of August
31, 2004. 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 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 is COO and Director of the Company. 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.
40
DING KE is 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, and the Chairman and owner of Shenzhen Significant Value
Industrial Co.,Ltd. (2002 through present), a company that owns coffee shops.
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 its
executive officers or directors. The following is a summary of the compensation
paid by Tonglin to its CEO and four most highly compensated officers for the
three years ended December 31, 2003.
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
41
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 posted by Tonglin 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. As of June 30, 2004, this guarantee of the bank line of credit
was released.
42
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.
PLAN OF DISTRIBUTION
The selling stockholder may sell the common stock directly or through
brokers, dealers or underwriters who may act solely as agents or may acquire
common stock as principals. The selling stockholder may distribute the common
stock in one or more of the following methods:
o ordinary brokers transactions, which may include long or short
sales;
o transactions involving cross or block trades or otherwise on the
open market;
o purchases by brokers, dealers or underwriters as principal and
resale by these purchasers for their own accounts under this
prospectus;
o "at the market" to or through market makers or into an existing
market for the common stock;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales made through
agents;
o through transactions in options, swaps or other derivatives (whether
exchange listed or otherwise); or
o any combination of the above, or by any other legally available
means.
43
In addition, the selling stockholder may enter into hedging transactions
with broker-dealers who may engage in short sales of common stock, or options or
other transactions that require delivery by broker-dealers of the common stock.
The selling stockholder and/or the purchasers of common stock may
compensate brokers, dealers, underwriters or agents with discounts, concessions
or commissions (compensation may be in excess of customary commissions).
We do not know of any arrangements between the selling stockholder and any
broker, dealer, underwriter or agent relating to the sale or distribution of the
common stock or warrants.
We and the selling stockholder and any other persons participating in a
distribution of our common stock will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, these parties and other
persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions subject to specified exceptions or
exemptions.
The selling stockholder may sell any securities that this prospectus
covers under Rule 144 of the Securities Act rather than under this prospectus if
they qualify.
We cannot assure you that the selling stockholder will sell any of their
shares of common stock.
In order to comply with the securities laws of certain states, if
applicable, the selling stockholder will sell the common stock in jurisdictions
only through registered or licensed brokers or dealers. In addition, in certain
states, the selling stockholder may not sell or offer the common stock unless
the holder registers the sale of the shares of common stock in the applicable
state or the applicable state qualifies the common stock for sale in that state,
or the applicable state exempts the common stock from the registration or
qualification requirement.
We have agreed to indemnify the selling stockholder whose shares we are
registering from all liability and losses resulting from any misrepresentations
we make in connection with the registration statement.
DESCRIPTION OF SECURITIES
44
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 either issue any preferred stock or 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 OUR
COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
45
As of the date of this prospectus, 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 August 31, 2004, there are 11 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
46
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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
47
We have agreed to indemnify the stockholders whose shares we are
registering from all liability and losses resulting from any misrepresentations
we make in connection with the registration statement.
Pursuant to Article V, Section 1 of our Amended By-Laws, we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that he or she is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceedings, had no reasonable cause to
believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our Directors, officers and controlling persons, we have
been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
Director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
LEGAL MATTERS
Our counsel, Guzov Ofsink Flink, LLC, located in New York, New York, is
passing upon the validity of the issuance of the common stock that we are
offering under this prospectus.
EXPERTS
Moore Stephens Wurth Frazer & Torbet LLP, independent certified public
accountants, located at 1199 S. Fairway Drive, Suite 200 Walnut, California
91789, have audited our Financial Statements included in this registration
statement to the extent, and for the periods set forth in their reports. We have
relied upon such reports, given upon the authority of such firm as experts in
accounting and auditing.
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.
48
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
F-1
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.
F-2
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.
F-3
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
============ ================ ================
F-4
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.
F-5
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.
F-6
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.
F-7
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.
F-8
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.
F-9
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.
F-10
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.
F-11
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.
F-12
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
============= ============
F-13
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.
F-14
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
and the credit line amount 2,420,000 --
Chengdu City Commercial Bank, Dayi Branch
due June 2003, transaction fee at 0.05%
restricted cash requirement of 30% or $363,000 -- 1,210,000
------------ ------------
Total $ 5,445,000 $ 1,210,000
============ ============
F-15
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.
F-16
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.
F-17
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.
F-18
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.
F-19
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.
F-20
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.
F-21
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
============= ============= ============= =============
F-22
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.
F-23
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.
F-24
CHINA AUTOPARTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003
ASSETS
June 30, December 31,
2004 2003
----------- -----------
(Unaudited) (Audited)
----------- -----------
CURRENT ASSETS:
Cash $ 1,010,220 $ 488,001
Cash - restricted 2,057,000
Accounts receivable, trade, net of allowance for doubtful
accounts of $20,430 as of June 30, 2004 and December 31, 2003
respectively 5,861,783 6,789,525
Accounts receivable, trade special 635,250 943,800
Other receivables, net of allowance for doubtful accounts of $278,300
as of June 30, 2004 and December 31, 2003, respectively 274,527 407,470
Other receivables - related party 4,682,019 5,462,785
Prepaid expense 1,393,846 1,030,156
Inventories 1,532,427 2,136,674
----------- -----------
Total current assets 15,390,072 19,315,411
----------- -----------
PLANT AND EQUIPMENT, net 2,640,313 2,554,007
----------- -----------
OTHER ASSETS:
Intangible asset, net 154,222 162,790
Employee advances 44,878 333,247
----------- -----------
Total other assets 199,100 496,037
----------- -----------
Total assets $18,229,485 $22,365,455
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,551,570 $ 1,854,084
Accounts payable - related party 15,675
Advances from customers 35,864 54,934
Wages and benefits payable 298,811 689,225
Income and other taxes payable 422,841 527,011
Accrued liabilities 467,114 379,689
Other payables 1,836,610 1,333,471
Other payables - related party 69,511 242,000
Dividend payable 564,400
Notes payable - bank 5,445,000
Short-term loans payable - bank 4,840,000 4,840,000
----------- -----------
Total current liabilities 10,086,721 15,381,089
----------- -----------
CONTINGENCIES -- --
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 1,000,000 shares authorized, none
issued, Common stock, $.0001 par value, 20,000,000 shares authorized,
9,090,910 and 500,000 shares issued and outstanding, respectively 959 100
Paid-in-capital 328,285 312,971
Statutory reserve 1,561,222 1,561,222
Retained earnings 6,239,880 5,101,798
Accumulated other comprehensive income 12,418 8,275
----------- -----------
Total shareholders' equity 8,142,764 6,984,366
----------- -----------
Total liabilities and shareholders' equity $18,229,485 $22,365,455
=========== ===========
F-25
CHINA AUTOPARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Three months ended Six months ended
------------------------- -------------------------
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
REVENUES $ 5,342,987 $ 4,184,879 $ 9,384,218 $ 8,748,646
COST OF SALES 3,531,785 2,372,035 6,169,360 4,850,186
----------- ----------- ----------- -----------
GROSS PROFIT 1,811,202 1,812,844 3,214,858 3,898,460
OTHER OPERATING INCOME -- 145,357 82,014 231,182
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 372,439 443,595 859,014 896,347
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,438,763 1,514,606 2,437,858 3,233,295
OTHER EXPENSE, net of other income 123,884 217,340 126,418 287,351
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,314,879 1,297,266 2,311,440 2,945,944
PROVISION FOR INCOME TAXES 98,616 67,020 173,358 190,108
----------- ----------- ----------- -----------
NET INCOME 1,216,263 1,230,246 2,138,082 2,755,836
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment 15,463 7,569 4,143 (5,295)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 1,231,726 $ 1,237,815 $ 2,142,225 $ 2,750,541
=========== =========== =========== ===========
EARNINGS PER SHARE, BASIC AND DILUTED $ 0.17 $ 2.48 $ 0.57 $ 5.50
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES 7,086,364 500,000 3,774,988 500,000
----------- ----------- ----------- -----------
F-26
CHINA AUTOPARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Number Common Paid in Statutory
of shares stock capital reserves
--------------- ---------------- --------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- ---------------- --------------- ----------------
BALANCE, January 1, 2003, AUDITED 500,000 $ 100 $ 280,624 $ 1,174,549
Net income
Land use right 16,173
Foreign currency
translation adjustments
--------------- ---------------- --------------- ----------------
BALANCE, June 30, 2003 500,000 100 296,797 1,174,549
Net income
Land use right 16,174
Adjustment to statutory
reserve 386,673
Dividend distributions
Foreign currency
translation adjustments
--------------- ---------------- --------------- ----------------
BALANCE, December 31, 2003, AUDITED 500,000 100 312,971 1,561,222
Issuance of common stock to
Rhohan shareholders due to
reorganization 8,590,910 859 (859)
Net income
Land use right 16,173
Dividend distribution
Foreign currency
translation adjustments
--------------- ---------------- --------------- ----------------
BALANCE, June 30, 2004 9,090,910 $ 959 $ 328,285 $ 1,561,222
=============== ================ =============== ================
Accumulated
other
Retained comprehensive
earnings income (loss) Totals
------------------- -------------------- ---------------
(Unaudited) (Unaudited) (Unaudited)
------------------- -------------------- ---------------
BALANCE, January 1, 2003, AUDITED $ 5,253,143 $ 8,213 $ 6,716,629
Net income 2,755,836 2,755,836
Land use right 16,173
Foreign currency
translation adjustments (5,295) (5,295)
------------------- -------------------- ---------------
BALANCE, June 30, 2003 8,008,979 2,918 9,483,343
Net income 1,117,582 1,117,582
Land use right 16,174
Adjustment to statutory
reserve (386,673)
Dividend distributions (3,638,090) (3,638,090)
Foreign currency
translation adjustments 5,357 5,357
------------------- -------------------- ---------------
BALANCE, December 31, 2003, AUDITED 5,101,798 8,275 6,984,366
Issuance of common stock to
Rhohan shareholders due to
reorganization -
Net income 2,138,082 2,138,082
Land use right 16,173
Dividend distribution (1,000,000) (1,000,000)
Foreign currency
translation adjustments 4,143 4,143
------------------- -------------------- ---------------
BALANCE, June 30, 2004 $ 6,239,880 $ 12,418 $ 8,142,764
=================== ==================== ===============
F-27
CHINA AUTOPARTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
----------- -----------
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,138,082 $ 2,755,836
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Foreign currency translation adjustments 4,143 (5,295)
Depreciation 106,404 67,157
Amortization 8,568 3,336
Land use right 16,173 16,173
(Increase) decrease in assets:
Change in restricted cash 2,057,000 (1,694,000)
Accounts receivable - trade 927,742 1,464,291
Accounts receivable - trade special 308,550 12,100
Other receivables 132,943 (16,753)
Other receivables - related party 780,766 (4,094,986)
Prepaid expenses (363,690) (216,810)
Inventories 604,247 (95,433)
Employee advances 288,369 (233,561)
Increase (decrease) in liabilities:
Accounts payable (302,514) 137,857
Accounts payable - related party (15,675)
Advances from customers (19,070) 54,071
Wages and benefits payable (390,414) (391,606)
Income and other taxes payable (104,170) 162,606
Accrued liabilities 87,425 111,883
Income and other payables 503,139 (1,149,166)
Other payables - related party (172,489) 242,000
----------- -----------
Net cash provided by (used in) operating activities 6,595,529 (2,870,300)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible asset - land use right (8,962)
Purchase of plant and equipment (114,104) (54,284)
Increase in construction in progress (78,606) (713,191)
----------- -----------
Net cash used in investing activities (192,710) (776,437)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings net of payments on short term notes payable (5,445,000) 3,630,000
Decrease in bank overdraft 16,737
Dividends paid (435,600)
----------- -----------
Net cash provided by (used in) financing activities (5,880,600) 3,646,737
----------- -----------
INCREASE IN CASH 522,219 --
CASH, beginning of period 488,001 --
----------- -----------
CASH, end of period $ 1,010,220 $ --
=========== ===========
F-28
CHINA AUTOPARTS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT
Note 1 - Summary of significant accounting policies
Background
On May 13, 2004, China Autoparts, Inc. (formerly known as Talram Corporation)
(referred to as CHINA AUTOPARTS or the Company), a Delaware corporation,
completed a "reverse acquisition" transaction in which it acquired all the
outstanding stock of Rhohan Holdings Limited (referred to as RHOHAN), a British
Virgin Islands (BVI) corporation, in consideration for the issuance of a
majority of CHINA AUTOPARTS's common shares.
The reverse acquisition was completed pursuant to a Capital Stock Exchange
Agreement dated April 22, 2004. Concurrently with the closing of the reverse
acquisition, Talram's shareholders changed the Company's name to China
Autoparts, Inc., its directors appointed designees of Double Unity Investments
Limited (100% shareholder of RHOHAN) as directors and then resigned as
directors. A more detailed description of this transaction is set forth in the
Company's Current Report on Form 8-K dated May 13, 2004.
China Autoparts, Inc. was incorporated in the State of Delaware on May 1, 2001.
Up until the reorganization, CHINA AUTOPARTS had only nominal assets and
liabilities and was a development stage company attempting to locate and
consummate a merger with an ongoing business. As a result of the reorganization,
CHINA AUTOPARTS will continue the business operations of RHOHAN.
Rhohan Holdings Limited 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. (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 (PRC).
Chengdu Tonglin Casting Industrial Co., Ltd.(TONGLIN) 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 was
formerly owned 100% 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
was 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).
F-29
Note 1 - Summary of significant accounting policies, (continued)
As of April 22, 2004, China Autoparts, Inc. owns the following subsidiaries:
Percentage
Subsidiary Ownership
- ----------------------------------------------------- ----------------
Rhohan Holdings Limited (BVI company) 100%
owned 100% by China Autoparts, Inc.
Chengdu Tonglin Casting Industrial Co., Ltd 100%
(Chinese registered limited liability
company), owned 100% by
Rhohan Holdings Limited
The reporting entity
The financial statements in the fillings of CHINA AUTOPARTS become those of
RHOHAN. The consolidated financial statements of China Autoparts, Inc. and
subsidiaries represent the activities of its 100% owned subsidiaries, Rhohan
Holdings Limited and Chengdu Tonglin Casting Industrial Co., Ltd. Talram's
continuing operations and balance sheet are insignificant and therefore are not
included in these financial statements.
Basis of presentation
Prior to April 22, 2004 Talram was considered to be a "development stage
enterprise" and its financial statements from December 31, 2003 and prior were
presented in accordance with Statement of Financial Accounting Standards (SFAS)
No. 7, "Accounting and Reporting by Development Stage Enterprises". As a result
of the reverse acquisition of Rhohan Holdings Limited, the Company is no longer
considered to be a "development stage enterprise" and is no longer required to
report its financial statements in accordance with SFAS No. 7.
The consolidated financial statements represent the activities of the Company
and its wholly owned subsidiaries. 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 the U.S. dollar. TONGLIN uses its local
currency, Renminbi, as its 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 consolidated 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 consolidated financial statements.
F-30
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 contracts.
The Company at this time replaces the defective goods with new products. The
defective goods are returned to the Company 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 six months ended June 30, 2004 and 2003 amounted to $106,404 and
$67,157, 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. Balances in
construction in progress 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 June 30, 2004, the Company expects these assets to be
fully recoverable.
F-31
Note 1 - Summary of significant accounting policies, (continued)
Plant and equipment consist of the following:
June 30, December 31,
2004 2003
----------- -----------
(Unaudited) (Audited)
----------- -----------
Buildings and improvements $ 1,187,128 $ 1,187,128
Machinery and equipment 2,242,099 2,064,257
Construction in progress 79,615 64,850
----------- -----------
Totals 3,508,842 3,316,235
Accumulated depreciation (868,529) (762,228)
----------- -----------
Property and equipment, net $ 2,640,313 $ 2,554,007
=========== ===========
In the year 2000, Rongxin, as part of its original capital contribution to
TONGLIN, 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 $138,511) 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.
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 June 30, 2004 and December 31, 2003 amounted to $975,150
and $2,500,000, 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 represent
93.2% or $8,742,486 of total sales for the six months ended June 30, 2004, as
compared to 92.9% or $8,130,427 for five customers in the six months ended June
30, 2003. Total outstanding accounts receivable for these customers amounted to
$5,117,501 and $4,959,943 as of June 30, 2004 and December 31, 2003,
respectively.
F-32
Note 1 - Summary of significant accounting policies, (continued)
Cash-restricted
The Company through its bank agreements is required to keep certain cash amounts
on deposit which are subject to withdrawal restrictions. The restricted amounts
are $ 0 and $2,057,000 as of June 30, 2004 and December 31, 2003, respectively.
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:
June 30, December 31,
2004 2003
---------- ----------
(Unauidted) (Auidted)
---------- ----------
Raw materials $ 458,901 $ 936,619
Finished goods 1,073,526 1,200,055
---------- ----------
Totals $1,532,427 $2,136,674
========== ==========
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 conducts its business operations 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 that 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 June 30, 2004 and December 31, 2003 amounted to $20,430.
Accounts receivable, trade special
This amount represents trade accounts receivable due from various customers for
which the customers' banks have guaranteed payments 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 a 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.
F-33
Note 1 - Summary of significant accounting policies, (continued)
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.
The Right is being amortized over a minimum life of 10 years in accordance with
generally accepted accounting principles in the PRC. The expense for the six
months ended June 30, 2004 and 2003 amounted to $8,568 and $3,336, respectively.
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 has applied 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 purposes 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 TONGLIN's balance sheet 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 reported in the accompanying consolidated
statements of income 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 six months ended
June 30, 2004 and 2003 amounted to $16,173.
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 consists
of taxes currently due plus deferred taxes. There are no deferred taxes as of
June 30, 2004 and 2003.
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.
F-34
Note 1 - Summary of significant accounting policies, (continued)
Income taxes, (continued)
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
probable that taxable profit will be available against which deductible
temporary differences can be utilized.
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 relates 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 offset each other 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). The Income Tax Law of the PRC 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, 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) generally are
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 was 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 the exemption and
reduction periods expire in 2005.
F-35
Note 1 - Summary of significant accounting policies, (continued)
Income taxes, (continued)
The provision for income taxes at June 30 consisted of the following:
2004 2003
-------- --------
Provision for China income tax $173,358 $190,108
Provision for China local tax -- --
Deferred taxes -- --
-------- --------
Total provision for income taxes $173,358 $190,108
======== ========
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate:
2004 2003
---- ----
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 5. 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 consolidated
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 on 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, the State Taxation Administration of Dayi County Sichuan
Province issued a certificate stating that the income tax and valued added tax
of TONGLIN from inception through the year ending December 31, 2002 have been
fully paid.
F-36
Note 2 - Condensed financial statements and footnotes
The interim consolidated financial statements presented herein have been
prepared by the Company and include the unaudited accounts of the Company and
its subsidiaries. All significant inter-company accounts and transactions have
been eliminated in the consolidation.
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States for interim
financial information and the instructions for Form 10-QSB and Article 10 of
Regulation S-X. Certain information and footnote disclosures that are normally
included in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. Management of the Company
believes the disclosures made are adequate to make the information presented not
misleading. The condensed consolidated financial statements should be read in
conjunction with CHINA AUTOPARTS' audited financial statements included in its
Annual Report on Form 10-KSB dated March 19, 2004 and RHOHAN's audited
consolidated financial statements for the year ended December 31, 2003 and notes
thereto included in CHINA AUTOPARTS' Current Report on Form 8-K, dated May 13,
2004.
In the opinion of management, the unaudited condensed consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of June 30, 2004, and the results of operations, changes in shareholders'
equity and cash flows for the six months ended June 30, 2004 and 2003. Interim
results are not necessarily indicative of full year performance because of the
impact of seasonal and short-term variations.
Note 3 - Supplemental disclosure of cash flow information
Income taxes paid amounted to $78,681 and $105,776 for the six months ended June
30, 2004 and 2003, respectively. Interest paid (including interest paid to
related parties) for the six months ended June 30, 2004 and 2003 amounted to
$147,777 and $129,046, respectively.
In 2003, TONGLIN made a non-cash shareholders' distribution of $3,638,090 to
offset other receivables/payables due from/to related parties.
In April, 2004, RHOHAN declared a $1,000,000 dividend distribution of which
$435,600 was paid by June 30, 2004 with the remaining $564,400 recorded as a
dividend payable on the accompanying balance sheet.
On April 22, 2004, the Company issued 8,590,910 shares of common stock in a
reverse acquisition transaction for no cash.
F-37
Note 4 - Earnings per share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128). SFAS 128 requires the presentation of earnings
per share (EPS) as Basic EPS and Diluted EPS. There are no differences between
Basic and Diluted EPS for the six months ended June 30, 2004 and 2003 (3,774,988
was the weighted average number of shares used to calculate EPS for the six
months ended June 30, 2004 and 500,000 was the number of shares used to
calculate EPS for the six months ended June 30, 2003) The weighted average
number of shares used to calculate EPS for the six months ended June 30, 2003
reflects only the 500,000 shares outstanding for that period and does not
include the 8,590,910 shares issued on April 22, 2004 in the reverse acquisition
transaction.
Weighted average number of shares outstanding as of June 30, 2004 is computed as
follows:
Dates Shares Weighted -
Outstanding Outstanding Days Average Shares
- ------------------------- ---------------- ---------- -------------------
Year - 2004
- -------------------------
January 1 - June 30 500,000 181 90,500,000
April 22 - June 30 8,590,910 69 592,772,790
---------- -------------------
Totals 181 683,272,790
========== ===================
Weighted-average shares - 6 months 3,774,988
===================
April 1 - June 30 500,000 90 45,000,000
April 22 - June 30 8,590,910 69 592,772,790
---------- -------------------
Totals 90 637,772,790
========== ===================
Weighted-average shares - 3 months 7,086,364
===================
Note 5 - Other receivables
In 2003 the Company made a prepayment of $278,300 to purchase several molds to
be used in its 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 June
30, 2004, management has decided to fully reserve this amount as uncollectible.
F-38
Note 6 - Notes payable-bank
The Company has the following lines of credit outstanding:
June 30, December 31,
2004 2003
---------------- -------------------
Unaudited Audited
---------------- -------------------
Shanghai Pu Dong Development Bank, Chengdu Branch
due June 2004, transaction fee at 0.05%
restricted cash requirement of 30% or $363,000
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
---------------- -------------------
Totals $ -- $ 5,445,000
================ ===================
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 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 party on the accompanying consolidated balance sheet
and is further explained in Note 8.
This amount is non interest bearing and is due and payable in May 2004. On April
1, 2004, Chengdu Taichang Metals Co., Ltd. repaid this amount in full.
F-39
Note 7 - Short-term loans payable - bank
The Company has the following short-term loans payable:
June 30, December 31,
2004 2003
---------------- ------------------
Unaudited Audited
---------------- ------------------
Chengdu City Commercial Bank, Dayi Branch
due January 15, 2005 and January 29, 2004, respectively,
monthly interest only payment at 0.57525%, guaranteed
by Chengdu High Pressure Valve Plant, a related party $ 1,210,000 $ 1,210,000
Shanghai Pu Dong Development Bank, Chengdu Branch
due March 29, 2005 and March 9, 2004, respectively,
monthly interest only payment at 0.48675%, guaranteed
by Chengdu Rongxin Ruigao Machinery Co., Ltd., a
related party 3,630,000 3,630,000
---------------- ------------------
Totals $ 4,840,000 $ 4,840,000
================ ==================
In 2004 the above loans have been refinanced into short-term loans due within
one year in the amount of $4,840,000.
Total interest expense on all bank debt for the six months ending June 30, 2004
and 2003 amounted to $147,777 and $99,589 respectively.
Note 8 - Related party transactions and contingencies
The following is a list of related parties described in the accompanying
consolidated 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.
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.
F-40
Note 8 - Related party transactions and contingencies, (continued)
During the six months ended June 30, 2004 and 2003, the Company entered into the
following transactions with related parties:
Sales, purchases and other expenses
2004 2003
------------------- -------------------
Sales
Chengdu Rongxin Ruigao Machinery Co., Ltd. $ 5,993 $ 9,577
=================== ===================
Cost of sales
Chengdu Rongxin Ruigao Machinery Co., Ltd. $ 5,762 $ 8,784
=================== ===================
Interest expense
Chengdu Rongxin Ruigao Machinery Co., Ltd. $ -- $ 29,457
=================== ===================
Lease expense
Chengdu Rongxin Ruigao Machinery Co., Ltd. $ 60,500 $ 60,500
=================== ===================
Amounts due to/from related parties
June 30, December 31,
2004 2003
------------------ -------------------
(Unaudited) (Audited)
------------------ -------------------
Other receivables - related party:
Chengdu Rongxin Ruigao Machinery Co., Ltd. $ 4,507,929 $ 17,785
Chengdu High Pressure Valve Plant 53,090 --
Chengdu Taichang Metals Co., Ltd. 121,000 5,445,000
------------------ -------------------
Totals $ 4,682,019 $ 5,462,785
================== ===================
Other payables - related party:
Chengdu Taichang Metals Co., Ltd. $ 69,511 $ 242,000
================== ===================
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 6. In addition, TONGLIN paid $1,089,000 to their bank as
restricted cash deposit as required by the loan agreement.
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. will
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.
F-41
Note 8 - Related party transactions and contingencies, (continued)
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 6. In addition, TONGLIN paid $968,000 to its bank as the 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 six
months ended June 30, 2004 and 2003 amounted to $0 and $29,457 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 expired
on April 29, 2004. As of June 30, 2004, this guarantee of the bank line of
credit was released.
Note 9 - Leases
The Company leases office building space, living quarters, and vehicles from
Chengdu Rongxin Ruigao Machinery Co., Ltd. formerly Chengdu Rongxin Enterprises
Co., Ltd., a related party, in the amount of $121,000 per year. The lease
expenses paid for the six months ended June 30, 2004 and 2003 amounted to
$60,500 and $60,500, respectively. Chengdu Rongxin Enterprises Co., Ltd. was
dissolved in October 2002. All of the assets, including the lease agreement,
were taken over by Chengdu Rongxin Ruigao Machinery Co., Ltd., a related party.
This agreement has no expiration date at this time.
Note 10 - 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 six months ending June 30, 2004 and 2003, this income amounted
to $82,014 and $231,182, respectively.
Note 11 - Dividend distribution
Before the Company entered into the Stock Exchange Agreement, the Company
declared a $1,000,000 dividend distribution to Double Unity Investments. As June
30, 2004, $435,600 was paid with the remaining balance of $564,400 recorded as a
dividend payable on the accompanying balance sheet.
F-42
====================================== Legal Proceedings.....
You should rely on the Changes and Disagreements with
information contained in Accountants...........................
this document or to which we Indemnification of Directors
have referred you. We have and Officers..........................
not authorized anyone to Legal Matters.........................
provide you with information Experts...............................
that is different. The Financial Statements..................
information in this document
may only be accurate on the
date of this document. This
document may be used only
where it is legal to sell
these securities.
----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary....................
Risk Factors..........................
Use of Proceeds.......................
Determination of Offering Price.......
Selling Stockolder....................
Business
Description of Property...............
Selected Financial Data...............
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations............................
Security Ownership of Certain
Beneficial Owners and
Management............................
Directors and Executive Officers,
Promoters And Control
Persons ..............................
Executive Compensation................
Certain Relationships and Related
Party Transactions....................
Plan of Distribution..................
Desciption of Securities....... ......
Market Price Of and Dividends On
Our Common Equity and
Related Stockholder
Matters...............................
Supplementary Financial
Information...........................
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification Of Directors And Officers
Pursuant to Article V, Section 1 of our Amended By-Laws, we may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that he or she is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceedings, had no reasonable cause to
believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, Officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore unenforceable.
Item 25. Other Expenses Of Issuance And Distribution
Our expenses in connection with the issuance and distribution of the securities
being registered, other than the underwriting discount, are estimated as
follows:
SEC Registration Fee $380.10
Printing Expenses ______________
Legal Fees and Expenses ______________
Accountants' Fees and Expenses ______________
Blue Sky Fees and Expenses ______________
Miscellaneous Expenses ______________
Total ______________
*Estimated
Item 26. Recent Sales Of Unregistered Securities
In the preceding three years, we have issued the following securities that
were not registered under the Securities Act:
In June 2001 we issued an aggregate of 500,000 shares of our common stock
for a purchase price of $.01 per share which was paid in cash. The issuance of
the shares was accomplished in reliance upon Section 4(2) of the Securities Act.
The facts relied upon for the exemption were that the purchasers were
sophisticated investors and the shares were offered and sold in a private
transaction.
On May 13, 2004 we issued an aggregate of 8,590,910 shares of our common
stock to eight persons in exchange for the transfer to us of all of the
outstanding common stock of Rhohan Holdings Limited, a British Virgin Islands
company. The issuance of the shares was accomplished in reliance upon Regulation
S promulgated under the Securities Act. The facts relied upon for the exemption
were that each of the persons acquiring our common stock in the transaction was
a non-U.S. person as defined under the Securities Act.
Item 27. Exhibits
3.1 Certificate of Incorporation. Incorporated by reference to Exhibit 3.1 to
the Company's Registration Statement on Form 10-SB filed under its former name
of Talram Corporation on February 13, 2002 (the "Form 10-SB").
3.2 Certificate of Amendment to Certificate of Incorporation, dated April 22,
2004. Incorporated by reference to Exhibit 3.1 to the Company's Current Report
on Form 8-K, filed May 13, 2004 (the "May 13, 2004 8-K").
3.3 By-laws. Incorporated by reference to Exhibit 3.2 to the Form 10-SB.
5.1 Opinion re legality of the common stock being registered.*
10.1 Capital Stock Exchange Agreement, dated as of April 22, 2004 among the
Company, Rhohan Holdings, Ltd. and Double Unity Investments Limited.
Incorporated by reference to Exhibit 2.1 to the May 13, 2004 8-K.
16.1 Letter dated May 18, 2004 from the Company to Michael T. Studer CPA, P.C.
Incorporated by reference to Exhibit 16.1 to the Company's Current Report on
Form 8-K, filed May 20, 2004 (the "May 20, 2004 8-K").
16.2 Letter dated May 19, 2004 from Michael T. Studer, CPA, P.C. to the
Securities and Exchange Commission. Incorporated by reference to Exhibit 16.2 to
the May 20, 2004 8-K.
21.1 List of subsidiaries.*
23.1 Consent of counsel to the use of the opinion annexed at Exhibit 5.1 is
contained in the opinion annexed at Exhibit 5.1;
23.2 Consent of accountants for use of their report.*
- -------------------------
*Filed herewith.
51
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement(or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
iii. To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering. Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
52
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly in the
City of Chengdu, PRC, on October 20, 2004.
CHINA AUTOPARTS, INC.
By: /s/ Li Yungao
--------------------
Li Yungao
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was by the following persons in the capacities and on the
dates stated.
Name and Title Date
- ---------------------------------- ----------------
/s/ Li Yungao
- ---------------------------------- October 20, 2004
Li Yungao
Chief Executive Officer
And Director
/s/ Li Jing
- ---------------------------------- October 20, 2004
Li Jing
Chief Operating Officer
and Director
/s/ Ding Ke
- ---------------------------------- October 20, 2004
Ding Ke
Executive Vice President
And Director
/s/ Weisheng Chen October 20, 2004
- ----------------------------------
Weisheng Chen
Chief Financial Officer
53