UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 or 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 333-147086-01
TONGXIN INTERNATIONAL LTD.
_____________________________________________________________________
(Translation of Registrant's Name into English)
199 Pierce Street,Suite 202
Birmingham, Michigan 48009
_____________________________________________________________________
(Address of Principal Executive Office)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T
Rule 101(b)(1): ____
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper
of a Form 6-K if submitted solely to provide an attached annual report to
security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T
Rule 101(b)(7): ____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper
of a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the
laws of the jurisdiction in which the registrant is incorporated, domiciled
or legally organized (the registrant's "home country"), or under the rules
of the home country exchange on which the registrant's securities are traded,
as long as the report or other document is not a press release, is not
required to be and has not been distributed to the registrant's security
holders, and, if discussing a material event, has already been the subject
of a Form 6-K submission or other Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b):
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Exhibit 1: The Company is filing this Form 6-K as an amendment to the Form 6-K
filed April 30, 2008, to support the consolidated balance sheets of
Hunan Tongxin Enterprise Co., Ltd. (Tongxin) and its subsidiaries
as of December 31, 2007 and 2006, and the consolidated statements
of operations and comprehensive income, shareholders' equity and
cash flows for the years ended December 31, 2007, 2006 and 2005.
Exhibit 2: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
CONSOLIDATED BALANCE SHEETS OF HUNAN TONGXIN ENTERPRISE CO., LTD.
AND ITS SUBSIDIARIES AS OF DECEMBER 31, 2007 AND 2006,AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME,
SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE YEARS ENDED DECEMBER
31, 2007, 2006 AND 2005.
- -----------------------------------------------------------------------------
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TONGXIN INTERNATIONAL LTD.
----------------------------------
(Registrant)
/s/ Rudy Wilson
-----------------------------
Name: Rudy Wilson
Title: Chairman and CEO
/s/ William Zielke
-----------------------------
Name: William Zielke
Title: Acting Chief Financial Officer
Date: July 7, 2008
===============================================================================
Exhibit 1: The Company is filing this Form 6-K as an amendment to the Form 6-K
filed April 30, 2008, to support the consolidated balance sheets of
Hunan Tongxin Enterprise Co., Ltd. (Tongxin) and its subsidiaries
as of December 31, 2007 and 2006, and the consolidated statements
of operations and comprehensive income, shareholders' equity and
cash flows for the years ended December 31, 2007, 2006 and 2005.
===============================================================================
Exhibit 2: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
CONSOLIDATED BALANCE SHEETS OF HUNAN TONGXIN ENTERPRISE CO., LTD.
AND ITS SUBSIDIARIES AS OF DECEMBER 31, 2007 AND 2006,AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME,
SHAREHOLDERS' EQUITY AND CASH FLOWS FOR THE YEARS ENDED DECEMBER
31, 2007, 2006 AND 2005.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
LehmanBrown
502 5/F Dongwai Diplomatic Office Building
23 Dongzhimenwai Dajie, Beijing 100600, China
Tel: 86 10 85321720
Fax: 86 10 65323270
E-mail:beijing@lchmanbrow.com
www.lehmanbrown.com
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Hunan Tongxin Enterprise Co., Ltd.
Changsha, Hunan Province, the People's Republic of China
We have audited the accompanying consolidated balance sheets of Hunan Tongxin
Enterprise Co., Ltd. (Toingxin) and its subsidiaries as of December 31, 2007
and 2006 and the consolidated statements of operations and comprehensive
income, shareholders' equity and cash flows for the years ended December 31,
2007, 2006 and 2005. These financial statements are the responsibility of
Tongxin's management. Our responsibility is to express and opinioin on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial stateents are free of material misstatement.Tongxin is
not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of ubterbak cibtrik iver fubabcuak reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinioin on the effectiveness of Tongxin's internal control
over financial reporting.Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence suporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinioin, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hunan
Tongxin Enterprise Co., Ltd. and its subsidiaries as of December 31, 2007
and 2006 and the results of its operations and its cash flows for the years
ended December 31, 2007, 2006 and 2005, in conformity with accounting
principles generally accepted in the United States of America.
/s/ LehmanBrown LuHua (Beijing) CPA Firm
- ----------------------------------------
LehmanBrown LuHua (Beijing) CPA Firm
Beijing, China
March 21, 2008
HUNAN TONGXIN ENTERPRISE CO., LTD. CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007 AND 2006,
AND FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
============================================================================
Hunan Tongxin Enterprise Co., Ltd.
Consolidated Balance Sheets
As of December 31, 2006 and 2007
(US$ amounts expressed in thousands,
except for share data and earnings per share)
December 31
2006 2007
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,582 $ 1,662
Accounts receivable,
Trade, net of allowance for doubtful
accounts of $4,688 and $4,538, respectively 15,085 21,571
Other, net of allowance of doubtful accounts
of $311 and $382, respectively 1,164 1,602
Related party 8,240 15,590
Notes receivable 1,531 2,091
Inventories 8,771 13,751
Investment in marketable securities - 68
Prepaid expenses 2,599 2,922
Deferred tax assets 1,644 1,572
----------- ----------
Total current assets 42,616 60,829
Investments in non-consolidated subsidiaries
and affiliates 797 852
Property, plant and equipment, net of
accumulated depreciation of $8,034 and
$11,009, respectively 20,183 25,950
Land occupancy rights 1,859 1,944
---------- ----------
Total assets $ 65,455 $ 89,575
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,338 $ 13,787
Accrued expenses and other liabilities 7,640 9,712
Provision for product warranty 54 43
Income taxes payable 4,804 15,300
Dividend payable 5,040 -
Short-term loans 15,140 20,514
Short-term loans from shareholders 5,179 2,313
----------- ----------
Total current liabilites 48,195 61,669
Long-term liabilities
Long-term loans 3,970 2,549
Long-term loans from shareholders - 10,476
Other 13 21
----------- ----------
Total liabilities 52,178 74,715
----------- ----------
Shareholders' equity:
Common stock (authorized, 72,521,705 shares
US$0.12 par value, issued and outstanding
72,521,705 shares) 8,762 8,762
Reserve funds 1,859 2,812
Accumulated other comprehensive income 873 1,813
Retained earnings 1,783 1,473
----------- ----------
Total shareholders' equity 13,277 14,860
----------- ----------
Total liabilities and shareholders' equity $ 65,455 $89,575
Note: The accompanying notes are an integral part of these consolidated
financial statements.
Hunan Tongxin Enterprise Co., Ltd.
Consolidated Statements of Operations and
Comprehensive Income
For years ended December 31, 2005, 2006 and 2007
(US$ amounts expressed in thousands,
except for share data and earnings per share)
Years Ended December 31,
2005 2006 2007
---------- ----------- ----------
Revenues $ 57,098 $ 64,697 $ 80,006
Sales of goods to related party 1,713 1,908 9,867
---------- ----------- ----------
58,811 66,605 89,873
---------- ----------- ----------
Cost of goods sold (44,781) (46,648) (60,543)
Purchases of goods from related party ( 9,030) ( 4,808) ( 9,322)
---------- ----------- ----------
Total cost of goods sold (53,811) (51,456) (69,865)
Gross profit 5,000 15,149 20,008
Operating expenses:
Selling, general and admin. expenses ( 2,639) ( 4,800) ( 5,372)
Operating income 2,361 10,349 14,636
Interest expense ( 1,082) ( 1,707) ( 1,723)
Equity in earnings of equity investee - - 19
---------- ----------- ---------
Income before income taxes 1,279 8,642 12,932
Income taxes ( 527) ( 2,939) ( 3,853)
---------- ----------- ---------
Net income $ 752 $ 5,703 $ 9,079
Other comprehensive income 407 466 940
---------- ----------- ---------
Comprehensive income 1,159 6,169 10,019
---------- ----------- ---------
Net income per common share $ 0.01 $ 0.08 $ 0.13
---------- ----------- ---------
Net income per common share-diluted $ 0.01 $ 0.08 $ 0.13
Weighted average shares outstanding 68,493,335 72,521,705 72,521,705
Weighted average shares outstanding
- -diluted 68,493,335 72,521,705 72,521,705
Note: The accompanying notes are an integral part of these consolidated
financial statements.
Hunan Tongxin Enterprise Co., Ltd.
Consolidated Statement of Shareholders' Equity
For years ended December 31, 2005, 2006 and 2007
(US$ amounts expressed in thousands, except for share data)
Common Par Retained Other
Shares Value Reserves Earnings Comprehensive
Income Total
---------- ------- -------- --------- ------------- -------
Balances at Jan.1, 2005 42,743,400 $ 5,164 $ 1,451 $ 6,111 - $12,726
Cash contribution from
shareholders 29,778,305 3,598 - - - 3,598
Net income - - - 752 - 752
Appropriation - - 241 (241) - -
Dividends declared - - - (1,759) - (1,759)
Translation adjustments - - - - 407 407
---------- ------- -------- --------- ------------- --------
Balances at Dec.31,2005 72,521,705 8,762 1,692 4,863 407 15,724
Net income - - - 5,703 - 5,703
Appropriation - - 167 (167) - -
Dividends declared - - - (8,616) - (8,616)
Translation adjustments - - - - 466 466
---------- ------- -------- --------- ------------- --------
Balances at Dec.31, 2006 72,521,705 8,762 1,859 1,783 873 13,277
Net income - - - 9,079 - 9,079
Appropriation - - 953 (953) - -
Distribution to shareholders - - - (8,436) - (8,436)
Translation adjustments - - - - 940 940
---------- ------- -------- --------- ------------- --------
Balances at Dec.31, 2007 72,521,705 8,762 2,812 1,473 1,813 14,860
---------- ------- -------- --------- ------------- --------
Note: The accompanying notes are an integral part of these consolidated
financial statements.
Hunan Tongxin Enterprise Co., Ltd.
Consolidated Statements of Cash Flows
For years ended December 31, 2005, 2006 and 2007
(US$ amounts expressed in thousands)
Years Ended December 31,
2005 2006 2007
------- ------- -------
Cash flows from operating activities:
Net income $ 752 $ 5,703 $ 9,079
Adjustments to reconcile net income
to net cash provided by (used in)
Operating activities:
Bad debt expense (306) 545 (409)
Depreciation expense 1,757 2,182 2,080
Amortization expense 35 38 42
Changes in
Increase in inventories (3,307) (1,264) (4,980)
Increae in trade accounts receivable (3,467) (8,042) (14,684)
Increase of prepaid expenses (1,285) (1,114) (324)
Increase in accounts payable 4,473 5,728 15,976
Increase/(decrease) of accrued
expenses (596) 361 321
------- ------- --------
Net cash provided by (used in)
operating activities (1,944) 4,137 7,101
------- ------- --------
Cash flows from investing activities:
Purchase of property, plant and
equipment (4,558) (5,271) (6,322)
Cash paid for investment - - (68)
------- ------- --------
Net cash used in investing activities (4,558) (5,271) (6,390)
Cash flows from financing activities:
Proceeds from capital contributions 3,598 - -
Proceeds from loans 23,587 28,231 17,437
Dividends paid (1,759) (3,576) (1,054)
Debt repayments (23,788) (22,301) (20,343)
------- ------- --------
Net cash provided by (used in)
financing activities 1,638 2,354 3,960
------- ------- --------
Effect of foreign exchange rate changes 906 1,172 1,329
------- ------- --------
Net incre3ase (decrease) in cash
and cash equivalents (3,958) 2,392 (1,920)
Cash and cash equivalents at
beginning of year 5,148 1,190 3,582
------- ------- --------
Cash and cash equivalents at
end of year 1,190 3,582 1,662
------- ------- --------
Supplemental information:
Income taxes paid 505 834 936
Interest paid 848 1,716 2,424
Non-cash investing and financing activities:
Long-term loans from shareholders - - 10,476
Dividends to shareholders - - (10,476)
------- ------- --------
Note: The accompanying notes are an integral part of these consolidated
financial statements.
=======================================================================
Hunan Tongxin Enterprise Co., Ltd.
Notes to Consolidated Financial Statements
December 31, 2005, 2006 and 2007
(US$ amounts expressed in thoursands)
1) BACKGROUND AND PRINCIPAL ACTIVITIES
Hunan Tongxin Enterprise Co., Ltd. ("Tongxin") was established on
November 27, 1984 and originally known as Changsha Meihua Automobile
Body Factory, a private domestic Chinese automotive supplier based
in Changsha City, Hunan Province, the People's Republic of China
("PRC"). In November 2000, Tongxin completed its stock holding
reorganization and changed its name.
Tongxin is engaged in designing, developing and manufacturing
engineered vehicle body structures ("EVBS") for light, medium and
heavy duty commercial vehicles in addition to designing, fabricating
and testing progressive stamping dies used in the fabrication of EVBS.
EVBS consists of complete cab structures and exterior body panels
including doors, floor pans, hoods, side panels and fenders. These
panels must meet specified dimensions for fit and finish before they
are assembled together into a body structure and painted.
2) BASIS OF PRESENTATION
These consolidated financial statements have been prepared in
accordance with the accounting principles generally accepted in
the United States of America ("U.S. GAAP").
3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) Principles of consolidation
The consolidated financial statements include the financial statements
of Tongxin, its subsidiaries and those entities that Tongxin has
determined it has a direct or indirect controlling financial interests.
All significant inter-company balances and transactions have been
eliminated in consolidation. Investments in unconsolidated subsidiaries
representing ownership of at least 20%, but less than 50%, are accounted
for under the equity method. Non-marketable investments in which Tongxin
has less than 20% ownership and in which it does not have the ability to
exercise significant influence over the investee are initially recorded
at cost and periodically reviewed for impairment.
Tongxin evaluates its relationships with other entities to identify
whether they are variable interest entities as defined by the Financial
Accounting Standard Board Interpretation No. 46(R), "Consolidation of
Variable Interest Entities" and to assess whether it is the primary
beneficiary of such entities. If the determination is made that Tongxin
is the primary beneficiary, then that entity is included in the
consolidated financial statements.
Tongxin owns 50% of the voting rights in Changsha Futianfengjing Bus Co.,
Ltd.. Tongxin has not been able to control Changsha Futianfengjing Bus
Co., Ltd., given that important operational and financial policies have
to be approved by shareholders with more than 50% of the voting rights
(the only other equity owner owns the remaining 50% of the voting
rights). However, as Tongxin has the right to appoint three of seven
members of the Board of Directors, Tongxin believes that it can exercise
significant influence on the operations of Changsha Futianfengjing Bus
Co., Ltd.. Accordingly, Tongxin accounted for its investment in Changsha
Futianfengjing Bus Co., Ltd. using the equity method.
Changsha Futianfengjing Bus Co., Ltd. owns 80% of the equity interest in
Changsha Meihua Vehicle Manufacture Co., Ltd. through Tongxin. On
December 25, 2003, Changsha Futianfengjing Bus Co., Ltd. authorized
Tongxin, together with other equity holders of Changsha Meihua Vehicle
Manufacture Co., Ltd., to enter into an agreement with an individual to
handover all the assets used in production and operation of Changsha
Meihua Vehicle Manufacture Co., Ltd.. Based on Changsha Futianfengjing
Bus Co., Ltd.'s evaluation, it is not the primary beneficiary of
Changsha Meihua Vehicle Manufacture Co., Ltd.. In addition, it has no
significant influence over the operations Changsha Meihua Vehicle
Manufacture Co., Ltd. Accordingly, Changsha Futianfengjing Bus Co., Ltd.
recorded its investment in Changsha Meihua Vehicle Manufacture Co., Ltd.
at cost and subject to periodical review for impairment. On July 4, 2007,
Changsha Futianfengjing Bus Co., Ltd. has disposed of its investment in
Changsha Meihua Vehicle Manufacture Co., Ltd. at cost.
(b) Use of estimates
The preparation of the consolidated financial statements in accordance
with U.S. GAAP requires management of Tongxin to make a number of
estimates and assumptions relating to the reported amount of assets
and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(c) Revenue recognition
Tongxin recognizes revenue when persuasive evidence of an arrangement
exists, services have been rendered, the sales price is fixed or
determinable, and collectibility is reasonably assured. This typically
occurs when the product is shipped.
Revenue from sale of goods represents the invoiced value of goods, net
of value added tax, sales returns and trade discounts.
(d) Shipping and handling costs
Costs incurred by Tongxin for shipping and handling are classified as
cost of sales.
(e) Cash and cash equivalents
Cash and cash equivalents include cash on hand and demand deposits
with banks. For purposes of the consolidated statements of cash flows,
Tongxin considered all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. None of
Tongxin's cash is restricted as to withdrawal. Cash deposits with banks
are held in financial institutions in China, which has no federally
insured deposit protection. Accordingly, Tongxin has a concentration of
credit risk related to these uninsured deposits.
(f) Trade accounts receivable and the allowance for doubtful accounts
The allowance for doubtful accounts is Tongxin's best estimate of the
amount of probable credit losses in its existing accounts receivable.
Tongxin's estimate is based on historical collection experience and a
review of the current status of trade accounts receivable.
(g) Inventories
Inventories consist of raw materials, work-in-progress and finished
goods. Inventories are stated at the lower of cost or market value.
Costs are calculated on the weighted average basis and are comprised
of direct materials, direct labour and a relevant portion of all
production overhead expenditures. Slow-moving inventories are
periodically reviewed for impairment in value.
(h) Property, plant and equipment
Property, plant and equipment are recorded at cost and are stated net
of accumulated depreciation. Depreciation expense is calculated using
the straight-line method over the estimated useful lives of the assets,
taking into account the estimated residual value. The estimated useful
lives are as follows:
Buildings 20 years
Machinery 10 years
Motor vehicles 5 years
Office and computer equipment 5 years
Maintenance and repairs are charged directly to expense as incurred,
whereas betterment and renewals are generally capitalized in their
respective property accounts. When an item is retired or otherwise
disposed of, the cost and applicable accumulated depreciation are
removed and the resulting gain or loss is recognized and reflected
as an item before operating income (loss).
(i) Construction in progress
Construction in progress represents factories under construction and
machinery and equipment pending installation. All direct costs relating
to the acquisition or construction of buildings, machinery and
equipment, including interest charges on borrowings, are capitalized as
construction in progress. No depreciation is provided in respect of
construction in progress.
Construction in progress is transferred to property, plant and equipment
and depreciation commences when the asset has been substantially
completed and ready for its intended use.
(j) Land occupancy rights
Land occupancy rights are paid to the PRC land bureau and represent
payments to the PRC for the right to use the land over the term of the
land occupancy agreement. Land occupancy rights are carried at cost
and amortized on a straight-line basis over the term of 46 and 50 years.
(k) Short-term investments
Tongxin's short-term investments consist of highly liquid debt
securities and/or euqity securities classified as available-for-sale.
Short-term investments are marked-to-market with any unrealized gains
or losses included in accumulated other comprehensive income/loss
(AOCI). At December 31, 2007, the fair market value approximates cost.
As a result, there was no gain or loss amount recorded in AOCI and
other comprehensive income.
(l) Investments in Non-Consolidated Subsidiaries and Affiliates
Investments in entities with less than a 20% voting interest are
generally accounted for under the cost method. Tongxin uses the equity
method to account for investment in entities in which it has a voting
interest of 20% to 50% or in which it otherwise has the ability to
exercise significant influence. Under the equity method, the investment
is originally recorded at cost and adjusted to recognize Tongxin's
share of net earnings or losses of the investee, limited to the extent
of Tongxin's investment in and advances to the investee.
Tongxin regularly monitors and evaluates its investments for impairment.
If events and circumstances indicate that a decline in the value of
these assets has occurred and is other-than-temporary, Tongxin records
a charge to investment income (expense).
(m) Impairment of long-lived assets
Tongxin assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances indicate that
the carrying amount of an asset may not be recovered. An impairment
loss is recognized when the carrying amount of the long-lived asset is
not recoverable and exceeds its fair value. The carrying amount of a
long-lived asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual
disposition of the asset. Any required impairment loss is measured as
the amount by which the carrying amount of a long-lived asset exceeds
its fair value and is recorded as a reduction in the carrying value of
the related asset and a charge to operating results.
(n) Foreign currency transactions and translation
The Renminbi ("RMB"), the national currency of China, is the functional
currency of Tongxin. Tongxin uses the United States dollar for financial
reporting purposes.
Tongxin translates assets and liabilities into U.S. dollars using the
rate of exchange prevailing at the balance sheet date, and the
consolidated statement of income is translated at average rates during
the reporting periods. Adjustments resulting from the translation of
financial statements from RMB into U.S. dollars are recorded in
shareholders' equity as part of accumulated comprehensive income/(loss).
Gains or losses resulting from transactions in currencies other than
RMB are reflected in income for the reporting periods.
(o) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated
financial statements carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets are reduced by a valuation allowance
to the extent Tongxin concludes it is more likely than not that the
assets will not be realized. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates, if any, is recognized in the consolidated
statements of operations in the financial year that includes the
enactment date.
In July 2006, the FASB issued Financial Interpretation (FIN) 48,
Accounting for Uncertainty in Income Taxes-an Interpretation of FASB
109 (FIN 48). FIN 48 created a single model to address accounting for
the uncertainty in income tax positions and prescribes a minimum
recognition threshold a tax position must meet before recognition in
the financial statements.
The evaluation of a tax position in accordance with FIN 48 is a two-step
process. The first step is a recognition process to determine whether it
is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. In evaluating
whether a tax position has met the more likely than not recognition
threshold, it is presumed that the position will be examined by the
appropriate taxing authority with full knowledge of all relevant
information. The second step is a measurement process whereby a tax
position that meets the more likely than not recognition threshold is
calculated to determine the amount of benefit/expense to recognize in
the financial statements. The tax position is measured at the largest
amount of benefit/expense that is more likely than not of being realized
upon ultimate settlement.
Tongxin adopted the provisions of FIN 48 effective January 1, 2007 which
did not have a material impact on its operating results, financial
position or cash flows. Tongxin did not record a cumulative effect
adjustment related to the adoption of FIN 48.
(p) Value added tax
Tongxin is subject to value added tax ("VAT") imposed by Chinese
government on its domestic product sales. The output VAT is charged to
customers who purchase goods from Tongxin and the input VAT is paid
when Tongxin purchases goods from its vendors. VAT rate is 17%, in
general, depending on the types of product purchased and sold. The
input VAT can be offset against the output VAT. VAT payable or
receivable balance represents either the input VAT less than or
larger than the output VAT. The debit balance represents a credit
against future collection of output VAT instead of a receivable.
Pursuant to EITF 06-3 "How Taxes Collected from Customers and Remitted
to Governmental Authorities Should Be Presented in the Income Statement",
Tongxin has elected to present revenue on net basis (net of VAT) within
the consolidated statements of operations.
(q) Warranty
Tongxin provides warranties on its products, for terms from three to
twelve months. Warranty costs are estimated based on historical
experience and are accrued.
(r) Recent accounting pronouncements
In December 2007, the FASB issued Statement SFAS No. 141, Business
Combinations (SFAS 141R), and Statement of Financial Accounting Standards
No. 160, Accounting and Reporting of Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160).
SFAS 141R and SFAS 160 will significantly change the accounting for and
reporting of business combination transactions and noncontrolling
(minority) interests in consolidated financial statements. SFAS 141R
retains the fundamental requirements in Statement 141, Business
Combinations, while providing additional definitions, such as the
definition of the acquirer in a purchase and improvements in the
application of how the acquisition method is applied. SFAS 160 will
change the accounting and reporting for minority interests, which will
be recharacterized as noncontrolling interests, and classified as a
component of equity. These Statements become simultaneously effective
January 1, 2009. Early adoption is not permitted. Tongxin is currently
assessing the impact, if any, that the adoption of this pronouncement
will have on the its operating results financial position or cash flows.
In May 2007, the FASB issued FSP No. FIN 48-1, Definition of Settlement
in FASB Interpretation No. 48, (FIN 48-1) which amends FIN 48 and provides
guidance concerning how an entity should determine whether a tax position
is "effectively," rather than the previously required "ultimately,"
settled for the purpose of recognizing previously unrecognized tax
benefits. In addition, FIN 48-1 provides guidance on determining whether
a tax position has been effectively settled. The guidance in FIN 48-1 is
effective upon the initial January 1, 2007 adoption of FIN 48. Companies
that have not applied this guidance must retroactively apply the
provisions of this FSP to the date of the initial adoption of FIN 48.
Tongxin has adopted FIN 48-1 and no retroactive adjustments were
necessary. The adoption did not have a material impact on Tongxin's
financial statements.
(s) Earnings per share
Basic net earnings (loss) per common share is computed by dividing net
earnings (loss) applicable to common shareholders by the weighted-average
number of common shares outstanding during the periods. Diluted net
earnings (loss) per common share is determined using the weighted-average
number of common shares outstanding during the period, adjusted for the
dilutive effect of common stock equivalents, consisting of shares that
might be issued upon exercise of common stock options. In periods where
losses are reported, the weighted-average number of common shares
outstanding excludes common stock equivalents, because their inclusion
would be anti-dilutive.
4) ACCOUNTS RECEIVABLE AND NOTES RECEIVABLE
Accounts and notes receivable as of December 31, 2006 and 2007 consist
of the following:
December 31,
2006 2007
---------- -----------
Trade accounts receivable $ 19,773 $ 26,109
Less: Allowance for doubtful accounts (4,688) (4,538)
---------- -----------
15,085 21,571
Notes receivable 1,531 2,091
Notes receivable represent amounts due from customers. As of
December 31, 2007, $2,091 of these notes receivable were guaranteed
by financial institutions (as of December 31, 2006, $1,531). These
notes bear no interest and generally mature within six months from
the date of issuance. As of December 31, 2007, no trade receivables
were pledged for bank loan arrangements (as of December 31, 2006: Nil).
5) OTHER RECEIVABLES
Other receivables as of December 31, 2006 and 2007 consist of
the following:
December 31,
2006 2007
----------- ------------
Receivables from transporters 154 104
Staff advances 189 348
Others 1,132 1,532
----------- -----------
1,475 1,984
Less: Allowance for doubtful accounts (311) (382)
----------- -----------
$ 1,164 $ 1,602
Staff advances consist of advances to employees for expenses to be
incurred in the normal course of business of Tongxin and advanced
salary payment to employees.
6) INVENTORIES
Inventories as of December 31, 2006 and 2007 consist of the
following:
December 31,
2006 2007
----------- -----------
Raw materials $ 4,806 $ 5,776
Work in progress 2,732 5,789
Finished goods 1,233 2,186
----------- -----------
Total $ 8,771 $ 13,751
As of December 31, 2007, no inventories were used as collateral
for bank loan arrangements (as of December 31, 2006: Nil).
7) INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES AND AFFILIATES
Investments as of December 31, 2006 and 2007 consist of the
following:
Equity in
Interest Investment Investee
Held At Cost Company Subtotal
---------- ------------ ----------- -----------
December 31, 2006
Equity Method
* Changsha Futianfengjing Bus Co. Ltd. 50% $ 1,613 $ (998) $ 615
Cost Method
Jiangbei Credit Union 1% 118 - 118
Hunan Xingsha Credit Warranty Co., Ltd. 1% 64 - 64
--------- ------------ ----------- -----------
Total $ 1,795 $ (998) $ 797
--------- ------------ ----------- -----------
December 31, 2007
Equity Method
* Changsha Futianfengjing Bus Co. Ltd. 50% $ 1,723 $ (1,066) $ 657
Cost Method
Jiangbei Credit Union 1% 126 - 126
Hunan Xingsha Credit Warranty Co., Ltd. 1% 69 - 69
--------- ------------ ----------- -----------
Total $ 1,918 $ (1,066) $ 852
* This company is not audited by LehmanBrown Lu Hua (Beijing)
CPA Firm
8) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2006 and 2007
consists of the following:
December 31,
2006 2007
---------- -----------
Buildings $ 8,751 $ 10,609
Machinery 17,987 25,265
Motor vehicles 322 551
Office and computer equipment 456 534
---------- -----------
27,516 36,959
Less: Accumulated depreciation (8,034) (11,009)
Property, plant and equipment, net 19,482 25,950
Construction in progress 701 -
---------- -----------
$ 20,183 $ 25,950
The depreciation expense for the years ended December 31, 2006
and 2007 was $2,296 and $2,975, respectively.
As of December 31, 2007, certain machinery and buildings with an
aggregate carrying value of $2,604 were used as collateral for
short-term loan arrangements of Changsha Agricultural Bank of
China (as of December 31, 2006: $2,736) (see Note 12).
As of December 31, 2007, certain machinery and buildings with an
aggregate carrying value of $2,008 were used as collateral for
short-term loan arrangements of Changsha Jiangbei Rural Credit
Union (as of December 31, 2006: $1,945) (see Note 12).
As of December 31, 2007, certain machinery and buildings with an
aggregate carrying value of $2,015 were used as collateral for
short-term loan arrangements of Agricultural Bank of China Ziyang
Branch (as of December 31, 2006: Nil) (see Note 12).
9) LAND OCCUPANCY RIGHTS
December 31,
2006 2007
--------- ----------
Land occupancy rights $ 1,932 $ 2,067
Less: Accumulated amortization (73) (123)
Land occupancy rights, net $ 1,859 $ 1,944
For the year ended December 31, 2007, amortization of $50 (for the
year ended December 31, 2006: $38) was recorded.
As of December 31, 2007, land occupancy rights with carrying value
totaling $1,944 (as of December 31, 2006: $1,859) was used as
collateral for short-term and long-term loans (see Note 12 and 13).
10) ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities as of December 31, 2006 and
2007 consist of the following:
December 31,
2006 2007
-------- ---------
Advances from customers $ 2,705 $ 3,911
Payable to employees 308 377
Deposit 489 400
Advances 1,234 932
Accrued expenses 434 1,252
Interest payable 731 243
Accrued payroll and welfare 1,292 1,978
Other payables 447 619
-------- ---------
$ 7,640 $ 9,712
Advances from customers are amounts received in advanced from
customers for future delivery of goods from Tongxin.
11) PROVISION FOR PRODUCT WARRANTY
A analysis of the provision for product warranty for the years
ended December 31, 2006 and December 31, 2007 is as follows:
December 31,
2006 2007
--------- -----------
Balance at beginning of year $ 26 $ 54
Provision charged to earnings 125 165
Less: Amount utilized (97) (176)
Balance at end of year $ 54 $ 43
12) SHORT-TERM LOANS
The following summarized list represents short-term loans at
December 31, 2006 and 2007:
Maturity date $'000 Interest rate
-------------- --------- ------------
December 31, 2006
(Renminbi denominated loans)
Changsha Agricultural Bank of China
Short-term loan I 03/22/2007 $ 320 6.138%
Short-term loan II 04/21/2007 2,561 6.138%
Short-term loan III 05/26/2007 2,561 6.435%
Short-term loan IV 11/27/2007 1,281 7.344%
Short-term loan V 09/30/2007 961 7.344%
Changsha Jiangbei Rural Credit Union
Short-term loan I 02/21/2007 256 6.510%
Short-term loan II 02/21/2007 256 6.510%
Short-term loan III 02/21/2007 256 6.510%
Short-term loan IV 01/31/2007 1,281 6.525%
Agricultural Bank of China Ziyang Branch
Short-term loan I 08/27/2007 1,921 6.732%
Short-term loan II 11/29/2007 1,024 6.732%
Short-term loans from other
individuals 2,462 5.400%
---------
15,140
Short-term loans from
shareholders 5,179 5.400%
---------
$20,319
December 31, 2007
(Renminbi denominated loans)
Agricultural Bank of China Changsha Branch
Short-term loan I 06/28/2008 $ 2,190 7.227%
Short-term loan II 10/10/2008 1,027 8.020%
Short-term loan III 08/27/2008 547 7.723%
Short-term loan IV 11/22/2008 1,369 8.020%
Short-term loan V 05/23/2008 1,369 7.885%
Short-term loan VI 04/26/2008 3,080 7.669%
Changsha Jiangbei Rural Credit Union
Short-term loan I 05/25/2008 1,369 7.150%
Short-term loan II 06/25/2008 2,464 9.180%
Short-term loan III 09/10/2008 274 7.605%
Short-term loan IV 09/10/2008 274 7.605%
Short-term loan V 09/10/2008 274 7.605%
Agricultural Bank of China Ziyang Branch
Short-term loan I 30/08/2008 2,053 8.073%
Short-term loan II 05/12/2008 1,095 10.060%
Short-term loan III 28/12/2008 685 8.591%
Shot-term loans from other
individuals 2,444 7.560%
---------
20,514
Short-term loans from
shareholders 2,313 7.560%
---------
$22,827
Weighted average interest rate for short-term loans as of
December 31, 2007 is 7.963% (as of December 31, 2006: 6.267%).
As of December 31, 2007, $13,415 of Changsha Agricultural Bank
of China's and Changsha Jiangbei Rural Credit Union's short-term
loans are secured by buildings, machinery and land occupancy
rights of Tongxin and Changsha Meihua Vehicle Manufacture Co.,Ltd.
As of December 31, 2007, $2,053 of Agricultural Bank of China
Ziyang Branch's short-term loan is secured by Tongxin, and the
remaining $1,780 of Agricultural Bank of China Ziyang Branch's
short-term loans are secured by buildings and land occupancy
right of Ziyang.
As of December 31, 2007, the un-used line of credit amounted to
$ 1,506 (as of December 31, 2006: $4,676).
13) LONG-TERM LOANS
Long-term loans as of December 31, 2007 (as of December 31,
2006: $3,970) consists of the following:
Maturity date $'000 Interest Rate
-------------- -------- --------------
December 31, 2006
Changsha Xingcheng Construction
Investment Co., Ltd 06/29/2009 $ 2,561 6.03%
Changsha Jiangbei Rural Credit
Union 06/25/2008 1,409 9.18%
--------
Total $ 3,970
December 31, 2007
Changsha Commercial Bank
Sifang Branch 11/14/2009 $ 769 8.96%
Changsha Commercial Bank
Sifang Branch 09/19/2009 1,780 7.47%
--------
2,549
Long-term loans from shareholders 12/31/2009 10,476 8.40%
--------
Total $ 13,025
As of December 31, 2007, Tongxin has obtained long-term loans
totaling $2,549 from Changsha Commercial Bank Sifang Branch
("CCBSB"). The loans from CCBSB are collateralized by land
occupancy rights of Hunan Tongxin Development and Construction
Co., Ltd.
Future repayments for the long-term loans for the years
subsequent to the balance sheet date are as follows:
Total
---------
Repayable by 2009 13,025
14) RESERVES
The Company's attributable share in the statutory reserves of
Tongxin and its subsidiaries as of December 31, 2007 is as
follows:
Years Ended December 31,
2005 2006 2007
---------- ---------- -----------
Statutory general reserve
Balance at January 1 $ 345 $ 500 $ 1,084
Transfer from consolidated statements
of operations 155 167 953
Transfer from statutory public
welfare fund - 417 -
------- -------- ---------
Balance at December 31 $ 500 $1,084 $ 2,037
------- -------- ---------
Statutory public welfare fund
Balance at January 1 $ 331 $ 417 $ -
Transfer from consolidated statements
of operations 86 - -
Transfer to statutory general reserve - (417) -
------- -------- ---------
Balance at December 31 $ 417 $ - $ -
------- -------- ---------
General surplus reserve
Balance at January 1 and December 31 $ 529 $ 529 $ 529
------- -------- ---------
Capital surplus
Balance at January 1 and December 31 $ 246 $ 246 $ 246
------- -------- ---------
Total $1,692 $1,859 $ 2,812
Notes:
(i) In accordance with the relevant regulations in China,
Tongxin is required to provide certain statutory
reserves that are designated for specific purposes
based on the net income reported in the PRC GAAP
financial statements. These reserves are not
distributable in the form of cash dividends.
(ii) In accordance with the relevant regulations in China,
a 10% appropriation to the statutory general reserve
based on the net income reported in the PRC financial
statements is required until the balance reaches 50%
of the registered capital of the company. Statutory
general reserve can be used to make good previous
years' losses, if any, and may beconverted into
capital by increasing the paid-in capital, provided
that the reserve balance after such conversion is not
less than 25% of the registered capital.
(iii) Prior to 2006, Tongxin shall determine to transfer 5%
to 10% of its net income reported in the PRC financial
statements to the statutory public welfare fund. There
is no limit on the amount that may be allocated to this
fund. This fund can only be utilized on capital
expenditure for the collective welfare of Tongxin's
employees, such as the construction of dormitories,
canteen and other welfare facilities, and cannot be
utilized to pay staff welfare expenses.
Pursuant to the Company Law of the PRC revised on
October 27, 2005 and carried out as of January 1, 2006,
Tongxin is required to cease to draw the statutory
public welfare fund from January 1, 2006. In accordance
with the Circular on Accounting Treatment Following
the Implementation of "Company Law" issued by the
Ministry of Finance of the PRC on March 15, 2006,
Tongxin transferred the statutory public welfare fund
balance as at the December 31, 2005 into the statutory
general reserve.
(iv) In addition to statutory general reserve and statutory
public welfare fund, Tongxin had made additional
appropriation of net profit to a general surplus reserve.
This general surplus reserve can be used to make good
previous years' losses, if any, and may be converted
into capital by increasing the paid-in capital, provided
that the reserve balance after such conversion is not
less than 25% of the registered capital.
(v) Capital surplus, arising from waiver of debt by a
creditor, can be used to increase the paidin capital.
15) GENERAL AND ADMINISTRATIVE EXPENSES
For year ended December 31, 2007, included in selling, general
and administrative expenses is $524 of professional fees
incurred for its listing exercise, which consists of:
Years Ended December 31,
2005 2006 2007
-------- -------- ---------
Professional fees - - 336
Consulting fee - - 120
Others - - 68
-------- -------- ---------
- - 524
16) INCOME TAXES
Tongxin is subject to the PRC Income Tax Laws applicable to
domestic enterprises. Tongxin is subject to income tax rate
of 33% in 2005, 2006 and 2007, which comprised 30% state income
tax and 3% local income tax. The PRC income tax rate applicable
to Tongxin's subsidiaries is 15% to 33% in 2005, 2006 and 2007.
The income tax expense in the consolidated statements of
operations consists of:
Years Ended December 31,
2005 2006 2007
--------- --------- ---------
Income taxes:
Current $ 424 $ 3,118 $ 3,674
Deferred 103 (179) 179
------- --------- ---------
$527 $ 2,939 $ 3,853
A reconciliation of the difference between the effective income
tax rate and the statutory income tax rate is as follows:
Years Ended December 31,
2005 2006 2007
-------- -------- --------
Statutory income tax rate 33% 33% 33%
Preferential tax policy (24)% (2)% (4)%
Permanent tax difference 26% 3% 1%
PRC tax law- statutory
limitation 8% - -
Unrealized profit (loss) (2)% 4% 1%
Tax incentive for purchase
of domestically produced
machinery - (4)% (1)%
------- --------- --------
Effective income tax rate 41% 34% 30%
The tax effects of temporary differences that have given
rise to the deferred income tax assets consist of the
following:
December 31,
2006 2007
---------- ----------
Allowance for doubtful accounts $ (1,644) $ (1,572)
Tax loss carried forward - (59)
--------- ----------
Subtotal (1,644) (1,631)
Less: Valuation allowance - 59
--------- ----------
Net deferred tax assets $ (1,644) $ (1,572)
17) RELATED PARTY RELATIONSHIP AND TRANSACTIONS
(a) Relationship
Name of the related party Relationship with Tongxin
- -------------------------------- -------------------------
Tongxin Development and Controlled by a family
Construction Co., Ltd. member of the major
shareholder of Tongxin
Changsha Meihua Vehicle Controlled by a family
Manufacture Co., Ltd. member of the
shareholder of Tongxin
(b) Significant outstanding balances with the related parties
as of December 31, 2006 and 2007 are as follows:
(i) Loans from shareholders
December 31,
2006 2007
-------- --------
Short-term loans from shareholders $ 5,179 $ 2,313
Long-term loans from shareholders - 10,476
-------- --------
5,179 12,789
Short-term loans from shareholders are unsecured, with no
fixed repayment term and carry interest rate of 7.56%
(2006: 5.40%) per annum.
Long-term loans from shareholders are unsecured, with no
fixed repayment term and carry interest rate of 8.40%
(2006: Nil) per annum.
(ii) Other receivables
December 31,
2006 2007
-------- --------
Changsha Meihua Vehicle Manufacture Co., Ltd. $ 5,113 $ 7,387
Hunan Tongxin Development and Construction Co., Ltd. 3,127 8,203
-------- --------
$ 8,240 $15,590
These other receivables from related parties are not
secured and have no fixed payment term.
(iii) Guarantee
Changsha Meihua Vehicle Manufacture Co., Ltd. uses
its buildings, machinery and land occupancy secured
for the company's short-term loan from Changsha
Jiangbei Rural Credit Union.
Hunan Tongxin Development and Construction Co., Ltd.
uses its land occupancy secured for the Tongxin's
long-term loan from Changsha Commercial Bank Sifang
Branch.
(c) Significant transactions with the related parties
during the years ended December 31, 2006 and 2007
are as follows:
(i) Sales of goods to
During fiscal
2006 2007
------- -------
Changsha Meihua Vehicle
Manufacture Co., Ltd. $ 1,908 $ 9,867
(ii) Purchases of goods from
During fiscal
2006 2007
-------- -------
Changsha Meihua Vehicle
Manufacture Co., Ltd. $ 4,808 $ 9,322
18) CONCENTRATION OF CREDIT RISKS
The following table summarizes the percentage of accounts
receivable from continuing operation from the top 5
customers for the years ended December 31, 2006 and 2007:
2006 2007
------- -------
Customer A 8% 15%
Customer B 8% 9%
Customer C 6% 8%
Customer D 5% 5%
Customer E 4% 4%
------- -------
31% 41%