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The following is an excerpt from a 10-K SEC Filing, filed by TIENS BIOTECH GROUP USA INC on 3/31/2008.
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TIENS BIOTECH GROUP USA INC - 10-K - 20080331 - OFFICER_TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE.

We markets all of our products through various domestic and international business entities that are related to us through common ownership. As a result, all of our total consolidated sales in 2007 were to related parties.

We have a sales contract with Tianshi Engineering which requires Tianshi Engineering to purchase all of our products to be sold in China. We sell our finished products to Tianshi Engineering at a price equal to 25% of the Chinese market price for the products. This 25% figure was negotiated between the parties in 2003, before we acquired Tianshi Holdings, and we believe that it is a reasonable sales price for us to receive. The price of semi-finished goods sold to Tianshi Engineering was originally set at the beginning of 2006 to provide us with a 75% gross profit margin. However, based on fluctuations in the cost of raw materials and quantities produced, the gross profit margin percentage varied during the year. This 75% figure was negotiated between the parties, and we believe that it is reasonable. The goal of this new pricing policy was to try to maintain the Company’s gross margins on semi-finished goods at a similar level to historical gross margins for finished goods. All of Tianshi Engineering’s Chinese affiliated companies are owned in whole or in part by Jinyuan Li’s immediate family members.

Internationally, we sell our products to overseas related companies located in 52 countries who in turn sell them to independent direct sales distributors. Our CEO, Jinyuan Li, owns or controls these overseas related companies. During 2007, in order to consolidate our international distribution, we reduced the number of countries where we sell directly to overseas affiliates from 63 to 52. Therefore, some of our overseas affiliate customers also now sell our products on to other overseas affiliates which are no longer our direct customers. Due to the common ownership, there are no formal sales or administrative agreements among us and those overseas related parties. The business operations among these related entities are regulated through internal ordinances.
 
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Our related party transactions are required to be reviewed and approved or ratified by a majority of our non-interested Board of Directors. The following tables are provided to facilitate your understanding of the transactions and outstanding balances between those related parties and us during 2007 and 2006.

   
December 31, 2007
 
December 31, 2006
 
Revenue-related party
 
$
54,900,060
 
$
66,790,466
 
Accounts receivable, trade - related parties, net of allowance for doubtful accounts of $71,700 and $86,776 as of December 31, 2007 and 2006, respectively
 
$
14,268,229
 
$
12,926,670
 
Other receivables - related parties
 
$
13,070,907
 
$
8,397,227
 
Loans receivable - related parties
 
$
0
 
$
25,640,000
 
Advances from customers - related parties
 
$
1,700,838
 
$
1,570,120
 
Other payables - related parties
 
$
7,938,205
 
$
522,105
 
Current portion of long-term debt - related party
 
$
2,130,000
 
$
2,130,000
 
Long term debt - related party
 
$
4,267,742
 
$
6,397,742
 

Revenue-related Parties

The details of revenue-related parties are as follows:

   
2007
 
2006
 
Tianshi Engineering
 
$
22,476,135
 
$
27,074,979
 
Overseas Related Companies
   
32,423,925
   
39,715,487
 
Total
 
$
54,900,060
 
$
66,790,466
 

Accounts Receivable-related Parties

The details of accounts receivables, trade-related parties are as follows:

   
December 31, 2007
 
  December 31, 2006
 
Tianshi Engineering
 
$
2,062,333
 
$
7,827,372
 
Overseas Related Companies
   
12,277,596
   
5,186,074
 
Allowance for Doubtful Accounts
   
(71,700
)
 
(86,776
)
Total
 
$
14,268,229
 
$
12,926,670
 
 
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Other Receivables-related Parties

Other receivables - related parties are generated by the Company making various cash advances and short term loans, the allocation of various expenses to related parties, and amounts transferred from accounts receivable. The following table summarizes the other receivables- related parties balances:
 
The details of other receivables-related parties are as follows:
 
   
December 31, 2007
 
December 31, 2006
 
Tianshi Engineering
 
$
9,460,811
 
$
5,592,772
 
Shengshi Real Estate Development
   
2,238
   
1,039
 
Tianjin Tianshi Technical School
   
-
   
46,589
 
JinMao (Group) Holding
   
-
   
104,466
 
Shanghai Tianshi Jinquan Investment Co.
   
874
   
2,129
 
Tianshi Group
   
2,334,493
   
2,650,232
 
Tianshi Pharmaceuticals
   
5,065
   
-
 
Life Resource
   
1,259,528
   
-
 
Beijin Xingda Travel Co., Ltd
   
5,959
   
-
 
Tianjin Xingda Travel Co., Ltd
   
1,939
   
-
 
  Total
 
$
13,070,907
 
$
8,397,227
 

Historically, Tianshi Engineering remitted payment to us upon sales to third party customers. However, in order to support Tianshi Engineering’s marketing efforts in anticipation of receiving a direct selling license in China, we have agreed to allow Tianshi Engineering to defer payment to us. Balances not remitted to us within 90 days are converted to other receivables - related parties. Beginning on January 1, 2007, the other receivables - related parties became interest bearing. The stated interest rate is the interest rate for the same level of loan stipulated by the People’s Bank of China. The credit terms provide an interest-free credit term of three months. Any amounts exceeding this term are transferred from accounts receivable - related parties to other receivable - related parties. Beginning January 1, 2007, the other receivables - related parties will then become interest bearing once a loan contract is adopted. The interest rate is the interest rate, on the date the loan commences, that is stipulated by the People’s Bank of China for a loan of the same level.

On January 1, 2007, Biological entered into a loan agreement (the “Q1 Loan”) with Tianshi Engineering. The Q1 Loan provided that, beginning January 1, 2007, $4.5 million of other receivables-related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The Q1 Loan was due March 31, 2007 and the stated interest rate was 6.3%. Both of the principal and interest of $41,876 were paid off February 28, 2007.

On April 24, 2007, a loan agreement (the “Q2 Loan”) was signed between Biological and Tianshi Engineering. The Q2 Loan provided that beginning April 1, 2007, $5.1 million of other receivables-related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The Q2 Loan was due June 30, 2007 and the stated interest rate was 5.67%, the interest rate for a loan of the same principal amount stipulated by the People’s Bank of China as of the date the loan was made. Both of the principal and interest of $65,882 were repaid on June 30, 2007.

On July 23, 2007, a loan agreement (the “Q3 Loan”) was signed between Biological and Tianshi Engineering. The Q3 Loan provided that, beginning July 1, 2007, $8.8 million of other receivables-related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The Q3 Loan was due September 30, 2007 and the stated interest rate was 5.85%, the interest rate for a loan of the same principal amount stipulated by the People’s Bank of China as of the date the loan was made. On September 30, 2007, $1 million of the Q3 Loan was repaid.

On October 15, 2007, a loan agreement (the “Q4 Loan”) was signed between Biological and Tianshi Engineering. Pursuant to the Q4 Loan, beginning October 1, 2007, $6.5 million of other receivables-related parties, which originated from Tianshi Engineering as accounts receivable, became interest bearing. The loan was due December 31, 2007 and the stated interest rate was 6.48%, the interest rate for a loan of the same principal amount stipulated by the People’s Bank of China as of the date the loan was made. On December 20, 2007, the remaining principal balance of $14,294,686 on the Q3 Loan and the Q4 Loan plus interest on the two loans of $306,360 was repaid by canceling an equal amount of the consideration paid by us for the acquisition of Life Resources from Tianshi Investment.
 
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During the years ended December 31, 2007 and 2006, we and Tianshi Group used common meters at our headquarters for electricity and water, and also used the same employee insurance account. When making payments to these outside parties, we usually pay the fees first and then are reimbursed by Tianshi Group. These pro-rated amounts relating to Tianshi Group are categorized as other receivables - related parties. In addition, during 2006 we were owed other receivables-related parties in the amount of RMB 7,560,000 ($1,033,603) from Tianjin Juchao Commercial and Trading Co., Ltd (“Juchao”), a related party owned by Jinyuan Li. On March 31, 2006, Juchao declared termination of its operations, and all of its rights and liabilities were transferred to Tianshi Group. This amount was also included in other receivables - related parties.

In June 2007, Biological signed four agreements with equipment suppliers in Europe and Australia, pursuant to which Biological agreed to purchase four production lines for use at its headquarters in Tianjin, China. At that time Biological paid $996,711, one-third of the total consideration, to those equipment suppliers. But, due to a government investment limitation policy, Biological could not clear the equipment with Chinese customs without having to pay a large import duty. However, no such import duty would need to be paid if Life Resources imported the production lines. Therefore, on August 16, 2007, Biological, Life Resources and the equipment suppliers entered into a new agreement. In this new agreement, Life Resources agreed: (i) to replace Biological as the purchaser of the equipment, (ii) to pay $996,711 to Biological, and (iii) to pay the remaining balance of the consideration to the equipment suppliers. As of December 31, 2007, Life Resources had paid the consideration due to the equipment suppliers and received the equipment, and the amount of $996,711 due to Biological had not been paid.

As Life Resources is still in the construction process and all of the construction is outsourced to third party contractors, it currently has no employees. All of the administrative work relating to the construction has been performed by employees of the construction department of Biological. In December 2007, Biological charged Life Resources $262,817 for this administrative work. At December 31, 2007 and 2006, amounts due from Life Resources were $1,259,528 and $0 respectively.

Loans Receivable-related Party

Related party loans receivable were $0 and $25.6 million as of December 31, 2007 and 2006 respectively. On January 1, 2006, Biological loaned Tianshi Engineering $25.6 million. The loan was non-interest bearing and matured on December 31, 2006. The purpose of the loan was to enable Tianshi Engineering to strengthen its sales network in China. On December 22, 2006, the loan was extended to June 30, 2007 and was converted to an interest-bearing loan. The interest rate for the loan was 22 base points plus the current interest rate for the same level of loan stipulated by the People’s Bank of China, which was 5.58%. The actual interest rate on this loan totaled to 5.8%, On June 28, the loan was further extended to September 30, 2007. On September 30, 2007, the loan was extended to December 31, 2007. On December 20, 2007, the principal loan and accrued interest of $1,461,248, was repaid by canceling an equal amount of the consideration payable by us for the acquisition of Life Resources from Tianshi Investment.

Advances from Customers-related Parties

Advances from related party customers were $1.7 million and $1.6 million as of December 31, 2007 and 2006, respectively. These advances represented prepayments made to us to insure that overseas customers could obtain enough of our products to meet their market demands.
 
39

 
Other Payables-related Parties

These amounts arose primarily from previous cash advances from related parties such as management fees due to related parties and various non-operational transactions incurred with related parties. The details of other payable-related parties are as follows:

   
December 31, 2007
 
December 31, 2006
 
Tianshi Investment
 
$
7,490,136
 
$
-
 
Tianshi Engineering
   
244,980
   
-
 
Tianshi Germany Co., Ltd
   
109,233
   
98,581
 
Beijin Xingda Travel Co., Ltd
   
-
   
255
 
Shenzhen Logistics Co., Ltd
   
-
   
295,333
 
Tianshi Administrative Committee of Industrial Park
   
13
   
13
 
Tianyuan Capital Development Co. Ltd.
   
84,359
   
84,359
 
Tianshi Pharmaceuticals
   
9,308
   
8,728
 
Tianshi Shanghai Co., Ltd
   
176
   
165
 
Director - Jinyuan Li
   
-
   
34,671
 
Total
 
$
7,938,205
 
$
522,105
 
 
On December 21, 2007 Tianshi Holdings signed an agreement with Tianshi Investment pursuant to which it agreed to reimburse Tianshi Investment for a $7.5 million capital contribution to be made to Life Resources. The reimbursement was to be made after the government approved the acquisition of Life Resources by Tianshi Holdings. As of December 31, 2007 such approval had not been received.

Long Term Debt-related Party

In 2004, Tianshi Holdings entered a term loan agreement with Tianyuan Capital Development Co. Ltd. ("Tianyuan Capital"), pursuant to which Tianyuan Capital agreed to lend $10.65 million in the aggregate to Tianshi Holdings, at an interest rate of 5% per year, with interest payable on June 30 and December 31, commencing December 31, 2004. Tianshi Holdings must repay the loan in ten consecutive semi-annual installments of $1,065,000 commencing June 30, 2006 and ending June 30, 2011. Tianshi Holdings used the loan proceeds in Tiens Yihai. Mr. Jinyuan Li owns 100% of Tianyuan Capital. Interest of $399,543 and two installment payments totaling $2,130,000 were made in 2007.

Other T ransactions with Tianshi Group

Since 2003, Biological has leased office space and manufacturing facilities from Tianshi Group. The lease provides for an annual rent at 1% of our total gross revenues. The rent was negotiated by the parties before we acquired Tianshi Holdings, and we believe that it is a reasonable rent for the facilities. The term of the lease was for five years and expired on December 31, 2007. In addition, we are obligated to pay insurance, maintenance and other expenses related to the premises. The total amount paid on this lease amounted to $522,318 for the 12 months ended December 31, 2007. We entered into a new one-year lease agreement with Tianshi Group, effective January 1, 2008 covering the same facilities and having identical rent terms.

On December 14, 2007, Biological entered into a Real Property Transfer Agreement (the “Transfer Agreement”) with Tianshi Group. Under the Transfer Agreement, Biological transferred to Tianshi Group title to buildings consisting of approximately 34,000 square meters total of office, workshop, conference and exhibition space, located at the Company’s headquarters in Tianjin China for $15,316,496. Land use rights on the underlying land, which is owned by the government of China and which rights continue through December 30, 2054 with respect to the conference center property and May 31, 2043 with respect the other properties were also transferred. Biological also assigned certain contracts with third parties related to the servicing and upkeep of the buildings being transferred (collectively, the “Third Party Contracts”). In consideration for the transfer of the buildings and land-use rights, Tianshi Group paid Biological $15,334,037, plus $3,190,773 to cover pre-payments previously made by Biological under the Third Party Contracts.
 
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On December 14, 2007, Biological and Tianshi Group also entered a Lease Agreement pursua nt to which Biological has the right to use and occupy the office and workshop spaces being transferred under the Transfer Agreement. The lease is rent-free, but Biological is required to pay Tianshi Group for utility charges and maintenance costs on the buildings. The lease continues until the earlier of the date that we move to the new administrative facilities being constructed by Life Resources, or the land use rights on the underlying property expire.

Other Transactions with Tianshi Engineering

On December 31, 2005, Biological entered into four lease agreements with Tianshi Engineering which enabled Tianshi Engineering to share the use of certain of Biological’s product production workshops and equipment to manufacture products which Tianshi Engineering owns, or jointly owns with Biological for one year started from January 1 st , 2006. These four lease agreements were renewed in December 2006 for the 2007 fiscal year and on October 17, 2007 for the 2008 fiscal year. Rent revenue from these leases amounted to $379,083 and $295,588 for the years ended 2007 and 2006 respectively.

On October 31, 2007, Biological entered into four lease agreements with Tianshi Engineering which enable Tianshi Engineering to share the use of certain of Biological’s product production workshops and equipment to manufacture products which Tianshi Engineering owns, or jointly owns with Biological. Each of the four agreements is effective as of January 1, 2008 and expires on December 31, 2009. Following is a summary of the monthly rent payable to Biological under the leases:

Lease Agreement
 
Monthly rent
 
       
Lease Agreement for Health Products Production Equipment
 
$
11,481
 
Lease Agreement for Health Products Production Workshops
 
$
13,367
 
Lease Agreement for Personal Care Product Production Equipment
 
$
5,160
 
Lease Agreement for Personal Care Products Production Workshops
 
$
2,891
 

On December 14, 2007, Biological entered into the Transfer Agreement with Tianshi Group, the parent company of Tianshi Engineering, pursuant to which Biological transferred to Tianshi Group title to two of the four buildings included in the Lease Agreement for Health Products Production Workshops. On December 31, Biological and Tianshi Engineering entered into a Supplement Agreement of Lease Agreement for Health Products Production Workshops. The Supplement Agreement removed the two buildings purchased by Tianshi Group from the lease and reduced the rent to $5,928 per month.

On December 31, 2007, Biological and Tianshi Engineering entered into a Supplement Agreement of Lease Agreement for Personal Care Products Production Equipment. The Supplement Agreement added additional production equipment to the lease and increased the rent to $5,635 per month.

In November 2007, we sold two cars to a supplier of Tianshi Engineering for $110,275. The proceeds from the sale to the supplier of Tianshi Engineering were recorded as other receivables from Tianshi Engineering, as both parties agree that we transferred our right to receive the proceeds from the sale of the cars to Tianshi Engineering.

Transactions with Tianshi Investments

On December 20, 2007, Tianshi Holding entered into a Sale and Purchase Agreement with Tianshi Investment, Biological and Tianshi Engineering. Pursuant to the Sale and Purchase Agreement, Tianshi Holdings agreed to buy all of the registered share capital of Life Resources from Tianshi Investment for RMB474,674,415 ($64,247,182). The closing of the transaction was subject to government approval of the transfer of Life Resources to Tianshi Holdings. On March 13, 2008, the government approved the transfer.
 
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Pursuant to the Sale and Purchase Agreement, we advanced a deposit of $64,247,182 to Tianshi Investment on December 20, 2007. This acquisition deposit was settled as follows:

 
·
$28,592,743 was paid by canceling a loan in the principal amount of RMB200,000,000 to Tianshi Engineering owned by Biological together with interest accrued;
 
·
$16,557,914 was paid by canceling of other receivable owned by Tianshi Engineering to Biological; and
 
·
$19,096,525 was paid in cash.

On December 21, 2007, Tianshi Holdings and Tianshi Investment entered into a Capital Contribution Agreement, pursuant to which Tianshi Investment agreed to fund a capital increase of Life Resources in the amount of $7.5 million. Tianshi Holdings agreed to pay back the $7.5 million to Tianshi Investment within five days of the date of the government approval of the transfer of the shares of Life Resources to Tianshi Holdings. The approval was received on March 13, 2008 and the $7.5 million was paid back on March 18, 2008, by canceling $7.5 million of accounts receivable owed to us by Tianshi Engineering.

On January 14, 2008, Tianshi Holdings and Tianshi Investment entered into a Loan Agreement pursuant to which Tianshi Holdings loaned Tianshi Investment $4.1 million without interest. The loan was required to be used by Tianshi Investment to increase the registered share capital of Life Resources. The loan was due on March 31, 2008, provided however, that if the government approved the transfer of the shares of Life Resources to Tianshi Holdings prior to that date, the loan would be cancelled, as Life Resources would then be a wholly-owned subsidiary of Tianshi Holdings. The approval was received on March 13, 2008, and therefore, the loan was cancelled on the same date.
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