TIENS BIOTECH GROUP USA INC - 10KSB - 20050331 - PART_I
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business Overview
Tiens Biotech Group (USA), Inc. (the "Company" or "Tiens USA"), formerly known
as Strategika, Inc. ("Strategika"), was incorporated on July 13, 1990 as Super
Shops, Inc. in the State of Michigan. In October 2000, Super Shops, Inc.
reincorporated in Delaware and changed its name to MIA Acquisition Corp., and
subsequently to Strategika in February 2002.
Tiens USA conducts its main business operations through its 80% owned subsidiary
Tianjin Tianshi Biological Development Co., Ltd. ("Biological"), which is based
in Tianjin, Peoples Republic of China (PRC). Biological primarily engages in the
research, development, manufacturing, and marketing of nutrition supplement
products, including wellness products and dietary supplement products, and
personal care products. Tiens USA derives its revenues principally from product
sales to affiliated companies in China and outside of China. Since its
establishment, Biological has developed and produced seven major product series,
of which six are comprised of nutrition supplement products, and the seventh is
comprised of personal care products. Biological develops its products at its own
product research and development center, which employs highly qualified
professionals in the fields of pharmacology, biology, chemistry and fine
chemistry. Biological has obtained all required certificates and approvals from
government regulatory agencies to manufacture its products in China, including a
Certificate of Good Manufacturing Practices (GMP) issued by the State Drug
Administration, a Sanitary Certificate for food manufactured in China ("Jin
(Wuqing) Wei Shi Zheng Zi" 2004, No.0049) for food manufacturers in China and a
Sanitary Certification for wellness products manufacturers ("Jin Wei Jian Zheng
Zi" 2004, No.0006) issued by the PRC Ministry of Health. In addition, all of
Biological's products have been certified by appropriate government regulatory
agencies, including the State Food and Drug Administration (SFDA) and the Bureau
of Technical Supervision, for manufacture and sale in China.
In China, Biological conducts the marketing and sales of its products through
its affiliated company, Tianjin Tianshi Biological Engineering Co., Ltd.
("Tianshi Engineering"), a company incorporated in China. Tianshi Engineering
markets and sells Biological's products in China through its 23 branches,
representative offices and chain stores, and nine domestic affiliated companies.
Six of the nine domestic affiliated companies are 51% owned by Tianshi
Engineering and 49% by Li Baolan, the daughter of Mr. Li Jinyuan, Tiens USA's
Chief Executive Officer and President. The other 3 affiliate companies are owned
by Ms. Li Baolan and Mr. Li' s other immediate family members. Outside of China,
Biological sells its products through an extensive direct sales force, or
multi-level marketing sales force, of overseas affiliates and independent
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distributors who use the products themselves and/or resell them to other
distributors or consumers. These affiliates are located in approximately 90
countries, including the United States, India, Malaysia, Indonesia, Canada,
Peru, Brazil, Russia, Kazakhstan, Mongolia, Finland, Lithuania, Britain,
Germany, France, Romania, Ukraine, Portugal, Turkey, Italy, Nigeria, Ghana,
South Africa, Australia, etc.. Our direct sales marketing program is subject to
governmental regulation in each of these countries.
In April 2004, Tianshi International Holdings Group Ltd., a corporation
organized under the laws of the British Virgin Islands ("Tianshi
International"), entered into a joint venture contract with Tianjin Tianshi
Pharmaceuticals Co., Ltd. ("Tianshi Pharmaceuticals"), a Chinese company in
which the majority shareholder is Tianjin Tianshi Group Co., Ltd. ("Tianshi
Group"), a company organized under the PRC laws, to establish Tiens Yihai Co.
Ltd., a Chinese-Foreign Equity Joint Venture ("Tiens Yihai"). On September 15,
2004, the Board of Directors of Tianshi International ratified and approved the
Tiens Yihai Joint Venture Project. Tianshi International is a wholly-owned
subsidiary of Tiens USA, and Tianshi Group is owned 90% by Mr. Li and 10% by Mr.
Li's daughter, Ms. Li Baolan. Tiens Yihai is 99.4% owned by Tianshi
International and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai, located in
Shanghai, P.R.C., was established to conduct research and development,
production, and marketing of nutrition supplement products, home care, and
personal care products. As of December 31, 2004, Tiens Yihai was a developmental
stage company and had not yet conducted any operations.
Both Biological and Tianshi Engineering receive administrative support from
Tianshi Group. Biological pays Tianshi Group 1% of its annual sales income
(excluding value added taxes "VAT") for administrative services (except for
services provided by the officers of Tianshi Group) and the use of Tianshi
Group's administrative building.
The following is an organization and equity ownership chart of Tiens USA and its
affiliates:
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GRAPHIC OMITTED
The graphic omitted shows the organizational chart of Tiens USA, including the
percentage ownership. The following describes the chart:
Tiens USA is owned 4.91% by public stockholders, 2.8% by officers and 92.29% by
Mr. Li Jinyuan. Tiens USA owns 100% of Tianshi International. Tianshi
Inernational owns 80% of Biological and 99.4% of Tiens Yihai.
Tianshi Group is owned 90% by Mr. Li Jinyuan and 10% by his daughter, Ms. Li
Baolan. Tianshi Group owns 87.66% of Tianshi Pharmaceuticals and 51% of Tianshi
Engineering. Tianshi Pharmaceuticals owns 20% of Biological and 0.6% of Tiens
Yihai.
Ms. Li Baolan owns 49% of Tianshi Engineering and 7.29% of Tianshi
Pharmaceuticals.
Tianjin Feishi Transportation Co., Ltd. owns 5.05% of Tianshi Pharmaceuticals.
Corporate History
In August 2003, Strategika and Tianshi International, LI Jinyuan, JIAO Wenjun
and YAN Yupeng, all Chinese Nationals who were stockholders of Tianshi
International (the "Tianshi Stockholders") entered an Agreement and Plan of
Reorganization (the "Agreement"), which was effective on September 9, 2003 (the
"Effective Date"). Pursuant to the Agreement, Strategika received from the
Tianshi Stockholders all of the issued and outstanding common stock of Tianshi
International, in exchange for the issuance by Strategika of 68,495,000 shares
of its common stock to the Tianshi Stockholders, representing 95% of the issued
and outstanding common stock of Strategika, giving effect to the issuance. As
additional consideration, Rene Larrave, the sole officer and director of
Strategika prior to the reorganization, contributed all of his Strategika common
stock to Strategika without additional consideration.
Tianshi International was incorporated on March 24, 2003, in the territory of
the British Virgin Islands. On June 18, 2003, Tianshi International acquired 80%
of Biological. Biological is a Chinese-foreign equity joint venture company
established under the laws of the PRC on March 27, 1997. Biological is subject
to the Law on Sino Foreign Equity Joint Ventures ("Joint Venture Law"), its
implementation regulations and other related rules and regulations ("Joint
Venture Regulations"). Biological is an independent legal entity having the
legal structure of a limited liability company, similar to a regular corporation
with limited liability organized under state laws in the United States of
America. The Articles of Association of Biological provides for a 50 year term
with registered capital of $10,000,000. As an approved, Chinese-foreign equity
joint venture Biological receives special income tax incentive treatment from
both the local (Wuqing County) and central governments in China. The original
partners in this joint venture were Tianshi Hong Kong International Development
Co., Ltd. ("Tianshi Hong Kong") incorporated in Hong Kong which owned 80% of the
joint venture, and Tianshi Engineering, which owned the remaining 20% of
Biological. Tianshi Hong Kong is owned 100% by LI Jinyuan. Tianshi Engineering
is 49% owned by Ms. Li Baolan and 51% by Tianshi Group. In June 2003, Tianshi
Engineering transferred its 20% interest in Biological for no consideration to
Tianshi Pharmaceuticals and Tianshi International acquired 80% of Biological
from Tianshi Hong Kong for no consideration. This transfer was made for no
consideration, since LI Jinyuan is president and sole shareholder of both
companies.
Business and Industry Overview
The wide variety of vitamins necessary for maintaining a human body's normal
functions are contained in many types of natural foods. Because of the
inter-relationship between nutrition and health, we believe there is developing
worldwide demand for nutrition supplement products. Biological has developed its
products to capture this increasing, yet geographically differentiated, market
demand for nutrition supplement products. In China, due to its recent rapid
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economic development, Chinese consumers have become more aware of the risks of
dietary imbalances and the importance of maintaining appropriate levels of
vitamins and minerals. Minerals operate with vitamins and other nutrient
elements to maintain proper PH balances and stimulate nerves and muscle systems.
Biological believes that its product series, containing vitamins and minerals,
will have extensive potential in markets in both China and many other developing
countries worldwide.
After China's admission into the World Trade Organization, markets for Chinese
products will expand internationally. Due to this, we believe that there will be
more opportunities for our enterprises to enter into international markets. Some
major components of Biological's products, i.e. lecithin, ginkgo extract, and
melatonin, are gradually being recognized by international markets as beneficial
food supplements for the human body. According to Global Information Inc.'s
vertical market research report, market demand for vitamins, herbal/botanical
products, sports nutrition, meal supplements, minerals, and specialty products
is expected to increase over the next 5 to 8 years.
CURRENT PRODUCTS
Since its incorporation in 1998, Biological has developed and produced seven
major product series, of which six consist of nutrition supplement products, and
the seventh consists of personal care products. Biological has produced 31 types
of nutrition supplement products. Therein, 30 types were developed and produced
by the year ended December 31, 2004, and one type has been developed and is
going to be produced and put into markets in the future. Each of our nutrition
supplement products falls within one of our six major nutrition supplement
products series, which includes the High-Calcium Series, the Immune Enhancement
Series, the Nutrient Supplement Series, the Adjustment Series, the High-Fiber
Series, and the Heart and Brain Improvement Series.
Each of our products has been issued a Product Standard Code by the Bureau of
Technical Supervision, and each of our 24 wellness products have been issued a
Certificate of Domestic Wellness Product by the State Food and Drug
Administration (SFDA). This SFDA certificate is required for the production and
sale of wellness products in China. Furthermore, 23 out of 31 of our products
have received Halal Approval by the end of 2004. Halal Approval is issued by the
Islamic Association of Shandong Province for food products not containing
substances banned by the Islamic religion. The issuance of this Approval
certified that our manufacturing processes comply with the requirements of
Islamic dietary law.
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The table below illustrates all of our nutrition supplement products categorized
by functions:
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Product Series Products Main Ingredients Benefits
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ii Tianshi Nutrient Zymolytic bone calcium powder, Help to improve bone
ii Calcium Powder oligosaccharide, density
ii * # de-fatted milk powder, ii
ii ii VA, VD, VC, iron ii
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ii Tianshi Super Zymolytic bone calcium powder, Help to supplement
ii Calcium Powder VA, VD, VC, taurine, zinc, iron calcium
ii for Children * # ii ii
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ii Tianshi Super Zymolytic bone calcium powder, Help to regulate blood
ii Calcium Powder oligosaccharide, pumpkin powder sugar
High-Calcium Series with Metabolic VA, VD, VB1,VB2 ii
ii Factors * # ii ii
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ii Tianshi Chewable Zymolytic bone calcium powder, Help to replenish
ii Calcium Tablets * coca powder, mannite, nondairy calcium
ii ii creamer, dextrin, magnesium stearate, ii
ii ii aspartame, cocoa essence, compound ii
ii ii vitamin (A, D2 and C) ii
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ii Tianshi Gourmet Monosodium glutamate, 1+G Help to supplement
ii Powder with Super Zymolytic bone calcium powder, calcium
ii Calcium ** ii ii
ii ii ii ii
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ii Tianshi Super Whole milk powder, Help to supplement
ii Calcium Milk Powder Zymolytic bone calcium powder, calcium
ii ** non-dairy creamer, aspartame, ii
ii ii multi-vitamins ii
ii ii ii ii
ii ii ii ii
ii ii ii ii
ii ii ii ii
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ii Tianshi Zinc Zinc lactate, glucose, egg protein Help to supplement zinc
ii Capsules * # powder ii
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ii Tianshi Chewable Calcium carbonate, de-fatted milk Help to supplement
Nutrient Supplement Calcium Tablets powder, fruit powder, gelatin, calcium
Series with Multiflavor * # magnesium stearate, VD ii
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ii Tianshi Iron Glucose, ferrous lactate, VC, Iron supplement to fight
ii Capsules * folic acid against iron-deficiency
ii ii ii anemia
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ii Tianshi Protein Soybean separating protein, supplement amino acid,
ii Powder ** # whey protein, soybean phospholipid and protein
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Product Series Products Main Ingredients Benefits
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ii Tianshi Lipid Herba gynostemma pentaphyllum, Help to regulate blood
ii Metabolic folium nelumbinis, radix polygoni lipid
ii Management Tea*# mutiflori, green tea, semen cassiae ii
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ii Tianshi Bone Calcium carbonate, soybean Help to increase bone
ii Treasure Tablets isoflavones,micro-crystal density
ii * # cellulose, carboxymenthyl amylo- ii
ii ii sodium, lactose, starch, magnesium ii
ii ii stearate, casein phosphor-peptide ii
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ii Tianshi Super Zymolytic bone calcium powder, Help hypermnesia
ii Calcium Capsules lecithin, taurine, VB1, VB12, VC ii
ii with Lecithin * # b-cyclodextrin ii
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ii Tianshi Beauty Radix rehmanniae, radix angelicae Clear complexion,
ii Face Capsules * # sinensis, radix paeoniae alba, flos rejuvenate skin
Adjustment Series ii carthami, semen persicae, radix (Chloasma-removing)
ii ii bupleuri, rhizoma chuanxiong, VC, ii
ii ii VE ii
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ii Tianshi Sweet Fructus crataegi, fructus lycii, poria, Help to improve the
ii Dreams Granules * # starch, aspartame, melatonin quality of sleep
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ii Tianshi Throatcare Radix ophiopogonis, Fructus Take care of your throat
ii Granules * canarli, honeysuckle, ebony, haw ii
ii ii powder, mint, liquorice ii
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ii Tianshi Slimming Folium nelumbinis, semen cassiae, Weight loss
ii Tea * # oolong tea, rhizoma alismatis, ii
ii ii folium llicis latifoliae, radixet ii
ii ii rhizoma rhei, pericarpium citri ii
ii ii reticulatae ii
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ii Tianshi PressureCare Folium kaki, plumula nelumbinis, Regulate blood pressure
ii Tea * fructus gardeniae, folium apocyni ii
ii ii veneti ii
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ii Tianshi Sea Sea Buckthorn oil Help to improve
ii Buckthorn Oil ii immune system
ii Softgels ** # ii ii
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ii Tianshi Double- Polydextrose, haw powder, supplement edible cellulose
High-Fiber Series cellulose Tablets hydroxypropyl cellulose, maize ii
ii ** # cellulose, gelatin, magnesium ii
ii ii stearate aspartame (phenylalanine) ii
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Product Series Products Main Ingredients Benefits
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ii Tianshi Chitosan Chitosan Regulate immune
ii Capsules * # ii system
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ii Tianshi Cordyceps Cordyceps mycelium powder Help to improve
ii Capsules * # ii immune system
ii ii ii and reduce fatigue
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ii Tianshi Vitality Wheat plumule oil, lecithin, Reduce fatigue
Immune Softgels * # b-carotene ii
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Enhancement Series Tianshi Spirulina Dried spirulina powder increase hypoxia
ii Capsules * # ii resistance and regulate
ii ii ii cellular immune system
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ii Tianshi Spirulina Dried spirulina powder Increase hypoxa
ii Tablets* ii resistance and regulate
ii ii ii cellular immune system
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ii Tianshi Pine Pollen Natural pine pollen powder, supplement amino acid,
ii Powder Capsules **# Povidone vitamins and minerals
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ii Tianshi Garlic Natural garlic, powder, lactose, Help to improve
ii Tablets ** starch, calcium carbonate, micro- immune system
ii ii crystal cellulose, malt dextrin, ii
ii ii carboxymethl amylo-sodium, ii
ii ii magnesium stearate ii
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ii Tianshi Grape Grape seed extract, starch Help to support healthy
ii Extract Capsules*# ii blood lipid levels.
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ii Tianshi Cell Carrot powder, heba gynostemma Hypoxia resistance
Heart and Brain Rejuvenation pentapyllum, tea polyphenol, VC ii
Improvement Series Capsules * # ii ii
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ii Tianshi Metabolic Radix salviae miltiorrhizae, radix Regulate blood lipid
ii Balance Capsules *# polygoni multiflori, fructus ii
ii ii crataegi ii
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ii Tianshi Ginkgo Leaf Ginkgo leaves extract, lactose, Increase hypoxia
ii Tablets * # micro-crystal cellulose, starch, resistance
ii ii carboxymethyl amylo-sodium, ii
ii ii french white ii
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Note: 1. The 24 products with * are wellness products. They should not be
used as a substitute for any drug for therapeutic purpose.
2. The 7 products with ** are dietary supplement products. They are
not prescribed medicine.
3. The 23 products with # have received Halal Approval.
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Our products have received significant recognition for quality:
2004
At the 4th International Healthcare Festival of China, Tianshi Metabolic Balance
Capsules was assessed as one of the Top 10 Nutrition Supplement Products.
2003
Biological's wellness products series were recommended by the Chinese Committee
for Evaluation and Recommendation of Famous Quality Products for Women and
Children as one of the Popular Famous Quality Brands.
2002
Tianshi Sea Buckthorn Oil Softgels, Tianshi Cordyceps Capsules and Tianshi
Spirulina Capsules were jointly recommended to the European market by the
Council for the Promotion of International Trade of China and the Committee for
Quality Assurance and Assessment of Science and Technology Products of France.
Tianshi Chitosan Capsules were recommended as high-quality products by the US
Council of International Quality Authentication.
Tianshi Chitosan Capsules were proved to be Recommended Products For
International Trade by U.S. Asia Economic Trade Cooperation Committee.
Manufacturing
Biological has put a great emphasis on product quality assurance. In 2002, it
was awarded a Quality System Certificate for compliance with the standard
"ISO9001: 2000" in the area of Design and Development, Production and Service of
Food and Health Care Food in China.
The manufacturing processes of our nutrition supplement products are categorized
into six types depending on the different forms of the finished products. All
six types of processes are illustrated in the flow charts below:
1. Powder
GRAPHIC OMITTED
This graphic shows the process suitable for manufacturing Nutrient Super Calcium
Powder, Nutrient Super Calcium Powder for Children, etc. Raw materials are
confected, sifted and mixed, resulting in a semi-finished product which is then
subject to inner and outer packing, resulting in a finished product.
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2. Tea
GRAPHIC OMITTED
This graphic shows the process suitable for manufacturing Slimming Tea,
PressureCare Tea. Raw materials are rid of impurities, rinsed, dried, confected
and mixed, resulting in a semi-finished product, which is then subject to inner
and outer packing, resulting in a finished product.
3. Capsule
GRAPHIC OMITTED
This graphic shows two processes for manufacturing capsules. Process A of the
graphic is suitable for manufacturing Zinc Supplement Capsules, Beauty Face
Capsules, etc. Raw materials are confected and mixed, resulting in a
semi-finished product, which is then sifted, filled and polished. The
semi-finished product is then subject to inner and outer packing, resulting in
the finished product. Process B of the graphic is suitable for manufacturing
Cordyceps Capsules and Chitosan Capsules. Raw materials are sifted and
confected, resulting in a semi-finished product which is then filled and
polished, and subjected to inner and outer packing, resulting in the finished
product.
4. Tablet
GRAPHIC OMITTED
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These graphics show the process for maufacturing tablets. Raw materials are
sifted, confected, and mixed resulting in a semi-finished product, which is then
granulated and mixed resulting in tablets.
Process A of the graphic is suitable for manufacturing Ginkgo Leaf Tablets,
Calcium Chewable Tablets, which are film coated and then subject to innner and
outer packing, resulting in a finished product. Process B of the graphic is
suitable for manufacturing Double-Cellulose Tablets, Chewable Calcium Tablets
with multiflavor, etc., which are subject to inner and outer packing, resulting
in a finished product. Raw materials are confected and mixed resulting in a
semi-finished product, which is then granulated, dried, griddled and subject to
inner and outer packing resulting in a finished product.
5. Granule
GRAPHIC OMITTED
This graphic shows the process suitable for manufacturing Sweat Dreams Granules.
Raw materials are confected and mixed resulting in a semi-finished product,
which is then granulated, dried, griddled and subject to inner and outer packing
resulting in a finished product.
6. Soft gel Capsule
GRAPHIC OMITTED
This graphic shows the process suitable for manufacturing Vitality Softgels and
Sea Buckthorn Oil Softgels. Raw materials are confected collocated, and injected
into gelatinized soft gels, then palletized, resulting in a semi-finished
product. The semi-finished product is then rinsed, dried and subject to inner
and outer packing resulting in the finished product.
All of our manufacturing processes above comply with the product standards
approved by the Bureau of Technical Supervision. In addition, most of our
manufacturing equipment was newly purchased or replaced after the year 2000.
Therefore, we do not anticipate having a large expense for the repair or
replacement of manufacturing equipment during 2005.
Trademarks and Patents
o We have registered our products under the logo "Tiens" with the State
Administration of Industry and Commerce.
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o Under the High-Calcium series, Biological has conducted extensive research and
developed Tianshi Super Calcium Powder with Metabolic Factors and Tianshi Super
Calcium Powder for Children, which have been awarded patents from State
Intellectual Properties Office in China with respective patent numbers of
ZL97115067.2 and ZL97115068.0. These two patents are effective for 20 years,
which commenced on January 13, 2001.
Suppliers
At present, Biological has established long-term stable relationships with most
of its suppliers. The raw materials required for manufacturing Biological's
products are relatively easy to find and alternative suppliers are convenient to
locate.
Our current major suppliers are:
o Ox backbone supplier:
Hebei Fucheng Wufeng Food Co., Ltd.
o Cordyceps mycelium powder supplier:
Tianjin Baiao Biotech Company
o Milk powder suppliers:
Beijing Shuangwa Dairy Industry Company Ltd.
Beijing Yinhelu Economic Trading Company Ltd.
o Chinese Herbs supplier:
Hebei Anguo Jinmu Chinese Herbs Co., Ltd.
Research and Development
Currently, Biological has several additional products under development that we
expect to launch in 2005. They are:
1. Tiens Eye Protection capsules to alleviate vision fatigue and improve
eyesight.
2. Vitamin and Mineral Supplement Tablets to supplement daily vitamins and
minerals intake to maintain equilibrium in the human body.
3. Tiens Womka Capsules to rapidly improve the female physiology function so
that women can adequately enjoy their sexual lives.
4. Tiens Manka Capsules to effectively activate the male vitality so that men
can adequately enjoy their sexual lives.
5. Drunken Alleviate Capsules to relieve symptoms caused by over drinking and to
care for the liver.
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Besides the products listed above, 2 groups of products are also under research
and development. One is Polly Peptide Products Group, a group of products with
multiple diversified functions. Another one consists of wellness products with
natural resources from Tibet, which is also a group of products with multiple
diversified functions.
All of the products and product groups listed above are still under research and
development. Therefore, we do not warrant that these products will have the
stated effects when development is completed.
R&D expense displayed below is accounted for through a related party of
Biological. Biological will take over all R&D functions starting in 2005.
2001- US $1,270,000
2002- US $ 993,000
2003- US $2,167,000
2004- US $6,529,000
We anticipate spending at a minimum, an additional US$10,164,000 to complete our
current research and development.
Currently, we employ 65 staff members in R&D, and we anticipate hiring an
additional 35 employees in R&D by the end of 2005.
Business Development Strategy - Marketing and Distribution
One of Tiens USA's overseas marketing strategies has been to develop a strong
direct sales force and Internet distribution networks through its overseas
affiliated companies. Domestically, Tiens is aiming to develop strong Internet
distribution networks, and expand its market share through the branches, chain
stores, and domestic affiliated companies of Tianshi Engineering. In China,
Biological sells all of its products to Tianshi Engineering. Tianshi
Engineering, in turn, sells the products to end-users through its chain stores
and domestic affiliated companies. Biological has a sales contract with Tianshi
Engineering. According to this contract, Tianshi Engineering accepted that it
would purchase all of Biological's products to be sold in China.
Internationally, Biological sells its products through an extensive direct sales
force of its overseas affiliates and independent distributors who use the
products themselves and/or resell them to other distributors or consumers. Due
to common ownership among Biological and the otheroverseas affiliated entities,
there are no formal sales or administrative agreements among them. The business
operations among these related entities are regulated through internal
ordinances.
Biological sells products to Tianshi Engineering at a price equal to 25% of the
domestic market price for the products. Tianshi Engineering then, through
individual distributors in its 23 representative offices or 9 affiliates, sells
the products to purchasers. Through this process, the commission to those
individual distributors is 52% of the domestic market price; while the
representative offices or affiliates incur 3-6% of the domestic market price as
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their operation expenses and Tianshi Engineering retains 17-20% as expenses and
profits. This is summarized as follows:
Biological (Costs, expenses and profit) 25%
Tianshi Engineering (expenses and profit) 17-20%
Representative Offices or Affiliates 3-6%
Individual Distributors' Commission 52%
--------------------------------------------------------------------------------
Domestic Market Price 100%
Our distribution network enables our products to reach about 170 countries
worldwide. The Company believes that direct sales business has significant
potential for growth over the next 10 years. Based on a study conducted by Mary
Kay Inc. (a direct sales company), by the year of 2007, worldwide direct sales
will total US$200 billion, and direct sales distributors will reach 60 million
people. For those heavily populated countries, such as, China, Russia and South
American countries, direct sales distribution is developing at increasing speed.
Within the past four years, direct sales distributors for a variety of products
have increased from 14 million people to 31 million people worldwide, and on
average 300,000 people join the business every month. The advantages of direct
sales are: (1) the direct sales concept has been generally accepted and
supported in many countries; (2) Internet provides good growth potentials for
direct sales networks; (3) direct sales provides distributors with more
flexibility; and (4) distributors can control sales activities themselves.
Currently, Biological and its affiliates are planning to set up an online system
among thirty-one (31) provinces in China. This system will generate a
multi-channeled distribution network for the sales of Biological's products.
Since 2003, Tiens USA's business development plan has been to focus on further
market expansion internationally. Tiens USA has targeted developing countries in
Southeast Asia, Africa, and Northeast Europe, giving consideration to its
overall market capabilities and targeted consumer groups. To achieve this
international expansion, the Company will focus on its product research and
development, online direct sales system, and quality assurance of its products.
At present, the Company has already sold its products in China, the United
States, South Korea, Japan, India, Thailand, Malaysia, Indonesia, Canada, Peru,
Brazil, Russia, Kazakhstan, Belarus, Mongolia, Finland, Lithuania, Britain,
Germany, France, Romania, Ukraine, Portugal, Turkey, Italy, Nigeria, Ghana,
South Africa and Australia etc.
Internationally, we sell our products to approximately 90 affiliated companies
located in Eastern and Western Europe, the Middle East, North, South and Central
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America, Asia and the Pacific Rim, Southeast Asia and Africa. The following
chart sets forth, as of December 31, 2004, the countries where our affiliated
companies are located and the year in which we commenced operations in those
countries. The majority of these companies are owned by Mr. LI Jinyuan, except
in jurisdictions in which foreign ownership is not permitted.
No. Country Overseas Affiliates Incorp. Date
Russia Area
1 Russia Tianshi Group Yatai Science and 2002.05.16
Technology Development Ltd. Co.
2 Russia Tianshi Ltd. Co. 2002.05.16
3 Russia Shengshi Ltd. Co. 2001.07.12
4 Russia Huamao Ltd. Co. 2001.07.10
5 Russia Tian Dihe Ltd. Co. 2001.07.16
6 Russia Huafeng Travel Ltd. Co. 2001.05.04
7 Russia Baofeng Ltd. Co. 2003.04.11
8 Russia Tianshi Health Foods (Russia) Co., Ltd. 1999.03.06
9 Russia Tianshi Ural Trading Co., Ltd. 2000.01.31
10 Russia Tianshi (New Siberia) Co., Ltd. 2000.02.24
11 Russia Tianshi Co., Ltd. 2000.03.20
12 Russia Tianshi CaliningCo., Ltd. 2000.06.07
13 Russia BiermuBaolan Co., Ltd. 2001.02.01
14 Russia Tianshi LiShi Ltd. Co. 2001.04.28
15 Russia Huayuan Trading (Russia) Co., Ltd. 2001.06.09
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16 Russia Nanfang Ltd. Co. 2002.01.14
17 Russia Bao Yuan Co., Ltd. 2003.06.04
18 Russia Tianshi Volgograd Co., Ltd. 2003.12.09
19 Russia Irkutsk Dongfang Co., Ltd. 2003.04
No. Country Overseas Affiliate Incorp. Date
20 Russia Tianshi Kazan Co., Ltd. 2003.02.27
21 White Russia Tianshi White Russia Co., Ltd. 2000.06.23
Ukraine Area
1 Ukraine Company "Hua Yuan" 2001.01
2 Ukraine Tianshi Company 2002.12
3 Ukraine Huaerkev Hua Mao Co., Ltd. 2002.12.16
4 Moldova "Tianshi-Grup" S.R.L. 2001.05
5 Poland Tianshi Poland Sp 2000.11.01
6 Turkey China Tianshi Group Import/Export 2000.11.16
Co., Ltd.
Eastern Europe
1 Latvia Tianshi (Latvia) Group Co., Ltd. 2000.05.02
2 Hungary Tiens KFT 2000.08.23
3 Czech Tianshi CZ. S.R.O. 2000.12.01
4 Romania Tianshi Grup Co., S.R.L 2000.12.08
5 Esthonia Tianshi Esthonia Co., Ltd. 2000.12.22
16
6 Lithuania Tianshi (Lithuania) Co. Ltd. 2001.11.18
7 Slovakia Tiens Slovakia S.R.O. 2002.07.11
8 Bulgaria Balkan Tianshi 2003.05
9 Croatia TIENS D.O.O.ZAGREB 2004.05.26
10 Greece Tiens Hellas A.E. 2002.06.19
No. Country Overseas Affiliate Incorp. Date
11 Austria Tianshi Health Products GmbH Co.,Ltd. 2002.08
Western Europe
1 UK Tiens UK PLC 2001.07.16
2 Spain Tianshi Spain, S.L. 1999.12.29
3 Germany Tianshi Gmbh 2000.12.01
4 Germany Tiens BmbH 2003.11.06
5 Portugal Tianshi Millenium-Comercio 2001.11.26
De Produtos Biologicos, Unipessoal
6 Denmark Tianshi Danmark Sundhedsprodukter 2001.01.30
Aps
7 Finland Tianshi Finland Healthproduct Co., Ltd. 2002.01.13
8 France Tiens France SARL 2002.02.26
9 Belgium Tiens Belaique S.P.R.L 2000.12
10 Holland Tianshi Israel Co., Ltd. 2004.05.10
11 Sweden Tiens sverige AB 2003.07.01
12 Israel Tianshi Israel Co., Ltd. 2000.07
17
Middle Asia
1 Kazakhstan Tianshi Kazakhstan Co., Limited 2000.09.02
2 Kazakhstan Aztanai Bao Lan Company 2003.05.13
3 Azerbaijan Azerbaijan Baolan Company 2003.06.25
4 Armenia LLC"Tianshi" 2003.05.20
5 Mongolia Tianshi Mongolia Co., Ltd. 2001.10.02
6 Uzbekistan Tianshi Invest 2004.06.25
7 Kirghizstan Tianshi Lishi Ltd. Co. 2003.05.20
North America
1 Canada Tianshi (Canada) Health Products, Inc. 1997.12.31
2 USA Tianshi Health Products, Inc. 1998.02.12
3 Mexico Tianshi Health Products de Mexico, 2000.01.30
S.A. de C.V.
4 Mexico Tiens imports and exports de Mexico, 2002.11.25
S.A. de C.V.
5 Mexico Tiens Human Services Civil Society S.C. 2002.11.25
Central & South America
1 Brazil Tianshi Brazil Co., Ltd. 2002.08.01
2 Brazil Tiends Brasil 2004.08
3 Peru Tianshi Peru S.A.C. 2000.11
4 Argentina Tianshi Argentina Co., Ltd. 2004.03
18
5 Chile Tianshi Chile Co., Ltd. 2004.03.25
6 Venezuela Tianshi Venezuela Co., Ltd. 2004.04.23
7 Ecuador Tianshi Ecuador Co., Ltd. 2004.04.02
Southeast Asia
1 Hong Kong Tianshi International Development Co.,
Ltd. 1996.11.07
2 Hong Kong Tianshi Development Co., Ltd. 2001.02.27
3 Hong Kong Jinyuan Development Co., Ltd. 2002.04.16
4 Hong Kong Tianshi International Holdings Group 2002.05.13
Co., Ltd.
5 Hong Kong Tianshi Communication Co., Ltd. 2003.03.24
6 Australia Tiens Australia Pty Ltd. 2002.08.05
7 New Zealand Tianshi Canada Health Products 2001.01
(New Zealand) Ltd.
8 India Tianjin Tianshi Biological Development 2000.02.17
Co., Ltd.
9 India Tianjin Tianshi (India) Private Ltd. 2002.04.29
10 Philippines Tianshi Philippine Inc 2001.07.01
11 Lao Tianshi Lao Co., Ltd. 2001.06.21
12 Malaysia Tiens Health Development (Malaysia) 2002.02.26
SDN. BHD
13 Bangladesh Tianshi (Bangladesh) Co., Ltd. 2004.01
19
14 Brunei TIEN-SHI SDN BHD 2004.06.03
15 Indonesia Pt. Singa Langit Jaya 2000.09.11
16 Indonesia Snga Langit 2003.06.25
17 Indonesia PT. Tianshi Bandung Jaya 2003.07.01
18 Indonesia PT. Singa Langit Utama Medan 2003.09.08
19 Indonesia PT. Tianshi Semarang Co., Ltd. 2003.08.14
20 Indonesia PT.Tianshi Palembang Indonesia 2003.05.01
21 Indonesia PT. Tianshi Surabaya 2004.06.29
22 Indonesia PT. KALIMAN TIANSHI 2003.09.24
23 Taiwan Tianshi Health Products Inc., 2001.05.20
Taiwan Branch
24 Pakistan Tianshi International Pakistan Co., (Pvt) 2002.09.01
25 Vietnam Jinyun Trading & Services Co., Ltd. 2004.06
26 Cambodia Tianshi Group (Camboia) Co., Ltd. 2004.04.26
27 Singapore Tianshi (Singapore) Pte.Ltd. 2003.03.12
Africa & Middle East
1 Nigera Tianshi Health Enterprise Development 2004.02.10
Co., ltd.
2 Nigera Tianshi Health IND.&ENT. Nigeria Ltd. 2003.12
3 Nigeria Tianshi Health Products Company 2000.10.23
(NIG) LTD
4 South Africa Tianshi (S.A)(Pty) Ltd 1998.12.02
20
5 Ghana Tianshi Health Industries and 2000.06.29
Enterprises Ghana Ltd.
6 Swaziland Tianshi (Swaziland)(Pty.) Ltd. 2000.07
7 Botswana Tianshi (Botswana) Pty. Ltd. 2000.08.23
8 Zambia Tianshi (Zambia)(Pty.) Ltd. 2000.12.08
9 Cote D'ivoire Tianshi Health Ind.& Ent. Cote D'ivoire 2002.06.28
Ltd.
10 Cameroon Tianshi Health Products Cameroon Ltd. 2003.09.29
11 Kenya Tianshi Health Products Co. 2002.12
(Kenya) Ltd.
12 Uganda Tianshi Health Products Co. 2003.06.05
(Uganda) Ltd.
13 Egypt Tianshi Health IND.&ENT. (Egypt) Ltd. 2003.02.17
14 Sierra Leone Tianshi Health IND.&ENT. 2003.09
(Sierra Leone) Ltd.
15 Benin Tianshi Health IND.&ENT. 2003.01
BENIN SARL
16 U.A.E. Tiens Enirates LLC 2003.03.26
17 Nambia Tianshi Health Products C.C. 2003.08.01
18 Zinbabwe TIANSHI (ZINBABWE) 2000.10
(PRIVATE) LIMITED Company
As operation costs vary from country to country, international market prices
vary accordingly. Biological sells the products to overseas affiliates at the
FOB (destination port) price, which consists of 35% of the domestic retail
price, including customs duty, value-added tax and other miscellaneous
transportation cost. The individual distributors of overseas affiliates sell the
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products to purchasers for commissions equal to 52.5% of the respective domestic
retail prices. The overseas affiliates charge their expenses to ensure
approximately 10% profits for themselves. In average, the international prices
comprise of the following components:
Biological (Costs, expenses and profit) 35% of Domestic Market Price
Representative Offices or Affiliates 4-9% of International Market Price
Individual Distributors' Commission 52.5% of International Market Price
--------------------------------------------------------------------------------
International Market Price 100%
Competition
For our international marketing and sales outside of China, we have adopted the
approach of multi-leveled direct sales networks. Our main competitors for
recruiting distributors from other multi-level marketing organizations,
including those that market products similar to ours, are some of the
world-renowned direct sales companies, such as, Amway, Avon, Mary Kay, Nu Skin,
Herbalife, SunRider, Unicity Network, FLP and Morinda. Some of our competitors
are substantially larger than we are, and have available considerably greater
financial resources than we have.
We believe that our competitive strengths will enable us to benefit from the
increasing demand for nutrition supplement products. Our strengths include:
o Quality and size of manufacturing facilities;
o Customer orientated business operation and market driven response system;
o Products quality assurance system;
o Worldwide information technology system; and
o Extensive product research and development efforts.
Regulatory Framework
Product Regulation
The central governing authority in the PRC for wellness products is the State
Food and Drug Administration ("SFDA"), which is under the jurisdiction of the
State Council.
SFDA issues administrative rules. Provincial, city and town authorities
implement the rules of the SFDA. Other than the SFDA, other ministries and
administrations also have certain responsibility for the management of wellness
or nutrition supplement products, such as the State Administration for Industry
and Commerce.
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Sales and Marketing Regulation
In most countries, sales of our products are usually considered under the
categories of general commodities, which does not require specific permits and
is not subject to the strict regulations applied to drugs and medicine. Since
the Company outsources the sale of its products to its affiliated companies, the
local approval issues with respect to sales and distribution are dealt with by
the Company's local affiliates.
In some countries, direct sales (or multi-level marketing) is highly regulated
or prohibited. The direct sales operation with respect to our products is
conducted by overseas affiliated companies. All of the Company and Biological's
affiliated companies overseas are legally registered in countries that do not
prohibit direct sales. In China,it is anticipated that the Chinese government
will lift the restriction on direct sales business in 2005. The Company expects
a favorable impact on its business development in China due to the new
regulation.
Government Approval Process for New Products
The Company develops and manufactures products that are mainly classified as
nutrition supplement products, which includes wellness products and dietary
supplement products. The governmental approval process in the PRC for a newly
developed wellness product is as follows:
1) An application for a product certificate is filed with SFDA;
2) SFDA gives a notice to the applicant requiring the applicant to send the
product samples to one of the government appointed research institutes;
3) The appointed research institute conducts clinic trials, stability tests,
function tests and toxical tests on the product, makes a report and sends
the report back to SFDA within 6 months;
4) The Expert Committee of SFDA makes a final decision on the application and
issues a "wellness products certificate" or a refusal notice to the
applicant.
This certificate authorizes the sales and marketing of the product in the PRC.
The whole process generally takes 9 to 12 months.
Environmental Compliance
Biological operates from facilities that are located in the PRC.
We are subject to the PRC's National Environmental Protection Law, which was
enacted on December 26, 1989, as well as a number of other national and local
laws and regulations regulating air, water and noise pollution and setting
pollutant discharge standards. Violation of such laws and regulations could
23
result in warnings, fines, orders to cease operations, and even criminal
penalties, depending on the circumstances of such violation. We believe that all
our manufacturing operations are in compliance with all applicable environmental
laws.
PRC Laws and Regulations on Sino-Foreign Equity Joint Ventures
The following sets forth the approval process and governmental requirements for
our joint ventures, Biological and Tiens Yihai.
1. Overview
Joint Ventures in PRC between Chinese and foreign parties take two forms: equity
joint ventures and co-operative joint ventures. Equity joint ventures are
governed by the Law of the People's Republic of China on Sino-Foreign Equity
Joint Ventures, and its Implementation Regulations and other related rules,
regulations and administrative orders and co-operative joint ventures are
governed by the Law of the People's Republic of China on Chinese-Foreign
Co-operative Joint Ventures and its Implementation Regulations.
To establish a Chinese-foreign joint venture, the parties must submit their
contract and other required documents to the Ministry of Commerce of PRC ("MOC")
or its local counterpart in the applicable province or city for approval. The
required documents include a letter of application, feasibility study, articles
of association, and a list of board members. A joint venture must also obtain a
business license from the State Administration for industry and Commerce or its
local offices before commencement of its operation.
2. Chinese-Foreign Equity Joint Ventures
(a) Legal Structure
An equity joint venture in the PRC is an independent entity having the form
of a limited liability company, similar to a regular corporation with limited
liability organized under state laws in the United States of America. It is a
"legal person" under PRC laws and has the right to own, use and dispose of
property rights. The parties to the equity joint venture agree to share profits,
risks and losses in the same proportion as their respective capital
contributions to the equity joint venture. The operations of equity joint
ventures are subject to an extensive body of laws and regulations governing such
matters as registration, capital contribution, profit distribution, board of
directors, accounting, taxation, foreign exchange and labor management.
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(b) Capital Contribution
The liability of a joint venture party to the equity joint venture is
limited to the amount of registered capital it has agreed to contribute under
the joint venture contract. The registered capital must be paid within a certain
time frame; for example, each party must make 15% payment of its share of the
contribution into the registered capital within 3 months upon issuance of a
business license for the equity joint venture by the Administration for Industry
and Commerce. The contribution may take the form of cash, land-use rights,
equipment, technology or other contribution in kind. The proportion of the
registered capital subscribed for by the foreign party to an equity joint
venture must not be less than 25%.
In the required documents, an equity joint venture must specify a total
investment, which limits the scale of its development, and registered capital
which must be contributed by the parties to the equity joint venture. The Joint
Venture Law prescribes the ratio between the amount of the registered capital
and the amount of total investment. For example, where the amount of total
investment is US$3 million or below, the registered capital shall not be less
than 70% of the total investment and where the total investment is between
US$10-30 million, the registered capital shall not be less than 40%. The
difference between the registered capital and total investment may be obtained
through outside financing or other legal mechanisms.
(c) Board of Directors
The board of directors exercises authority over all major corporate
decisions of an equity joint venture, including the appointment of managers,
strategic planning and budgeting, employee compensation and welfare,
distribution of after tax profits and dissolution. The board may not be
comprised of less than three persons and such persons must be appointed by the
parties according to the proportion of their capital contribution to the
registered capital of the equity joint venture. Therefore, Directors appointed
by a party are expected to represent the interests of that party in the
operation of the business of the equity joint venture. The daily management of
an equity joint venture is conducted by a management group headed by a general
manager, who is required to act in accordance with the directions and guidance
of the board of directors. The Joint Venture Law stipulates that certain matters
(such as amendment to the articles of association, termination and dissolution
of the equity joint venture, increase and transfer of the registered capital,
merger) must have the unanimous approval of the directors present in a board
meeting. Quorum for a board meeting is set at two-thirds of all board members.
(d) Profit Distribution
The Joint Venture Law provides that after payment of taxes, an equity joint
venture must allocate three funds, namely, a reserve fund, an expansion fund and
a fund for employee welfare and bonuses, before profits may be distributed to
the joint venture parties. The amount of after tax profits allocated to the
25
three funds is determined at the discretion of the board of directors of the
equity joint venture. Profits of an equity joint venture, when distributed, must
be distributed to the joint venture parties according to the ratio of the
amounts of the registered capital to which they subscribed respectively.
(e) Termination
Pursuant to the Joint Venture Law, an equity joint venture may be
liquidated or terminated in certain circumstances, including expiration of the
joint venture term, inability of the equity joint venture to conduct its
business due to heavy losses, a breach by or insolvency of one of its parties,
etc. Upon termination, the board of directors is required to establish a
liquidation committee to dissolve the equity joint venture, which dissolution is
subject to the review and approval by MOC.
3. Taxation
The major PRC taxes applicable on the net income of an equity joint venture are
summarized as follows:
Income Tax for Equity Joint Ventures
The standard income tax rate for an equity joint venture is 33% comprising
a national income tax of 30% and a local surtax of 3 %. All equity joint
ventures established in the special economic zones are entitled to a
reduced national income tax rate of 15%. Reduced income tax rates are also
available to, among others, equity joint ventures of a manufacturing nature
and located in one of the designated "open economic zones" in the coastal
regions of the PRC or "economic and technological development zones". The
3% local surtax may be reduced or waived by the local government of the
place where the equity joint venture is located.
Equity joint ventures of a manufacturing nature with terms of at least 10
years are exempt from income tax for the first 2 profit-making years and
are entitled to a 50% reduction of the otherwise applicable income tax rate
during the next 3 years. The 50% tax reduction is extended further for a
manufacturing nature if they employ advanced technology or export 70% or
more of their products.
U.S. Tax Impact
Because Biological is 80% owned by Tianshi International, which is wholly
owned by Tiens USA, Tianshi International is a controlled foreign
corporation; therefore, for U.S. federal income tax purposes, we may be
required to include in our gross income for U.S. tax purposes:
26
o The Company's "Subpart F" income, which includes certain passive income and
income from certain transactions with related persons, whether or not this
income is distributed to it; and
o Increases in the Company's earnings invested in certain U.S. property.
Based on the current and expected income, assets, and operations of our company,
we believe that it will not have significant U.S. federal income tax
consequences under the controlled foreign corporation rules.
Currency Conversion and Exchange
The currency in China is designated as the Renminbi. Although the
Renminbi/United States dollar exchange rate has been relatively stable in the
past several years, there can be no assurance that the exchange rate will not
become volatile or that the Renminbi will not be officially devalued against the
United States dollar by direction of the Chinese government.
Exchange rate fluctuations may adversely affect our financial performance
because of our foreign currency denominated assets and liabilities, and may
reduce the value, translated or converted, as applicable into United States
dollars, of our net fixed assets, our earnings and our declared dividends. We do
not engage in any hedging activities in order to minimize the effect of exchange
rate risks.
Employees
The Company, including Biological and Tiens Yihai, currently has 683 full-time
employees, which includes approximately 300 staff members performing
administrative and management functions.
RISKS FACTORS
Forward-Looking Statements: The discussion of the business and industry of the
Company contains various forward-looking statements within the meaning of
applicable federal securities laws and are based upon the Company's current
expectations and assumptions concerning future events, which are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those anticipated.
Risks Related to our Business
We may incur material product liability claims, which could increase our costs
and adversely affect our reputation, revenues and operating income. As a
manufacturer of products designed for human consumption, we are subject to
product liability claims that use of our products have results in injury. Our
27
dietary supplement products consist of vitamins, minerals, herbs and other
ingredients that are not subject to pre-market regulatory approval. Our products
could contain contaminated substances, and some of our products contain
innovative ingredients that do not have long histories of human consumption.
Previously unknown adverse reactions resulting from human consumption of these
ingredients could occur. A product liability claim against us could result in
increased costs and could adversely affect our reputation with our customers,
which in turn could adversely affect our revenues and operating income.
Newly developed products may not be compatible with market needs. Our business
is particularly subject to changing consumer trends and preferences. Our
continued success depends in part on our ability to anticipate and respond to
these changes, and we may not respond in a timely or commercially appropriate
manner to such changes. Because markets for nutrition supplement products
differentiate geographically, we must accurately assess demand in each specific
market into which we wish to make sales. If we fail to invest in extensive
market research on consumer health needs in each market we target, we may face
limited market acceptance of our products, which could have a material adverse
effect on our sales and earning.
Our products must keep pace with advances in the industry or they may be
displaced by competitors' newly developed products. The nutrition supplement
products industry is characterized by rapid product development, with
significant competitive advantages gained by companies that introduce products
that are first to market, deliver constant innovation in products and
techniques, offer frequent new product introductions and have competitive
prices. Our future growth partially depends on our ability to develop products
that are more effective in meeting consumer needs. In addition, we must be able
to manufacture and effectively market those products. The sales of our existing
products may decline if a competing product is introduced by other companies.
The success of our new product offerings depends upon a number of factors,
including our ability to:
o accurately anticipate consumer needs;
o innovate and develop new products;
o successfully commercialize new products in a timely manner;
o price our products competitively;
28
o manufacture and deliver our products in sufficient volumes and in a
timely manner; and
o differentiate our product offerings from those of our competitors.
If we fail to make sufficient investments in research and pay close attention to
consumer needs or we focus on technologies that do not lead to more effective
products, our current and future products could be surpassed by more effective
or advanced products of others.
We have limited control over the activities of our distributors. We place
significant reliance on a network of affiliates to act as our primary sales
force. Although a majority of our affiliated companies are controlled in whole
or part by Mr. Li Jinyuan, our CEO and President, such affiliates are not
employed or otherwise controlled by us and are generally free to conduct their
business at their own discretion. The distributors are dedicated more to
establishing their own reputations and business relationships than to promoting
our products. The simultaneous loss of a number of these distributors could have
a material adverse effect on our business, financial condition, and results of
operations.
Biological began operating in July 1998, and incurred losses until 2002.
Although we were profitable in 2003 and 2004, due to increases in sales,
especially internationally, this relatively short history of profitability may
not be adequate to fully assess our ability to achieve market acceptance of our
products or our ability to respond to competition and continue this level of
performances. Therefore, we can give no assurance that we will maintain
profitability in the long run.
Due to the inter-related ownership and business dealings among Biological and
its affiliates, there are conflict of interest and self-dealing risks and
increased potential for manipulation of financial results. Biological has
affiliated companies or business entities that are owned by Mr. LI Jinyuan and
his immediate family members (mostly his daughter Ms. LI Baolan). Although all
affiliated companies and business entities were established so that they are
legally and financially independent, except for the common ownership, they are
centrally administrated by Tianshi Group. The decisions of Tianshi Group could
materially affect the operation of our business, which could be adverse to our
investors.
Biological sells all of its products for resale in China to Tianshi Engineering.
As both Biological and Tianshi Engineering are majority owned by Mr. LI Jinyuan,
even given consideration to the internal price transferring policies set among
the related parties, these internal policies could be faulty or might not be
strictly followed.
29
Tiens USA is establishing a system to ensure the independence of its operations
and financial controls. However, there can be no assurance that the systems and
controls can be effectively designed.
We face risks due to our reliance on sales in international markets. Our future
success will depend in part on the continued expansion of international sales.
Such international operations expose us to certain risks, including but not
limited to, need for export licenses; unexpected regulatory requirements;
tariffs and other potential trade barriers and restrictions; political, legal
and economic instability in foreign markets; longer account receivable cycles;
difficulties in managing operations across disparate geographic areas; foreign
currency fluctuations; limited protection of our intellectual property rights in
some countries; dependence on local distributors; and potential disruptions in
sales or manufacturing due to military or terrorist acts.
Risks Related to Government Regulations
We are required to follow various government regulations, particularly in the
areas of nutrition supplement products and direct marketing, which could
increase our costs or prevent us, from or delay us in selling our products.
Internationally
Nutrition supplement products are subject to regulatory requirements that vary
by country. Obtaining approval to sell nutrition supplement products
internationally involves complexities of dealing with a variety of governmental
regulations. We have limited experience in dealing with the specific regulations
that may be required to sell our products in certain international markets,
which could delay our ability to obtain relevant regulatory approval for our
products. In addition, our product sales in other countries are subject to
product regulatory regimes of various degrees and direct marketing or
distribution regulations. Although currently these aspects are handled by our
distributors in the relevant jurisdictions, there can be no assurance that the
current operations of our company and our affiliates and distributors will not
be adversely affected by compliance issues and changes in applicable laws and
regulations in relevant jurisdictions.
In China
The research, development, testing, manufacturing and marketing of our products
are subject to various governmental regulations in China. Government regulation
includes inspection of and controls over testing, manufacturing, safety and
environmental controls, efficacy, labeling, advertising, promotion, record
keeping and the sale and distribution of wellness products. Tianshi Engineering
is also subject to government regulations with respect to the prices it will
charge, the rebates it may offer to customers and the methods of its marketing.
Government regulation substantially increases the cost of developing,
manufacturing and selling our products.
30
The uncertainty of the development of direct selling regulations may adversely
affect sales of our products in China. Substantially all of our assets are
located in China and approximately 50% of our revenues derive from our
operations in China. Accordingly, our operations are subject, to a significant
degree, to PRC law. As stated under "Business Development Strategy", one of our
overseas marketing strategies has been to develop strong direct sales force and
Internet distribution networks through its overseas affiliated companies.
Domestically, Tiens is aiming to develop strong Internet distribution networks,
and expand its market share through the branches, chain stores, and domestic
affiliated companies of its affiliated company, Tianshi Engineering. Chinese
government is now in the process of developing new direct selling regulations.
Publication of the new regulations has been delayed. There is no assurance that
such new regulations will be enacted in the foreseeable future. Uncertainties
and delays with respect to the new direct selling regulations may adversely
affect our ability to increase sales growth in China by incorporating a direct
sales marketing program there.
We are subject to complex Chinese business regulations. As China changes its
economy from planned to more market-oriented, uncertainties arise regarding
governmental policies and measures. Although, in recent years, the Chinese
government has implemented measures emphasizing the use of market forces for
economic reform, reduction of state ownership of productive assets, and
establishment of sound corporate governance practices, a substantial portion of
productive assets in China are still owned by the Chinese government. For
example, all lands are State owned and leased to business entities or
individuals through governmental grants of state-owned Land Use Rights. The
grant process is typically based on government policies at the time of grant,
which can be lengthy and complex and may adversely affect our planed
manufacturing expansion. The Chinese government also exercises significant
control over China's economic growth through allocation of resources, foreign
currency control and providing preferential treatment to particular industries
or companies.
Products distributed outside China are subject to government regulations of
different jurisdictions, which could be stricter than in China. In some
developed countries, the government regulations for product approval could be
stricter than in China, while in developing countries, government regulation
could be uncertain. Our products could take a significantly longer time than we
expect to gain regulatory approval or may never gain approval in certain
countries, which could limit Biological's ability to promote, sell and
distribute products. In addition, in terms of our marketing approach, MLM may
also be prohibited in some countries. As such, growth in our sales may be
adversely affected if such approval cannot be obtained in certain jurisdictions.
31
Risks Related to Manufacturing
There are risks associated with ingredients mixing and production processes and
techniques. Our manufacturing process requires a significant degree of technical
expertise. If we fail to manufacture our products to specifications or
inadvertently use defective materials in the manufacturing process, the
reliability and performance of our products will be compromised.
We rely on our manufacturing operations to produce nearly all of the proprietary
products we sell. Our manufacturing operations produce all of the products we
sell. Any significant disruption in those operations for any reason, such as
regulatory requirements and loss of certifications, power interruptions, fires,
hurricanes, war or other force majeure, could adversely affect our sales and
customer relationships.
Risks Related to our Common Stock
The liquidity of our common stock is affected by its limited trading market.
Shares of our common stock are traded on the OTC Bulletin Board under the symbol
"TBGU.OB". There is currently no broadly followed established trading market for
our common stock. An established trading market may never develop or be
maintained. Active trading markets generally result in lower price volatility
and more efficient execution of buy and sell orders. The absence of an active
trading market reduces the liquidity of shares. The trading volume of our common
stock historically has been limited and sporadic. As a result of this trading
activity, the quoted price for our common stock on the OTC Bulletin Board is not
necessarily a reliable indicator of its fair market value. Further, if we cease
to be quoted, holders would find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of our common stock and the market
value of our common stock likely would decline.
Our common stock may be subject to regulations prescribed by the Securities and
Exchange Commission relating to "Penny Stock". The Securities and Exchange
Commission has adopted regulations that generally define a penny stock to be any
equity security that has a market price (as defined in such regulations) of less
than $5.00 per share, subject to certain exceptions. If our common stock meets
the definition of a penny stock, it will be subjected to these regulations,
which impose additional sales practice requirements on broker-dealers who sell
such securities to persons other than established customers and accredited
investors.
Our president and chief executive officer controls a majority of our common
stock. Mr. LI Jinyuan beneficially owns approximately 92% of our outstanding
common stocks. As a result, Mr. Li has the ability to exert significant control
over our management and affairs requiring stockholder approval, including
approval of significant corporate transactions. This concentration of ownership
32
may have the effect of delaying or preventing a change in control, including a
merger, consolidation or other business combination involving us, or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control, even if such change of control would benefit our
other shareholders.
Our common stock will likely be subject to substantial price and volume
fluctuations. The stock market has experienced extreme price and volume
fluctuations in recent years that have significantly affected the quoted prices
of securities of many companies, including companies in our industry. The
changes often appear to occur without regard to specific operating performance.
In addition, there has been a limited public market for our common stock. We
cannot predict the extent to which investor interest in us will be maintained.
Such interest is necessary for an active, liquid trading market for our common
stock. Active trading markets generally result in lower price volatility and
more efficient execution of buy and sell orders for investors. The price and
trading volumes of our common stock may fluctuate widely due to the limited
public market for our stock.
Shares available for future sale. A significant number of our shares are
eligible for sale and their sale could depress the market price of our stock.
Sales of a significant number of shares of our common stock in the public market
following the merger and related transactions could harm the market price of our
common stock. Moreover, as additional shares of our common stock become
available for resale in the public market pursuant to the registration of the
sale of the shares, and otherwise, the supply of our common stock will increase,
which could decrease its price. Some or all of the shares of common stock may be
offered from time to time in the open market pursuant to Rule 144, and these
sales may have a depressive effect on the market for the shares of common stock.
In general, a person who has held restricted shares for a period of one year
may, upon filing with the SEC a notification on Form 144, sell into the market
common stock in an amount equal to the greater of 1% of the outstanding shares
or the average weekly number of shares sold in the last four weeks prior to such
sale. Such sales may be repeated once each three months, and any of the
restricted shares may be sold by a non-affiliate after they have been held two
years.
We do not anticipate paying dividends in the foreseeable future, and the lack of
dividends may have a negative effect on the stock price. We have never declared
or paid any cash dividends or distributions on our common stock. We currently
intend to retain our future earnings to support operations and to finance
expansion and, therefore, do not anticipate paying any cash dividends on our
common stock in the foreseeable future.
Our certificate of incorporation and Delaware Law contain certain anti-takeover
provisions that may inhibit a takeover, and we may adopt other measures to
discourage a takeover. Delaware Law and the provisions we intend to add to our
certificate of incorporation relating to a classified board of directors may
have the effect not only of discouraging attempts by others to buy us, but also
33
of making it more difficult or impossible for existing stockholders to make
management changes. A classified board, which is made up of directors elected
for staggered terms, while promoting stability in board membership and
management, also moderates the pace of any change in control of our board of
directors by extending the time required to elect a majority, effectively
requiring action in at least two annual meetings. Our board may consider and
adopt additional measures that would prevent us form being subject to a
takeover.
After the reorganization, the Company was managed by a new management team that
is not familiar with the capital market and the processes by which a U.S. public
company should be managed and operated. The management is currently making
efforts to familiarize itself with the relevant laws, rules and regulations and
market practice. However, there can be no assurance that the new management team
can master the relevant knowledge and skills and set up the required system in
time to prevent breaches and to meet the expectations of its shareholders. In
terms of financial control, the Company is making major adjustments to comply
with the reporting obligations and new securities law requirements. However,
there can be no assurance that the financial control system will be improved
effectively to ensure smooth operations.
Item 2. Description of Property
We conduct our main business activities through Biological in Tianjin, PRC.
Biological's manufacturing workshops are located at No. 6., Yuanquan Road,
Wuqing New-tech Industrial Park, Tianjin, PRC, and include:
(1) We have three management buildings and one research building.
(2) We have five production plants, and their total area is 5879.4 m2.
(3) We have six warehouses.
(4) We have three production lines.
(5) We have approximately 170 sets of equipment each of which is worth more
than RMB30,000.
According to the PRC laws, the government owns the land and only authorizes land
use rights to individuals or enterprises. The land on which our workshops are
built, is identified as Lot W-30-35-2 of the District with the total area of
28,425.5 square meters. According to the State-owned Land Use Right Grant
Contract signed between the Tianjin Wuqing Land Management Commission and
Qinghai Aluminum Factory Wuqing Trading Company ("Qinghai Aluminum", an
independent party) on June 15, 1995, Qinghai Aluminum has been granted the land
use right of 30,000 square meters of land (including Lot W-30-35-2) located
inside the District under Land Use Right Certificate No. 95026, for a total land
use price of RMB 4,230,000 (RMB 141 per square meter). The term for the use
34
right of the land is 50 years (starting retrospectively from June 1, 1993 and
expiring on May 31, 2043). Under an agreement signed between Qinghai Aluminum
and Tianshi Group on May 22, 1997, Qinghai Aluminum agreed to transfer the said
land use right, together with the factories, offices and other facilities
constructed thereon to Tianshi Group for a total price of RMB7,750,000. A new
Land Use Right Certificate No. 97070 has been granted in replacement of the
previous certificate of No. 95026. On January 10, 2001, Tianshi Group passed a
Board of Director's resolution to divide the said land use right into two parts:
(i) land use right of 28,425.5 square meters of the land was legally transferred
to Biological without consideration, and such transfer was legally registered
with the relevant government agency in China; (ii) 1,574.5 square meters land
use right was retained by Tianshi Group. In this way, Biological has legally
obtained land use right in the Lot W-30-35-2 of the District with the total area
of 28,425.5 square meters.
In 1999, prior to obtaining the land use right of the said land from Tianshi
Group, Biological had obtained governmental approvals and proceeded to build
five buildings on the premises as its manufacturing factories. Some of them are
still under construction in progress now. In 2004, Biological proceeded to build
one warehouse in Hankou, one conference center and one exhibition center in
Tianjin, PRC. As of December 31, 2004, the total investment made by Biological
in constructing these factories and buildings has reached approximately RMB 43
million. The construction of the exhibition center was completed at the
beginning of 2005. In August 2004, Biological entered an Agreement with Tianjin
Wuqing Development Co., Ltd.. According to the Agreement, Biological has the
right to use 6660 square meters of the land for 50 years, commencing on August
2004, by paying RMB1,307,050. The said land is in the Wuqing New-tech Industrial
Park and has been used to build the conference center mentioned above.
In addition, we lease a portion of our office building and manufacturing
facilities from Tianshi Group, a related party through common ownership. On June
30, 2003, the Company entered into a written lease agreement with Tianshi Group
to pay annual rent at 1% of total gross revenues. The term of this agreement is
for five years commencing on January 1, 2003. In addition, the Company is
obligated to pay insurance, maintenance and other expenses related to the
premises. The amount of the expense paid in 2004 amounted to $595,494.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 17, 2004, the annual meeting of stockholders of the Company (the
35
"Annual Meeting") was held at the Company's Tianjin offices for the following
purposes:
1.Elect following persons to the Board of Directors: Jinyuan Li, Wenjun Jiao,
Yupeng Yan, Ping Bai, Gilbert D. Raker, Howard R. Balloch, and Socorro M.
Quintero.
2. Ratify the Board of Directors' appointment of Moore Stephens Wurth Frazer and
Torbet, LLP, the independent public accountants as the auditor of the Company
for the fiscal year 2004.
In this Annual Meeting, there were accordingly present, in person or by proxy,
an aggregate of 69,710,176 shares of Common Stock, such shares being a majority
of the 71,333,586 shares of Common Stock entitled to notice of and to vote at
the meeting.
The result of the vote taken for the election of directors at the meeting was as
follows:
Withheld
Directors No. of Shares For No. of Shares Against Authority
--------- ----------------- --------------------- ---------
Jinyuan Li 69,690,910 7,916 11,350
Wenjun Jiao 69,698,410 416 11,350
Yupeng Yan 69,698,410 416 11,350
Ping Bai 69,697,810 1,016 11,350
Socorro M. Quintero 69,698,110 716 11,350
Howard R. Balloch 69,698,110 716 11,350
Gilbert D. Raker 69,698,110 716 11,350
The result of the vote taken for the ratification of the appointment of Moore
Stephens Wurth Frazer and Torbet, LLP was as follows:
69,700,978 shares voted in favor of the proposal
5,268 shares voted against the proposal
3,930 shares abstained.
36
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Over the Counter Bulletin Board under the
symbol "TBGU". The following table sets forth the range of high and low bid
prices reported by the OTCBB in each fiscal quarter from January 1, 2003 to
December 31, 2004. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
Information presented for dates prior to September 9, 2004, relate to the
Company prior to the share exchange transaction described elsewhere in this Form
10-KSB,
---------------------------------------------------- -------------- ------------
High Low
-------------- ------------
---------------------------------------------------- -------------- ------------
Fiscal 2003
-----------
---------------------------------------------------- -------------- ------------
Quarter Ended March 31, 2003 $0.02 $0.02
---------------------------------------------------- -------------- ------------
Quarter Ended June 30, 2003 $0.15 $0.03
---------------------------------------------------- -------------- ------------
July 1, 2003 - September 9, 2003 $0.05 $0.03
---------------------------------------------------- -------------- ------------
September 9, 2003 - September 30, 2003* $3.80 $0.03
---------------------------------------------------- -------------- ------------
Quarter Ended December 31, 2003 $12.75 $0.03
---------------------------------------------------- -------------- ------------
Fiscal 2004
-----------
---------------------------------------------------- -------------- ------------
Quarter Ended March 31, 2004 $13.00 $5.00
---------------------------------------------------- -------------- ------------
Quarter Ended June 30, 2004 $9.20 $5.15
---------------------------------------------------- -------------- ------------
Quarter Ended September 30, 2004 $6.50 $3.26
---------------------------------------------------- -------------- ------------
October 1, 2004 - October 27, 2004 $5.75 $3.85
---------------------------------------------------- -------------- ------------
October 28, 2004 - December 31, 2004 $7.95 $5.51
---------------------------------------------------- -------------- ------------
Fiscal 2005
-----------
---------------------------------------------------- -------------- ------------
January 1, 2005 - March 24, 2005** $7.00 $4.88
---------------------------------------------------- -------------- ------------
*Represents stock performance for periods after the share exchange transaction.
** Reflects partial period
Holders. As of December 31, 2004, there were a total of 71,333,586 shares of our
common stock outstanding, held by approximately 1,000 stockholders of record.
Dividends. We have not declared any dividends on our common stock since
inception and do not intend to pay dividends on our common stock in the
foreseeable future.
Sales of Unregistered Securities. We did not sell any unregistered equity
securities during the year ended December 31, 2004.
37
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's Discussion and Analysis of Financial Condition and Results of
Operation
Forward-Looking Statements:
The following discussion of the financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
related notes thereto. The following discussion contains forward-looking
statements. Tiens Biotech Group (USA), Inc. is referred to herein as "we" or
"our." The words or phrases "would be," "will allow," "expect to", "intends to,"
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements". Such statements include those concerning our
expected financial performance, our corporate strategy and operational plans.
Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently and
operate profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities;(c) whether we are able to generate sufficient
revenues or obtain financing to sustain and grow our operations; and (d) whether
we are able to successfully fulfill our primary requirements for cash which are
explained below under "Liquidity and Capital Resources. Statements made herein
are as of the date of the filing of this Form 10-KSB with the Securities and
Exchange Commission and should not be relied upon as of any subsequent date.
Unless otherwise required by applicable law, we do not undertake, and we
specifically disclaim any obligation, to update any forward-looking statements
to reflect occurrences, developments, unanticipated events or circumstances
after the date of such statement.
OVERVIEW
Tiens Biotech Group (USA), Inc. (the "Company" or "Tiens USA"), formerly known
as Strategika, Inc. ("Strategika"), was incorporated on July 13, 1990 as Super
Shops, Inc. in the State of Michigan. In October 2000, Super Shops, Inc.
reincorporated in Delaware and changed its name to MIA Acquisition Corp., and
subsequently to Strategika in February 2002.
Tiens USA conducts its main business operations through its subsidiary Tianjin
Tianshi Biological Development Co., Ltd. ("Biological"), which is based in
Tianjin, Peoples Republic of China (PRC). Biological primarily engages in the
38
research, development, manufacturing, and marketing of nutrition supplement
products, including wellness products and dietary supplement products, and
personal care products. Tiens USA derives its revenues principally from product
sales to affiliated companies in China and outside of China. Since its
establishment, Biological has developed and produced seven major product series,
of which six are comprised of nutrition supplement products, and the seventh is
comprised of personal care products. Biological develops its products at its own
product research and development center, which employs highly qualified
professionals in the fields of pharmacology, biology, chemistry and fine
chemistry. Biological has obtained all required certificates and approvals from
government regulatory agencies to manufacture its products in China, including a
Certificate of Good Manufacturing Practices (GMP) issued by the State Drug
Administration and a Sanitary Certificate for food maufacturers in China ("Jin
(Wuqing) Wei Shi Zheng Zi" 2004, No.0049) and a Sanitary Certification for
wellness products manufacturers ("Jin Wei Jian Zheng Zi" 2004, No.0006) issued
by the PRC Ministry of Health. In addition, all of Biological's products have
been certified by appropriate government regulatory agencies, including the
State Food and Drug Administration (SFDA) and the Bureau of Technical
Supervision, for manufacture and sale in China.
In China, Biological conducts the marketing and sales of its products through
its affiliated company, Tianjin Tianshi Biological Engineering Co., Ltd.
("Tianshi Engineering"), a company incorporated in China. Tianshi Engineering
markets and sells Biological's products in China through its twenty-three
branches, representative offices and chain stores, and nine domestic affiliated
companies. Six of the nine domestic affiliated companies are 51% owned by
Tianshi Engineering and 49% by Li Baolan, the daughter of Mr. Li Jinyuan, Tiens
USA's Chief Executive Officer and President. The other three affiliate companies
are owned by Ms. Li Baolan and Mr. Li' s other immediate family members. Outside
of China, Biological sells its products through an extensive direct sales force,
or multi-level marketing sales force, of overseas affiliates and independent
distributors who use the products themselves and/or resell them to other
distributors or consumers. These affiliates are located in approximately 90
countries, including the United States, India, Malaysia, Indonesia, Canada,
Peru, Brazil, Russia, Kazakhstan, Mongolia, Finland, Lithuania, Britain,
Germany, France, Romania, Ukraine, Portugal, Turkey, Italy, Nigeria, Ghana,
South Africa and Australia. Our direct sales marketing scheme is subject to
governmental regulation in each of these countries.
In April 2004, Tianshi International Holdings Group Ltd., a corporation
organized under the laws of the British Virgin Islands ("Tianshi
International"), entered into a joint venture contract with Tianjin Tianshi
Pharmaceuticals Co., Ltd. ("Tianshi Pharmaceuticals"), a Chinese company in
which the majority shareholder is Tianjin Tianshi Group Co., Ltd. ("Tianshi
Group"), a company organized under the PRC laws, to establish Tiens Yihai Co.
Ltd., a Chinese-Foreign Equity Joint Venture ("Tiens Yihai"). Tianshi
International is a wholly-owned subsidiary of Tiens USA and Tianshi Group is 90%
owned by Mr. Li and 10% owned by Mr. Li's daughter, Ms. Li Baolan. On September
39
15, 2004, the Board of Directors of Tianshi International ratified, and approved
the Tiens Yihai Joint Venture Project. Tiens Yihai is 99.4% owned by Tianshi
International and 0.6% owned by Tianshi Pharmaceuticals. Tiens Yihai, located in
Shanghai, P.R.C., was established to conduct research and development,
production and marketing of nutrition supplement products, home care and
personal care products. As of December 31, 2004, Tiens Yihai was a developmental
stage company and had not yet conducted any operations.
Both Biological and Tianshi Engineering receive administrative support from
Tianshi Group. Biological pays Tianshi Group 1% of its annual sales income
(excluding value added taxes "VAT") for administrative services (except for
services provided by the officers of Tianshi Group) and the use of Tianshi
Group's administrative building.
The following is an organization and equity ownership chart of of Tiens USA
and its affiliates.
GRAPHIC OMITTED
The graphic omitted shows the organizational chart of Tiens USA, including the
percentage ownership. The following describes the chart:
Tiens USA is owned 4.91% by public stockholders, 2.8% by officers and 92.29% by
Mr. Li Jinyuan . Tiens USA owns 100% of Tianshi International. Tianshi
Inernational owns 80% of Biological and 99.4% of Tiens Yihai.
Tianshi Group is owned 90% by Mr. Li Jinyuan and 10% by his daughter, Ms. Li
Baolan. Tianshi Group owns 87.66% of Tianshi Pharmaceuticals and 51% of Tianshi
Engineering. Tianshi Pharmaceuticals owns 20% of Biological and 0.6% of Tiens
Yihai.
Ms. Li Baolan owns 49% of Tianshi Engineering and 7.29% of Tianshi
Pharmaceuticals.
Tianjin Feishi Transportation Co., Ltd. owns 5.05% of Tianshi Pharmaceuticals.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The Company's financial statements reflect the selection
and application of accounting policies which require management to make
40
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
The Company recognizes revenue from domestic sales by distributors in China, net
of sales commissions and taxes only when the related Chinese distributor
recognizes sales of the Company's products to unaffiliated third parties. The
Company recognizes revenue from international sales (non-Chinese) to both
affiliated and unaffiliated third parties, net of commissions and taxes as goods
are shipped, and cleared by the international customs department.
The Company is generally not contractually obligated to accept returns. However,
on a case by case negotiated basis, the Company permits customers to return
their products. In accordance with SFAS No. 48, "Revenue Recognition when the
Right of Return Exists", revenue is recorded net of an allowance for estimated
returns. Such reserves are based upon management's evaluation of historical
experience and estimated costs. The amount of the reserves ultimately required
could differ materially in the near term from amounts included in the
accompanying consolidated financial statements.
In 2004, Tianshi Engineering, a related company, owned all of the related party
distributors which sell the Company's products domestically in China.
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 0.5% of the outstanding accounts receivable balance in
accordance with generally accepted accounting principles in the PRC.
Inventories
The Company reviews its inventory annually for possible obsolete goods or to
determine if any reserves are necessary for potential obsolescence. As of
December 31, 2004, the Company has determined that no reserves are necessary at
year end.
41
RESULTS OF OPERATIONS
2004 Compared to 2003
During the year ended December 31, 2004, the Company continued its strong 2003
performance, increasing sales by 53%. As of December 31, 2004, the Company had
retained earnings of $42,200,940, cash of $39,243,872 and reported total
shareholders' equity of $60,522,899. For the year ending December 31, 2004, the
Company had revenue of $58,910,532 and selling, general and administrative
expenses of $7,363,248.
The year ending December 31, 2004 2003 Change
------------------------------------------- ------------------- ---------------- -----------------
Revenue $ 58,910,532 $ 38,392,208 53.44%
COGS $ 17,483,739 $ 12,725,161 $ 4,758,578
Gross Profit $ 41,426,793 $ 25,667,047 $ 15,759,746
Gross Profit margin 70.32% 66.85%
Selling and administrative expenses $ 7,363,248 $ 3,171,338 $ 4,191,910
Selling and administrative expenses as a
percentage of sales 12.50% 8.26%
Net income $ 27,438,296 $ 17,053,822 60.89%
(1) SALES. Compared to the year 2003, sales increased by $20,518,324, or
approximately 53.44%, for the year ended December 31, 2004, including
international sales which increased by $16,330,594 and domestic sales which
increased by $4,187,730. The growth in reported sales was primarily due to: (1)
continued and successful marketing of our products internationally since the end
of 2002; (2) increased networking sales forces in China during 2003 and 2004;
and (3) continued growth in worldwide demand for our products. During the year
2004, the Company experienced a significant sales growth in overseas markets and
a solid sales growth in China. Please see the table below for details.
Domestic and Overseas Sales Revenue (04 vs. 03)
Sales Revenue Year 2004 Year 2003 Increase in %
--------------------------------------------------------------------------------
Domestic $29,210,167 $25,022,437 16.74%
--------------------------------------------------------------------------------
Overseas $29,700,365 $13,369,771 122.15%
--------------------------------------------------------------------------------
42
(2) GROSS PROFIT. Consolidated gross profit increased by $15,759,746 for the
year 2004 in comparison with the year 2003. In the mean time, the gross profit
margin was increased to 70.32% for the year ended December 31, 2004, from 66.85%
for the year ended December 31, 2003. The increase in gross profit margin was
primarily due to sales growth both in the domestic and overseas markets and the
decrease in production cost, which was a result of continuing stronger
management control over (1) cost of raw material purchases; (2) utilization of
raw material and production cost efficiency; (3) product quality control; (4)
improvement of manufacturing technology; and (5) economy of scale.
(3) SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased by $4,191,910 in the year 2004, compared to the year 2003. The selling
and administrative expenses as a percentage of sales increased to 12.50% in for
the year 2004. The increase was principally due to the significant increase in
advertising expenditures, and continued sales growth and market expansion.
(4) NET INCOME. Net income for the year ended December 31, 2004, increased by
60.89%, compared to the year ended December 31, 2003 due primarily to steady
growth in worldwide sales. Continued decrease in production cost also
contributed to the Company's net income growth.
2003 Compared to 2002
As of December 31, 2003, the Company had of retained earningsof $20,453,290,
cash of $12,725,043 and reported total shareholders' equity of $33,086,192. For
the year ending December 31, 2003, we had revenues of $38,392,208 and general,
administrative and sales expenses of $3,171,338.
The year ending December 31, 2003 2002 Change
--------------------------------------------------- ------------------- ---------------- -----------------
Revenue $ 38,392,208 $ 14,096,726 172.35%
COGS $ 12,725,161 $ 8,297,845 $ 4,427,316
Gross Profit $ 25,667,047 $ 5,798,881 $ 19,868,166
Gross Profit margin 66.85% 41.14%
Selling and Administrative Expenses $ 3,171,338 $ 3,193,190 $ (21,852)
Selling and ad. Expenses as a percentage of sales 8.26% 22.65%
Net income $ 17,053,822 $ 1,995,865 754.46%
43
(1) SALES. Sales increased by $24,295,482, or approximately 172.35%, from
$14,096,726 for the year ended December 31, 2002 to $38,392,208 for the year
ended December 31, 2003. The 172.35% increase was the result of directly
marketing our products internationally at the end of 2002. By the end of 2003,
we sold our products to approximately 90 countries. In addition, we increased
our domestic networking sales forces during 2003. Domestic sales increased by
$13,335,295 and overseas sales increased by $10,960,187. Please see the table
below for details.
Domestic and Overseas Sales Revenue (03 vs. 02)
Sales Revenue Year 2003 Year 2002 Increase in %
--------------------------------------------------------------------------------
Domestic $25,022,437 $11,687,142 114.10%
--------------------------------------------------------------------------------
Overseas $13,369,771 $ 2,409,584 454.86%
--------------------------------------------------------------------------------
(2) GROSS PROFIT. Consolidated gross profit increased by $19,868,166, from
$5,798,881 for the year ended December 31, 2002 to $ 25,667,047 for the year
ended December 31, 2003. Gross profit as a percentage of sales increased to
66.85% for the year ended December 31, 2003 from 41.14% for the year ended
December 31, 2002. This increase in gross profit as a percentage of sales was
the result of increasing sales both domestically and worldwide and stronger
management control on production cost.
(3) SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
decreased by $21,852 from $3,193,190 for the year ended December 31, 2002 to
$3,171,338 for the year ended December 31, 2003. The selling and administrative
expenses as a percentage of sales decreased to 8.26% for the year ended December
31, 2003 from 22.65% for the year ended December 31, 2002. The decrease in
selling and administrative expenses was due to the decrease in the cost of
selling expenses and related selling administrative expenses. At the end of
2002, in order to monitor our production's manufacturing and selling functions,
our management decided to divide all the sales divisions to our affiliated
company. As a result, all the expenses related to sales reduced tremendously for
the year ended of 2003 compared to the same period ended 2002.
(4) NET INCOME. Consolidated net income increased by $15,057,957, or
approximately 754.46%, from $1,995,865 for the year ended December 31, 2002 to
$17,053,822 for the year ended December 31, 2003. The increase was mainly due to
increase in sales and decrease in production cost and selling and administrative
expenses.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company markets most of its products through various domestic and
international business entities that are related to Biological through common
44
ownership. Related party sales amounted to 100% of total sales. Internationally,
Biological sells its products directly to its overseas affiliates. Due to the
common ownership, there are no formal sales or administrative agreement among
Biological and those overseas related parties. The business operations among
these related entities are regulated through internal ordinances. For the
domestic market, Biological sells all of its products to Tianshi Engineering,
which in turn sells them through its 23 representative offices, and 9 other
affiliated companies in China. Biological has a sales contract with Tianshi
Engineering. According to this contract, Tianshi Engineering accepted that it
would purchase all of Biological's products to be sold in China. All of those
Tianshi Engineering's domestic affiliated companies are owned in whole or in
part by Li Jinyuan's immediate family members. Please see the table under the
Section "Business Development Strategy-Marketing and Distribution" in Part I,
Item 1, "Description of Business" for a list of the international affiliated
companies owned by Mr. Li Jinyuan.
Other receivables and note receivable
The Company through its Chinese joint venture, Biological, is owed additional
amounts classified as other receivables from related parties totaling $8,144,740
and $26,831,339 as of December 31, 2004 and 2003, respectively. These
receivables are generated from the Company making various cash advances and
short-term loans and the allocation of various expenses to related parties. The
following is the detail of those transactions.
On March 26, 2004, Biological entered into an agreement with Tianjin Juchao
Commercial and Trading Co., Ltd. ("Juchao") to convert various receivable
amounts into a note receivable in the amount of RMB200,000,000 or approximately
USD$24,200,000. The note was paid off during 2004 in four quarterly installments
of RMB50,000,000 beginning March 31, 2004 and ending December 31, 2004. Interest
in the amount of $914,760 was paid on this note during the year ending December
31, 2004 beginning January 1, 2004 at an annual interest rate of 6.048%.
The receivable was secured by the personal guarantee of Li Jinyuan, President
and major shareholder of Tiens, and the pledge of 20% of his stock ownership in
Tiens or 13,167,000 shares. These shares are restricted stock (as defined in
Rule 144 of the Securities Act of 1933, as amended) and cannot be traded until
September 10, 2004.
During the year ended December 31, 2004, Biological advanced approximately
US$3,532,504 to Tianjin Tianshi Group Co., Ltd. ("Tianshi Group"). In addition,
Biological advanced approximately US$1,710,446 to Tianshi Engineering. These
transactions are recurring in nature and the Company does not charge interest on
these receivables.
As of December 31, 2004, the Company had an amount of $2,590,630 classified as
other receivables from Tianshi Pharmaceuticals. The company does not charge
interest on this receivable.
45
Accounts payable
Accounts payable due to related parties amounted to $209,199 and $758,570 as of
December 31, 2004 and 2003, respectively. These amounts were generated from the
purchases of raw materials, rent expense and the Company's transportation costs.
Other payables
The Company also has amounts classified as other payables due to related
parties, which amounted to $945,274and $1,312,288 as of December 31, 2004 and
2003, respectively. These amounts arose from cash advances from related parties
such as management service fees due to related parties and various
non-operational transactions incurred with related parties.
On March 25, 2205 Tianshi International entered into a loan agreement with a
company owned by Mr. Li, Jinyuan, pursuant to which Tianshi International
borrowed $300,000. The loan is non-interest bearing and is due on June 25, 2005.
Note Payable
On September 10, 2004, in order to fund their capital contribution due to Tiens
Yihai Co., Ltd. ("Tiens Yihai"), Tianshi International entered into a loan
agreement with Tianyuan Capital Development Corp. Ltd. (i(degree)Tianyuan
Capital") to borrow $10.65 million. Mr. Li Jinyuan, the president and major
shareholder of the Company, is a director of Tiens Yihai and a director of
Tianyuan Capital.
The principal of the loan will be paid in ten consecutive semiannual
installments of each US $1,065,000 on the last day of each June, December
commencing on December 31, 2006 and ending June 30, 2011. The interest payment
will be paid on the outstanding and unpaid principal amount of the loan at an
annual interest rate of 5% on the last business day of each June and December
commencing on December 31, 2004. The interest expense of $163,516 has been
accrued on December 31,2004 on this note.
Rent expense
As of January 1, 2003, the Company had a verbal agreement with Tianshi Group, to
lease a portion of its office building and manufacturing facilities. On June 30,
2003, the Company entered into a written lease agreement with Tianshi Group to
pay annual rent on these facilities at 1% of total gross revenues. The term of
this agreement is for five years commencing on January 1, 2003. In addition, the
Company is obligated to pay insurance, maintenance and other expenses related to
the premises. The total amount paid on this lease amounted to $595,494 and
$375,645 in the years 2004 and 2003, respectively.
46
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2004, net cash provided by operating activities
was $32,937,516, net cash used in investing activities was $3,713,214, and net
cash used in financing activities was $2,697,234.
For the year ended December 31, 2003, net cash provided by operating activities
was $5,561,449, net cash provided by investing activities was $8,291,361, and
net cash used in financing activities was $1,430,741.
Net cash provided by operating activities increased by $27,376,067 to
$32,731,213 for the year ended December 31, 2004, representing an increase of
approximately 492.25% compared to $5,561,449 net cash provided by operating
activities for the year 2003. The increase in cash flow from operating
activities primarily reflects an increase in revenues for the year ended
December 31, 2004. This increase was also due to better management of the
collection of other receivables from our related parties during the year 2004.
Net cash used in investing activities was $3,713,234 for the year ended December
31, 2004. For the year ended December 31, 2003, the net cash provided by the
investing activities was $8,291,361. The increase in the use of cash is due to
the purchase of fixed assets, i.e. equipment and automobiles, for the Company's
subsidiaries and no collections on loans receivables due from related parties.
Net cash used in financing activities increased by $1,266,493 to $2,697,234 for
the year ended December 31, 2004, representing a 88.52% increase, compared to
$1,430,741 net cash used in financing activities for the same period of 2003.
The increase in cash used in financing activities was primarily due to the
payments to short term notes payable and minority interest shareholders.
Going forward, our primary requirements for cash consist of: (1) the continued
production of existing products and general overhead and personnel related
expenses to support these activities; (2) continued promotion of networking
sales activities pertaining to our attempt to increase related revenues; and (3)
the development costs of new products; (4) construction and development of Tiens
Yihai. We anticipate that our current operating activities will enable us to
meet the anticipated cash requirements for the 2005 fiscal year.
MANAGEMENT ASSUMPTIONS
Management anticipates, based on internal forecasts and assumptions relating to
our current operations that existing cash and funds generated from operations
will be sufficient to meet working capital for at least the next 12 months. In
the event that plans change, our assumptions change or prove inaccurate or if
other capital resources and projected cash flow otherwise prove to be
insufficient to fund operations (due to unanticipated expense, technical
47
difficulties, or otherwise), we could be required to seek additional financing.
There can be no assurance that we will be able to obtain additional financing on
terms acceptable to it, or at all.
EFFECTS OF INFLATION
We are subject to commodity price risks arising from price fluctuations in the
market prices of the various raw materials that comprise our products. Price
risks are managed by each business unit through productivity improvements and
cost-containment measures. For the time being, the management does not believe
that inflation risk is material to our business or our consolidated financial
position, results of operations or cash flows.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
Our operating subsidiaries are located in China. This Company buys all raw
materials in China and sells 50% of our products in China using Chinese Renminbi
as the functional currency. Based on Chinese government regulations, all foreign
currencies under the category of current accounts are allowed to be freely
exchanged with hard currencies. During the past several years of operation,
there were no significant changes in exchange rates; however, unforeseen
developments may cause a significant change in exchange rates.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item may be found following the
signature page of this annual report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, as of the end of the period
ended by this report, we carried out an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures. This evaluation
was carried out under the supervision and with the participation of our
management. The Company is in the process of reviewing its internal control
systems in order to be compliant with Section 404 of the Sarbanes Oxley Act. The
48
Company anticipates that the review and any changes required to implement to be
in compliance with Section 404 will be completed on or prior to the year ended
December 31, 2006. However at this time the Company makes no representation that
the Company's systems of internal control comply with Section 404 of the
Sarbanes Oxley Act.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, to allow timely decisions regarding
required disclosure.
Item 8B. OTHER INFORMATION
None
49
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Set forth below are the names of the directors, executive officers and key
employees of the Company as of December 31, 2004. With the exception of Mr.
Jinyuan Li, who served on the Board since the reorganization in September 2003,
all other directors served on the Board since January 2004.
NAME AGE POSITION
------------------- --- -----------------------------------------
Jinyuan Li 46 Chairman, Chief Executive Officer,
Presidentand Director
Wenjun Jiao 40 Chief Financial Officer and Director
Yupeng Yan 41 Executive Vice President and Director
Ping Bai 34 Executive Assistant to the President
and Director
Socorro M. Quintero 52 Director
Howard R. Balloch 53 Director
Gilbert D. Raker 61 Director
None of our directors and officers was selected pursuant to any agreement or
understanding with any other person. There is no family relationship between any
director or executive officer and any other director or executive officer.
Business Experience
Jinyuan Li
Mr. Li has served as the Chairman of the Board and a Director since September
2003. Mr. Li is also the President and founder of the Company. Mr. Li has 14
years of experience in the petroleum and plastics industries. He holds a number
of leadership positions in government and social associations, including as
commissioner of the Tianjin Political Consultative Conference; Standing Director
of China Entrepreneur's National Council; Executive Commissioner of All-China
Federation of Industry and Commerce; Vice President of Chinese Bioengineering
Association; and Vice president of Chinese Healthcare Association. Mr. Li was
elected as one of the Top Ten Most Outstanding Talents in the Great China Area;
one of the Ten Most Popular Personages, by China Economic Forum Among the
High-Ranking; Excellent Entrepreneur, by the Organization Committee of the
50
Second Chinese Entrepreneur Forum in 2003, and as the Most Creative Chinese
Businessman of Asia in 2004. Mr. Li holds a MBA degree from Nankai University.
Wenjun Jiao
Mr. Jiao has served as the Chief Financial Officer of the Company since the
reorganization in September 2003. Prior to the reorganization, Mr. Jiao served
as the Chief Financial Officer of Tianjin Tianshi Biological Development Co.
Ltd. ("Biological") from May 2001 through August 2003, and as Chief Accountant
at Xincheng Accounting Firm from 2000 until 2001. Mr. Jiao holds a Doctorate
Degree in Accounting from Tianjin University of Finance and Economics and a
Master Degree of Business Administration from Oklahoma University. Mr. Jiao is a
Certified Public Accountant in China.
Yupeng Yan
Mr. Yan has served as Executive Vice-President of the Company since the
reorganization in September 2003. Prior to the reorganization, Mr. Yan served as
Vice-President of Tianshi Group Co., Ltd. from March 1997 to May 2004. Since
June 2004, Mr. Yan has also served as CEO of Tianshi Marketing Group. Mr. Yan
currently holds a number of leadership positions including, CEO of Tianshi
International Marketing Group, Vice-Dean of Tianshi Occupational Technique
Institute, and Vice-Chairman of Tianshi Science and Technique Association. Mr.
Yan was elected as one of the Chinese Ten Outstanding Professional Managers in
2004. Mr. Yan received an Executive Masters of Business Administration Degree
from Nankai University in July 2004.
Ping Bai
Ms. Bai has served as the Executive Assistant to the President of the Company
since the reorganization in September 2003. She held a similar position with
Biological prior to the reorganization from May 2001. Ms. Bai served as the
Regional Sales Manager for the North China Region in Sinar Mas Group from March
1998 until April 2001. Ms. Bai has rich experiences in international public
relationship, management of modern enterprises and strategic management of human
resources.
Socorro M. Quintero
Dr. Quintero serves as a director of the Company. Dr. Quintero is an Associate
Professor of Finance at Oklahoma City University's Meinders School of Business
("OCU"). Prior to joining OCU in 1993, she served as Assistant Professor of
Finance at the University of South Florida. Dr. Quintero has extensive work
experience in various industrial engineering capacities and management levels
51
while working for Atlantic Steel Company, Abbott Laboratories and Levi Strauss &
Co. She received a Bachelor of Science in Physics degree from the University of
the Philippines, a Master of Science in Industrial Engineering degree from the
Georgia Institute of Technology, and a Doctorate degree in Finance from the
University of Texas at Austin.
Gilbert D. Raker
Mr. Raker serves as a director of the Company, and has served as the President,
Chief Executive Officer and Chairman of the Board of SEMX Corporation (NASDAQ:
SEMX) since 1988. SEMX Corporation manufactures materials and components used in
the microelectronic circuitry, primarily for the automotive, consumer
electronics, defense, medical and aerospace industries. Prior to 1988, Mr. Raker
worked at two private equity investment firms and was employed as the Chief
Financial Officer of two New York Stock Exchange listed companies and several
private companies. Mr. Raker received his Bachelor of Science degree in
Chemistry from Eastern University and his Master of Business Administration
degree in Production Management from Syracuse University.
Howard R. Balloch
Mr. Balloch serves as a director of the Company, and has been the President and
Chief Executive Officer of the Canada China Business Council since 2001. In
addition, Mr. Balloch served as the "Canadian ambassador to the People's
Republic of China from February of 1996 until July of 2001. Mr. Balloch
currently serves on the board of directors of the following companies: Magic
Lantern Group (AMEX: GML), Zi Corporation (NASDAQ: ZICA), Oztime Media, a
wholly-owned subsidiary of Zi Corporation, Ivanhoe Energy (NASDAQ: IVAN), Maple
Leaf Education Holding and Capital Club, Beijing. Mr. Balloch is the founder and
President of The Balloch Group, an investment advisory and merchant banking firm
located in Beijing, China. He currently serves as an Adjunct Professor of
International Business at the University of British Columbia. Mr. Balloch
received his Bachelor of Arts and Master of Arts degrees from McGill University.
Based solely upon a review of Forms 3 and 4 and amendments to these forms
furnished to the Company, all parties subject to the reporting requirements of
Section 16(a) of the Exchange Act filed all such required reports during and
with respect to the fiscal year ended December 31, 2004.
BOARD AND COMMITTEE MEETINGS
Our Board of Directors has responsibility for establishing the Company's
corporate policies and overseeing the Company's overall performance, although it
is not involved in day-to-day operating details. The Board meets regularly
52
throughout the year, including at its annual organization meeting following the
annual meeting of stockholders, to review significant developments affecting the
Company and to act upon matters requiring Board approval. It also holds special
meetings as required from time to time when important matters arise requiring
Board action between scheduled meetings. Due to the change in control of the
Company in 2003, the current members of the Board of Directors did not hold any
meetings during 2003. The Board of Directors held three meetings during 2004. No
director attended fewer than 75% of the meetings of the Board of Directors and
the total number of meetings held by all committees of the Board on which he
served.
The Board of Directors has determined that directors Socorro M. Quintero,
Gilbert D Raker and Howard R. Balloch are all considered "independent" under
Section 121(A) of the listing standards of the American Stock Exchange ("AMEX")
and the requirements of the Securities and Exchange Commission ("SEC"). The
remaining four members of the Board of Directors do not satisfy these
"independence" definitions. Accordingly, the Board of Directors is not comprised
of a majority of independent directors as would be required under the AMEX
listing standards. This is permissible under applicable AMEX listing standards
because Mr. Jinyuan Li, our President and Chief Executive Officer, owns more
than 50% of the voting power of our stock (specifically, 92.29% as of December
31, 2004). As a "controlled company" within the meaning of relevant AMEX listing
standards (Rule 801(a)), we are not required to comply with certain provisions
that would require us to have a majority of "independent" directors serving on
our Board, or standing nominating and compensation committees, all of whose
members must be "independent" under AMEX standards. In creating this exception,
AMEX has recognized that majority shareholders, have the right to select
directors and control certain key decisions, such as executive officer
compensation, by virtue of their stock ownership rights. To summarize, because
we are a controlled company, we are exempt from the requirements of the AMEX
listing standards relating to having:
(1) a majority of independent directors on the Board; as noted, the Board of
Directors had determined that only three of the Board's 7 directors are
"independent" under applicable AMEX and SEC requirements; and
(2) a standing Board nominating committee composed entirely of "independent"
directors. As we explain below, our entire Board performs this function; and
Although as a controlled company we are exempt from the requirements of having a
standing compensation committee composed entirely of "independent" directors as
defined by the AMEX listing standards, we formed a Compensation Committee in
2004, as discussed below.
The Board of Directors has an Audit Committee, a Compensation Committee and a
Governance Committee. The Board of Directors does not have a Nominating
Committee. The entire Board of Directors assumes the duties that would be
53
delegated to a Nominating Committee. The Company does not have a policy with
regard to Board members' attendance at annual meetings of stockholders. Since
September 9, 2003, when the Company consummated the Agreement and Plan of
Reorganization and new directors were appointed to the Board, the Company has
held an annual meeting of stockholders on November 17, 2004. All seven directors
attended that annual meeting.
Nominating Committee
The Board of Directors does not have a standing Nominating Committee. The entire
Board of Directors fulfills the role of a Nominating Committee. The Board of
Directors does not have a charter governing its duties with respect to the
nomination process. The Board of Directors has three members who are independent
as defined in the American Stock Exchange listing standards currently in effect.
Audit Committee
The Audit Committee operates under a formal charter in accordance with all
applicable laws. The charter has been approved and adopted by the Board of
Directors and is reviewed and reassessed annually by the Audit Committee. The
charter sets forth the responsibilities, authority and specific duties of the
Audit Committee. The charter specifies, among other things, the structure and
membership requirements of the Audit Committee, as well as the relationship of
the Audit Committee to the Company's independent auditors and management.
The Board of Directors has established an audit committee in accordance with
Rule 10A-3 of the Securities Exchange Act of 1934. The members of the Audit
Committee are Ms. Socorro Maria Quintero, and Messrs. Howard R. Balloch and Mr.
Gilbert D. Raker, each of whom are independent as defined under Section 121(A)
of the American Stock Exchange listing standards currently in effect. None of
the Audit Committee members is a current officer or employee of the Company or
any of its affiliates.
The Board of Directors has determined that Ms. Socorro Maria Quintero, Chairman
of the Audit committefe and Mr. Gilbert D. Raker each qualify as an "audit
committee financial expert" under the Securities and Exchanges Commission's
definition.
Audit Committee Report
The responsibilities of the Audit Committee of this newly listed Company
are set forth in the Audit Committee Charter. The Audit Committee assists the
Full Board in fulfilling its oversight responsibilities with respect to the
integrity of financial statements and other financial information. Management
prepares the financial statements and establishes the system of internal
control.
54
As part of its oversight responsibility, the Audit Committee reviewed and
discussed the financial statements with Management and the Company's Independent
Auditor, Moore Stephens Wurth Frazer and Torbet, including a discussion about
the quality and appropriateness, not just acceptability, of accounting
principles applied in the company's financial statement. The Independent Auditor
has the responsibility for expressing an opinion on the conformity of the annual
financial statements with US GAAP and disclosure requirements. The Audit
Committee reviewed with the Independent Auditor their judgments as to the
acceptability of the Company's financial statements with US GAAP and SEC
disclosure requirements; and also other matters as are required to be discussed
under US generally accepted accounting standards. The Audit Committee met with
the Independent Auditor, including an executive session without Management
present, to discuss the results of their audit, quality of financial reporting
and audit experience with the Company.
The Audit Committee discussed with the Moore Stephens Wurth Frazer and
Torbet its independence from management and the Company. The Audit Committee
received a letter and written disclosure, as required by Independence Standard
Board Standard No.1, from Moore Stephens Wurth Frazer and Torbet confirming its
independence from Management and the Company.
An engagement letter was submitted to and approved by the Audit Committee
outlining the scope and plan of the annual audit.
Relying on the reviews and discussions noted above, the Audit Committee
recommends to the Full Board that the financial statements be included in the
Company's Annual Report on the Form 10-KSB for the year ended December 31, 2004
for filing with the US SEC. The Audit Committee also recommends Moore Stephens
Wurth Frazer and Torbet as the Company's Independent Auditor for 2005.
The Audit Committee
Socorro Maria Quintero, Chairman
Howard R. Balloch
Gilbert D. Raker
March 2005
55
Compensation Committee
The Board of Directors formed a Compensation Committee in early 2004. The
members of the Compensation Committee are Messrs. Gilbert D. Raker, Wenjun Jiao
and Yupeng Yan, and Ms. Ping Bai. The Compensation Committee did not hold any
meetings in 2004 and has not yet adopted a formal charter pursuant to which it
shall be governed.
Governance Committee
The Board of Directors formed a Governance Committee in August 2004. The members
of the Compensation Committee are Messrs. Howard R. Balloch and Yupeng Yan, and
Ms. Ping Bai. The Governance Committee has constructed a Code of Ethics, by
which the Company's officers and its senior executives are governed. The
Governance Committee has not yet held any meetings since its establishment in
2004.
Code of Ethics
The Board of Directors has adopted a Code of Ethics to promote its commitment to
the legal and ethical conduct of the Company's business. A copy of our Code of
Ethics is filed as Exhibit 14 to this Form 10-KSB. The Chief Executive Officer,
Chief Financial Officer, and other senior officers are required to abide by the
Code of Ethics, which provides the foundation for compliance with all corporate
policies and procedures, and best business practices. The policies and
procedures address a wide array of professional conduct, including the
establishment of sound employment policies, methods for avoiding and resolving
conflicts of interest, safeguarding intellectual property, protecting
confidential information, and a strict adherence to all laws and regulations
applicable to the conduct of the Company's business. The Company intends to
satisfy its obligations, imposed under the Sarbanes-Oxley Act, to disclose
promptly on the Company's website amendments to, or waivers from, the Code of
Ethics, if any.
ITEM 10. Executive Compensation.
The following table sets forth the compensation paid or accrued, for the fiscal
years ended December 31, 2004, 2003 and 2002.for the Company's Chief Executive
Officer. There are no other executive officers whose salary and bonus were in
excess of $100,000.
56
------------------------------ ------- -----------------------------------------
Annual Compensation
-------------------
------------------------------ ------- ------------------------ ----------------
Name and Other Annual
Principal Position Year Salary Compensation
------------------ ---- ------ ------------
------------------------------ ------- ------------------------ ----------------
Jinyuan Li 2004 USD$145,455.00 -0-
Chief Executive Officer and 2003 USD$48,326.10(1) -0-
President 2002 N/A N/A
------------------------------ ------- ------------------------ ----------------
(1) On September 9, 2003, Mr. Li was appointed as CEO. The salary disclosed
here represents the compensation paid to Mr. Li from September 9, 2003
through December 31, 2003.
Option Grants in Last Fiscal Year
None.
Aggregate Option Exercises In Last Fiscal Year
None.
Equity Compensation Plan Information
None.
Directors' Compensation
The Company pays its non-employee Directors USD$30,000 per year in connection
with their activities on behalf of the Company, plus travel expenses in
connection with the Board of Directors meetings.
Employment Contracts, Termination of Employment and Change in Control
Arrangements
On July 31, 2004, the board of directors accepted the resignation of Mr. Percy
Kong Kei Chin from the board of directors. Mr. Chin advised Tiens that his
resignation was due to personal reasons. Mr. Chin submitted his resignation on
July 15, 2004. Tiens is in the process of evaluating candidates for the purpose
of filling the resulting vacancy in its board of directors. In addition,
pursuant to an agreement with the Company, Mr. Chin's 665,000 shares of common
stock of the Company owned by Mr. Chin were returned to the Company and were
cancelled on September 14, 2004.
57
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth information with respect to the beneficial
ownership of shares of common stock as of December 31, 2004: each person or
entity who is known by the Company to beneficially own five percent or more of
the common stock; each director and executive officer of the Company; and all
directors and executive officers of the Company as a group.
------------------------------------ ----------------------------- -------------
Name of Beneficial Owner Number of Shares Percent
------------------------------------ ----------------------------- -------------
Jinyuan Li 65,835,000 (1) 92.29%
------------------------------------ ----------------------------- -------------
Wenjun Jiao 665,000 *
------------------------------------ ----------------------------- -------------
Yupeng Yan 665,000 *
------------------------------------ ----------------------------- -------------
Ping Bai 665,000 (2) *
------------------------------------ ----------------------------- -------------
Socorro Maria Quintero 0 0
------------------------------------ ----------------------------- -------------
Howard R. Balloch 0 0
------------------------------------ ----------------------------- -------------
Gilbert D. Raker 0 0
------------------------------------ ----------------------------- -------------
All Directors and Executive 67,830,000 95.09%
Officers as a Group
------------------------------------ ----------------------------- -------------
--------------------
* Less than one percent
Unless otherwise indicated, the address for each named individual or group is
c/o Tiens Biotech Group (USA), Inc., No. 6, Yuanquan Road, Wuqing New-Tech
Industrial Park, Tianjin, China.
Unless otherwise indicated, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of common
stock beneficially owned by them. A person is deemed to be the beneficial owner
of securities that can be acquired by such person within 60 days upon the
exercise of options, warrants or convertible securities (in any case, the
"Currently Exercisable Options"). Each beneficial owner's percentage ownership
is determined by assuming that the Currently Exercisable Options that are held
by such person (but not those held by any other person) have been exercised and
converted.
(1) Includes 2,633,400 shares owned by family members and 658,350 owned by
Tian Jin Mei Jing International Love and Affection Foundation Limited,
over which Mr. Li has sole voting and investment power.
(2) Includes 6,650 shares owned by Tian Jin Mei Jing International Love
and Affection Foundation Limited, over which Ms. Bai has sole voting
and investment power.
58
Equity Compensation Table
None.
Item 12. Certain Relationships and Related Transactions.
The Company markets all of its products through various domestic and
international business entities that are related to the Company's main operating
subsidiary, Biological, through common ownership. Related party sales amounted
to 100% of the Company's total consolidated sales. Internationally, Biological
sells its product directly to its overseas affiliates. Due to the common
ownership, there are no formal sales or administrative agreements among
Biological and those overseas related parties. The business operations among
these related entities are regulated through internal ordinances. For the
domestic market, Biological sells all of its products to Tianshi Engineering,
which sells them through its 23 representative offices, and 9 other affiliated
companies in China. Biological has a sales contract with Tianshi Engineering.
According to this contract, Tianshi Engineering accepted the it would purchase
all of Biological's products to be sold in China. All of Tianshi Engineering's
domestic affiliated companies are owned in whole or in part by Mr. Li Jinyuan's
immediate family members. Please see the table under the Section "Business
Development Strategy-Marketing and Distribution" in Part I, Item 1, "Description
of Business" for a list of the international affiliated companies owned by Mr.
Li Jinyuan.
The following table is provided to facilitate your understanding of the
relationships between related parties and us and their transactions with us
during the fiscal year of 2004 and 2003.
--------------------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------------------
Revenue ---related party $58,910,532 $38,392,208
--------------------------------------------------------------------------------
December 31, December 31,
2004 2003
--------------------------------------------------------------------------------
Accounts receivable, trade - related party, net of
allowance for doubtful accounts of $30,442 and $0 $6,058,021 $8,533
as of December 31, 2004 and 2003, respectively
--------------------------------------------------------------------------------
Other receivables - related party $8,144,740 $26,831,339
--------------------------------------------------------------------------------
Accounts payable - related party $209,199 $758,570
--------------------------------------------------------------------------------
Other payable - related party $945,274 $1,312,288
--------------------------------------------------------------------------------
Related party sales amounted to $58,910,532 and $38,392,208 for the year ending
December 31, 2004 and 2003, which represent 100% of total Company sales for the
periods then ended. Related party accounts receivable amounted to $6,058,021 and
$8,533 as of December 31, 2004 and 2003, respectively, net of an allowance for
doubtful accounts of $ 30,442 and $0, respectively.
59
Other Receivables
The Company is owed additional amounts classified as other receivables from
related parties totaling $8,144,740 and $26,831,339 as of December 31, 2004 and
2003, respectively. These receivables are generated from the Company making
various cash advances and short-term loans and the allocation of administrative
and operating costs and various non-operational transactions incurred with
related parties.
On March 26, 2004, Biological entered into an agreement with Tianjin Juchao
Commercial and Trading Co., Ltd. ("Juchao") to convert various receivable
amounts into a note receivable in the amount of RMB200, 000,000 or approximately
USD $24,200,000. The note was to be paid off in four quarterly installments of
RMB50, 000,000 beginning March 31, 2004 and ending December 31, 2004. Interest
was charged beginning January 1, 2004 at an annual interest rate of 6.048%. The
receivable is secured by the personal guarantee of LI Jinyuan, President and
major stockholder of Tiens, and the pledge of 20% of his stock ownership in
Tiens or 13,167,000 shares. These shares are restricted stock (as defined in
Rule 144 of the Securities Act of 1933, as amended) and cannot be traded until
September 10, 2004. The note was paid off during the year ended December 31,
2004 and interest income of $914,760 was paid on this note.
Accounts Payable
Accounts payable due to related parties amounted to $209,199 and $758,570 at
December 31, 2004 and 2003, respectively. These amounts were generated from the
related parties paying expenses on behalf of the Company.
Other Payables
The Company has amounts classified as other payables due to related parties
which amounted to $945,274 and $1,312,288 as of December 31, 2004 and 2003,
respectively. These amounts arose from cash advances from related parties,
management fees due to related parties and various non-operational transactions
On March 25, 2205 Tianshi International entered into a loan agreement with a
company owned by Mr. Li, Jinyuan, pursuant to which Tianshi International
borrowed $300,000. The loan is non-interest bearing and is due on June 25, 2005.
incurred with related parties.
Loan Agreement
On April 20, 2004, our wholly-owned subsidiary, Tianshi International,
consummated a joint venture contract (the "Joint Venture Project") with Tianshi
Pharmaceutical. Pursuant to the terms of the contract, the parties agreed to
establish Tiens Yihai, a Chinese-Foreign Equity Joint Venture. On September 15,
2004, the Board of Directors of Tianshi International ratified, confirmed and
approved in all respects, Tianshi International's authority to enter into the
Joint Venture Project. Tiens Yihai, located in Shanghai, PRC, is in the business
of research and development, production and marketing of nutrition supplement
products, home care and personal care products. Mr. Jinyuan Li who is the Chief
60
Executive Officer, President and one of the Board Directors, is the majority
shareholder of Tianshi Pharmaceutical.
On September 10, 2004, Tianshi International, entered into a term loan agreement
with Tianyuan Capital Development Corp. Ltd. ("Tianyuan"), pursuant to which
Tianyuan agreed to loan USD$10.65 million in the aggregate to Tianshi
International, at an interest rate of 5% per year. Tianshi International shall
pay the principal of the loan in ten consecutive semiannual installments of
USD$1,065,000 on the last day of each June and December commencing December 31,
2006 and ending June 30, 2011. The loan proceeds were advanced to Tianshi
International to establish and invest in Tiens Yihai Co., Ltd., the joint
venture with Tianshi Pharmaceutical. Mr. Jinyuan Li, a director of the Company,
is a director of Tianyuan.
Rent expense
As of January 1, 2003, the Company has a verbal agreement with Tianshi Group,
which is a related party through ownership, to lease a portion of its office
building and manufacturing facilities. The Company has agreed to pay for certain
expenses of the Tianshi Group in lieu of a lease payment. On June 30, 2003, the
Company entered into a written lease agreement with Tianshi Group to pay annual
rent on these facilities at 1% of total gross revenues. The term of this
agreement is for five years commencing on January 1, 2003. In addition, the
Company is obligated to pay insurance, maintenance and other expenses related to
the premises. Rent expense under this agreement amounted to $595,494 and
$375,645 in 2004 and 2003.
ITEM 13. EXHIBITS AND REPORTS
Exhibits
-------------- -----------------------------------------------------------------
Exhibit No. Description
-------------- -----------------------------------------------------------------
2.1* Agreement and Plan of Reorganization, as amended, dated as of
August 22, 2003, by and among Strategika, Tianshi International
and the Stockholders of Tianshi International
-------------- -----------------------------------------------------------------
3.1 Certificate of Incorporation of MIA Acquisition Corp. (1)
-------------- -----------------------------------------------------------------
3.2 By-laws of MIA Acquisition Corp (1)
-------------- -----------------------------------------------------------------
3.3 Certificate of Amendment to Certificate of Incorporation of MIA
Acquisition Corp. changing the company's name to Strategika (1)
-------------- -----------------------------------------------------------------
4.1 Specimen Stock Certificate (1)
-------------- -----------------------------------------------------------------
10.1 Stock Purchase Agreement, dated February 11, 2002, by and between
Rene Larrave and MIA Acquisition Corp. (1)
-------------- -----------------------------------------------------------------
61
-------------- -----------------------------------------------------------------
14* Code of Ethics
-------------- -----------------------------------------------------------------
23.1* Consent of Independent Accountants, Moore Stephens Wurth Frazer
and Torbet, LLP
31.1* Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
-------------- -----------------------------------------------------------------
31.2* Certification of the Chief Financial Officer and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
-------------- -----------------------------------------------------------------
32.0* Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
-------------- -----------------------------------------------------------------
* Filed herewith
(1) Filed as an exhibit to the Registrant's Form 10SB filed with the Securities
and Exchange Commission on March 7, 2002.
Item 14. Principal Accountant Fees and Services
AUDIT FEES
Total annual audit fees billed for professional services rendered by Moore
Stephens Wurth Frazer and Torbet, LLP during the 2003 and 2004 fiscal years for
the audit of our annual financial statements and the review of the financial
statements included in our quarterly reports on Form 10-QSB, or services that
are normally provided by Moore Stephens Wurth Frazer and Torbet, LLP in
connection with statutory and regulatory filings or engagements for those fiscal
years, totaled $150,000 and $215,000, respectively.
AUDIT RELATED FEES
Other than the fees described under the caption "Audit Fees" above, Moore
Stephens Wurth Frazer and Torbet, LLP did not bill any fees for services
rendered to us during the fiscal years ended December 31, 2003 and 2004 for
assurance and related services in connection with the audit or review of our
financial statements.
TAX FEES
The total fees billed during the 2003 and 2004 for professional services
rendered by Moore Stephens Wurth Frazer and Torbet, LLP for tax compliance
62
services were $10,000 and $10,000, respectively. Specifically, these services
involved preparation of the consolidated tax returns.
ALL OTHER FEES
No other fees were billed by Moore Stephens Wurth Frazer and Torbet LLC for the
years ended December 31, 2003. In 2004, Moore Stephens Wurth Frazer and Torbet
LLC billed $5,500 for providing professional advice on the Company's compliance
with Section 404 of the Sarbanes Oxley Act and performing research and preparing
memo regarding FASB FIN 46R.
PRE-APPROVAL OF SERVICES
The Audit Committee pre-approves all services, including both audit and
non-audit services, provided by our independent auditors. For audit services,
each year the independent auditor will provide the Audit Committee with an
engagement letter outlining the scope of the audit services proposed to be
performed during the year, which must be formally accepted by the Audit
Committee before the audit commences. The independent auditor will also submit
an audit services fee proposal, which also must be approved by the Audit
Committee before the audit commences.
63
TIENS BIOTECH GROUP (USA), INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income and Other Comprehensive
Income (Loss) F-3
Consolidated Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Registered Public Accounting Firm
The Board of Directors
Tiens Biotech Group (USA), Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Tiens Biotech
Group (USA), Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations and other comprehensive income
(loss), shareholders' equity and cash flows for the 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 standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit 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 Tiens Biotech Group
(USA), Inc. and Subsidiaries as of December 31, 2004 and 2003, 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 Wurth Frazer and Torbet, LLP
February 26, 2005
Walnut, California
F-1
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
ASSETS
------
2004 2003
------------ ------------
CURRENT ASSETS:
Cash $ 39,243,872 $ 12,725,043
Accounts receivable, trade - related parties, net of
allowance for doubtful accounts of $30,442 and $0
as of December 31, 2004 and 2003, respectively 6,058,021 8,533
Other receivables 529,036 139,820
Other receivables - related parties 8,144,740 26,831,339
Inventories 4,567,418 4,004,216
------------ ------------
Total current assets 58,543,087 43,708,951
------------ ------------
PLANT AND EQUIPMENT, net 20,200,806 11,156,268
------------ ------------
OTHER ASSETS:
Intangible assets, net 469,765 363,330
Employee advances 75,212 821,536
Deposits 4,230,063 1,051,557
------------ ------------
Total other assets 4,775,040 2,236,423
------------ ------------
Total assets $ 83,518,933 $ 57,101,642
============ ============
LIABILITIES AND SHARE HOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,791,019 $ 2,531,829
Accounts payable - related party 209,199 758,570
Advances from customers - related parties 673,349 5,141,661
Wages and benefits payable 165,370 25,447
Other taxes payable 623,113 206,723
Other payables 263,469 27,251
Other payables - related parties 945,274 1,312,288
Short term notes payable -- 5,324,000
Current portion of long term debt 155,442 259,364
------------ ------------
Total current liabilities 4,826,235 15,587,133
LONG TERM DEBT, net of current portion 10,657,742 155,591
------------ ------------
Total liabilities 15,483,977 15,742,724
------------ ------------
MINORITY INTEREST 7,512,057 8,272,726
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, $0.001 par value, 260,000,000
shares authorized, 71,333,586 and 71,998,586
shares issued and outstanding, respectively 6,851 6,851
Paid-in-capital 8,906,492 8,906,492
Statutory reserves 9,420,783 3,730,137
Retained earnings 42,200,940 20,453,290
Stock receivable -- (6,650)
Accumulated other comprehensive income (loss) (12,167) (3,928)
------------ ------------
Total shareholders' equity 60,522,899 33,086,192
------------ ------------
Total liabilities and shareholders' equity $ 83,518,933 $ 57,101,642
============ ============
The accompanying notes are an integral part of this statement.
F-2
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
REVENUE - RELATED PARTIES $ 58,910,532 $ 38,392,208
COST OF SALES 17,483,739 12,725,161
------------ ------------
GROSS PROFIT 41,426,793 25,667,047
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,363,248 3,171,338
------------ ------------
INCOME FROM OPERATIONS 34,063,545 22,495,709
OTHER INCOME (EXPENSE), net of other expense 388,266 (1,178,389)
------------ ------------
INCOME BEFORE MINORITY INTEREST 34,451,811 21,317,320
MINORITY INTEREST 7,013,515 4,263,498
------------ ------------
NET INCOME 27,438,296 17,053,822
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment (8,239) --
------------ ------------
COMPREHENSIVE INCOME $ 27,430,057 $ 17,053,822
============ ============
EARNINGS PER SHARE, BASIC AND DILUTED $ 0.38 $ 0.38
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES 71,801,819 44,730,609
============ ============
The accompanying notes are an integral part of this statement.
F-3
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Number Common Paid-in Statutory
of shares stock capital reserves
------------- ------------- ------------- -------------
BALANCE, January 1, 2003 5,000,508 $ 1 $ 8,906,492 $ 399,173
Tianshi stock issued to Tianshi shareholders -- 6,850 -- --
6.5 for one shares forward split 27,503,078 -- -- --
Issuance of common stock to Tianshi
shareholders due to reorganization 68,495,000 -- -- --
Cancellation of common stock held by
Rene Larrave (29,000,000) -- -- --
Net income -- -- -- --
Adjustment to statutory reserve -- -- -- 3,330,964
------------- ------------- ------------- -------------
BALANCE, December 31, 2003 71,998,586 6,851 8,906,492 3,730,137
Cancellation of common stock (665,000) -- -- --
Receipt of stock receivable -- -- -- --
Net Income -- -- -- --
Foreign currency translation loss -- -- -- --
Adjustment to statutory reserve -- -- -- 5,690,646
------------- ------------- ------------- -------------
BALANCE, December 31, 2004 71,333,586 $ 6,851 $ 8,906,492 $ 9,420,783
============= ============= ============= =============
Accumulated
other
Retained Stock comprehensive
earnings receivable income (loss) Totals
------------- ------------- ------------- -------------
BALANCE, January 1, 2003 $ 6,730,432 $ -- $ (3,928) $ 16,032,170
Tianshi stock issued to Tianshi shareholders -- (6,650) -- 200
6.5 for one shares forward split -- -- -- --
Issuance of common stock to Tianshi
shareholders due to reorganization -- -- -- --
Cancellation of common stock held by
Rene Larrave -- -- -- --
Net income 17,053,822 -- -- 17,053,822
Adjustment to statutory reserve (3,330,964) -- -- --
------------- ------------- ------------- -------------
BALANCE, December 31, 2003 20,453,290 (6,650) (3,928) 33,086,192
Cancellation of common stock -- -- -- --
Receipt of stock receivable -- 6,650 -- 6,650
Net Income 27,438,296 -- -- 27,438,296
Foreign currency translation loss -- -- (8,239) (8,239)
Adjustment to statutory reserve (5,690,646) -- -- --
------------- ------------- ------------- -------------
BALANCE, December 31, 2004 $ 42,200,940 $ -- $ (12,167) $ 60,522,899
============= ============= ============= =============
The accompanying notes are an integral part of this statement.
F-4
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,438,296 $ 17,053,822
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Minority interest 7,013,515 4,263,498
Depreciation 1,303,433 991,138
Amortization 51,718 47,764
(Gain) loss on sale of assets 124,536 (18,587)
(Increase) decrease in assets:
Accounts receivable - related parties (6,049,488) 2,554,124
Other receivables (389,216) 188,671
Other receivables - related parties 11,773,082 (26,831,339)
Inventories (563,202) 43,457
Employee advances 746,324 (267,504)
Deposits (3,178,506) 882,879
Increase (decrease) in liabilities:
Accounts payable (740,810) 569,761
Accounts payable - related party (549,371) (4,124)
Advances from customers (4,468,312) 5,081,222
Wages and benefits payable 139,923 (140,489)
Other taxes payable 416,390 (4,065)
Other payables 236,218 (1,103,318)
Other payables - related parties (367,014) 2,254,539
------------ ------------
Net cash provided by (used in) operating activities 32,937,516 5,561,449
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in loans receivable - related party -- 10,899,102
Increase in intangible assets (158,153) --
Proceeds from sales of plant and equipment 713,036 66,549
Purchase of equipment and automobiles (4,268,097) (2,674,290)
------------ ------------
Net cash provided by (used in) investing activities (3,713,214) 8,291,361
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments, net of borrowings on short term notes payable (5,324,000) (1,136,190)
Payments on long term debt (259,513) (294,751)
Payments to minority interest shareholder (7,778,113) 0
Proceeds from long term debt 10,657,742 0
Proceeds of stock receivable 6,650 200
------------ ------------
Net cash provided by (used in) financing activities (2,697,234) (1,430,741)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (8,239) --
------------ ------------
INCREASE IN CASH 26,518,829 12,422,069
CASH, beginning of year 12,725,043 302,974
------------ ------------
CASH, end of year $ 39,243,872 $ 12,725,043
============ ============
The accompanying notes are an integral part of this statement.
F-5
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Background
Background
Tiens Biotech Group (USA), Inc. (the "Company" or "Tiens "), formerly known as
Strategika, Inc. ("Strategika"), was incorporated on July 13, 1990 as Super
Shops, Inc. in the State of Michigan. In October 2000, Super Shops, Inc.
reincorporated in Delaware and changed its name to MIA Acquisition Corp., and
subsequently to Strategika in February 2002.
In August 2003, Strategika and Tianshi International, LI Jinyuan, JIAO Wenjun
and YAN Yupeng, all Chinese Nationals who were stockholders of Tianshi
International (the "Tianshi Stockholders") entered an Agreement and Plan of
Reorganization (the "Agreement"), which was effective September 9, 2003 (the
"Effective Date"). Pursuant to the Agreement, Strategika received from the
Tianshi Stockholders all of the issued and outstanding common stock of Tianshi
International, in exchange for the issuance by Strategika of 68,495,000 shares
of its common stock to the Tianshi Stockholders, representing 95% of the issued
and outstanding common stock of Strategika, giving effect to the issuance. As
additional consideration, Rene Larrave, the sole officer and director of
Strategika prior to the reorganization, contributed all of his Strategika common
stock to Strategika without additional consideration.
Tianshi International was incorporated on March 24, 2003, in the territory of
the British Virgin Islands. On June 18, 2003, Tianshi International acquired 80%
of Tianjin Tianshi Biological Development Co., Ltd ("Biological"). Biological is
a Chinese-foreign equity joint venture company established under the laws of the
PRC on March 27, 1997. Biological is subject to the Law on Sino Foreign Equity
Joint Ventures ("Joint Venture Law"), its implementation regulations and other
related rules and regulations ("Joint Venture Regulations"). Biological is an
independent legal entity having the legal structure of a limited liability
company, similar to a regular corporation with limited liability organized under
state laws in the United States of America. The Articles of Association of
Biological provides for a 50 year term with registered capital of $10,000,000.
As an approved Chinese-foreign equity joint venture, Biological receives special
income tax incentive treatment from both the local (Wuqing County) and central
governments in China. The original partners in this joint venture were Tianshi
Hong Kong International Development Co., Ltd. ("Tianshi Hong Kong") incorporated
in Hong Kong which owned 80% of the joint venture, and Tianshi Engineering,
which owned the remaining 20% of Biological. Tianshi Hong Kong is owned 100% by
LI Jinyuan. Tianshi Engineering is 49% owned by Ms. Li Baolan and 51% by Tianshi
Group. In June 2003, Tianshi Engineering transferred its 20% interest in
Biological for no consideration to Tianshi Pharmaceuticals and Tianshi
International acquired 80% of Biological from Tianshi Hong Kong for no
consideration. This transfer was made for no consideration, since LI Jinyuan is
president and sole shareholder of both companies.
See report of independent registered public accounting firm.
F-6
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Background (continued)
As result of the above transactions, Tianshi International is now a wholly owned
subsidiary of the Company and Biological remained as an 80% owned subsidiary of
Tianshi International. The following diagram is an organization and equity
ownership chart of the Company and its affiliates:
[GRAPHIC OMITTED]
The graphic omitted shows the organizational chart of Tiens USA, including the
percentage ownership. The following describes the chart:
Tiens USA is owned 4.91% by public stockholders, 2.8% by officers and 92.29% by
Mr. Li Jinyuan . Tiens USA owns 100% of Tianshi International. Tianshi
Inernational owns 80% of Biological and 99.4% of Tiens Yihai.
Tianshi Group is owned 90% by Mr. Li Jinyuan and 10% by his daughter, Ms. Li
Baolan. Tianshi Group owns 87.66% of Tianshi Pharmaceuticals and 51% of Tianshi
Engineering. Tianshi Pharmaceuticals owns 20% of Biological and 0.6% of Tiens
Yihai.
Ms. Li Baolan owns 49% of Tianshi Engineering and 7.29% of Tianshi
Pharmaceuticals.
Tianjin Feishi Transportation Co., Ltd. owns 5.05% of Tianshi Pharmaceuticals.
Note 2 - Summary of significant accounting policies
The reporting entity
--------------------
The financial statements in the Strategika filings became those of Tiens. The
consolidated financial statements of Tiens reflect the activities of the
following Company subsidiaries:
Percentage
Subsidiary Of Ownership
------------------------------------------------------------------------- ------------
Tianshi International Holdings Group, Ltd British Virgin Islands 100.0%
Tianjin Tianshi Biological Development Co., Ltd P.R.C. 80.0%
Tiens Yihai Co. Ltd. P.R.C. 99.4%
Tianshi International is a corporation organized under the laws of the British
Virgin Islands. Tianshi International is a holding company for Tiens 80%
investment in Biological and its 99.4% investment in Tiens Yihai Co., Ltd.
("Tiens Yihai").
See report of independent registered public accounting firm.
F-7
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued)
The reporting entity (continued)
Biological is a foreign investment joint venture which is incorporated under the
laws of PRC. Biological is classified as a Foreign Investment Enterprise (FIE)
in the PRC and is subject to the FIE laws of the PRC. Biological 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 beginning on March 27, 1998 with registered capital of $10,000,000.
Tiens Yihai Co. Ltd. (Tiens Yihai) is a foreign investment joint venture which
is incorporated under the laws of PRC. Tiens Yihai is classified as a Foreign
Investment Enterprise (FIE) in the PRC and is subject to the FIE laws of the
PRC. Tiens Yihai 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 beginning on May 27, 2004 with
registered capital of $200,000,000.
Tianshi International owns 80% of its subsidiary Biological and 99.4% of its
subsidiary Tiens Yihai. The remaining 20% and 0.6% respectively are owned by
Tianshi Pharmaceuticals whose majority shareholder is Tianshi Group.
Nature of operations
The Company through its subsidiaries is primarily engaged in the manufacturing
and marketing of wellness products, nutrition supplement products and personal
care products. The Company sells its products to a sales force of related
distributors who in turn sell to independent distributors and managers who
resell them to other distributors or public consumers. The Company markets its
products in China, South Korea, Japan, India, Thailand, Malaysia, Indonesia,
Canada, Peru, Brazil, Russia, Kazakhstan, Belarus, Mongolia, Finland, Lithuania,
Britain, Germany, France, Romania, Ukraine, Portugal, Turkey, Italy, Nigeria,
Ghana, South Africa and Australia.
Revenue recognition
The Company recognizes revenue from domestic sales by distributors in China, net
of sales commissions and taxes only when the related Chinese distributor
recognizes sales of the Company's products to unaffiliated third parties. The
Company recognizes revenue from international sales (non-Chinese) to both
affiliated and unaffiliated third parties, net of commissions and taxes as goods
are shipped and clear review by the international customs department.
The Company is generally not contractually obligated to accept returns. However,
on a case by case negotiated basis, the Company permits customers to return
their products. In accordance with SFAS No. 48, "Revenue Recognition when the
Right of Return Exists", revenue is recorded net of an allowance for estimated
returns. Such reserves are based upon management's evaluation of historical
experience and estimated costs. The amount of the reserves ultimately required
could differ materially in the near term from amounts included in the
accompanying consolidated financial statements.
See report of independent registered public accounting firm.
F-8
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued)
Revenue recognition (continued)
In 2004 and 2003, Tianshi Engineering, a related company, owned all of the
related party distributors which sell the Company's products domestically in
China.
Foreign currency translation
The reporting currency of the Company is the US dollar. Biological's and Tiens
Yihai' s financial records are maintained and the statutory financial statements
are stated in their local currency, Renminbi (RMB), 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
unified exchange rate as quoted by the People's Bank of China at the end of each
reporting period.
This quotation of the exchange rates does not imply free convertibility of RMB
to other foreign currencies. All foreign exchange transactions continue to take
place either through the People's Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People's Bank of
China.
Approval of foreign currency payments by the Bank of China or other institutions
requires submitting a payment application form together with invoices, shipping
documents and signed contracts.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders' equity
and amounted to $(8,238) and $(3,928) December 31, 2004 and December 31, 2003,
respectively.
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.
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.
The Company is subject to income taxes on an entity basis on income arising in
or derived from the tax jurisdiction in which each entity is domiciled. The
Company's subsidiary, Tianshi International, was incorporated in the British
Virgin Islands and is not liable for income taxes.
See report of independent registered public accounting firm.
F-9
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued)
Income taxes (continued)
The Company's subsidiaries, Biological and Tiens Yihai, are Sino-Foreign Joint
Ventures incorporated in the People's Republic of China. Pursuant to the income
tax laws of the PRC concerning Foreign Investment Enterprises and foreign
Enterprises and various local income tax laws (the "Income Tax Law"),
Sino-foreign joint venture enterprises generally are subject to income tax at an
effective rate of 33% (30% state income taxes plus 3% local income taxes) on
income as reported in their statutory financial statements unless the enterprise
is located in specially-designated regions or cities for which more favorable
effective rates apply.
Biological is located in a Special Economic Zone and is subject to the special
reduced income tax rate of 15%. Pursuant to the approval of the relevant PRC tax
authorities, Biological is fully exempt from PRC income taxes for two years
starting from the year profits are first made, followed by a 10% reduced tax
rate for the next three years.
Prior to the year ended December 31, 2002, Biological suffered operating losses.
Biological started generating taxable profits in the year ended December 31,
2003. Effective January 1, 2005, the two-year 100% exemption for income taxes
will expire for Biological and it will become subject to income tax at a reduced
rate of 10%.
Tiens Yihai is located in a Special Industry Zone and is subject to the special
reduced income tax rate of 15%. Pursuant to the approval of the relevant local
Chinese tax authorities, Tiens Yihai is fully exempt from PRC income taxes for
two years starting from the year profits are first made, followed by a 15%
reduced tax rate for the next three years. In addition, to encourage Tiens Yihai
doing business in the special industry zone, the local Chinese tax authorities
agreed to refund 50% of the total income tax after the five-year tax break.
Tiens Yihai was established for the purposes of being in the business of
research and development, production and marketing of healthcare, home care and
personal care products. As of December 31, 2004, Tiens Yihai is in the
developmental stage of its organization and did not have any operating income.
Plant and equipment, net
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Depreciation expense for the years ended December
31, 2004 and 2003 amounted to $1,303,433 and $991,138, respectively.
Estimated useful lives of the assets are as follows:
Estimated Useful Life
---------------------
Buildings 20 years
Machinery and equipment 10 years
Computer, office equipment and furniture 5 years
Automobiles 5 years
See report of independent registered public accounting firm.
F-10
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued)
Plant and equipment, net (continued)
Construction in progress represents the costs incurred in connection with the
construction of buildings or new additions to the Company's plant facilities. No
depreciation is provided for construction in progress until such time as the
relevant assets are completed and are ready for their intended use. The
capitalization of interest associated with the cost in construction in progress
is discussed in note 2, Capitalized interest.
The cost and related accumulated depreciation of assets sold or otherwise
retired are eliminated from the accounts and any gain or loss is included in the
consolidated statements of operations. Maintenance, repairs and minor renewals
are charged directly to expenses as incurred. Major additions and betterment to
buildings 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 the future projected cash flows from related
operations. The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives. As of December 31, 2004, the Company expects these assets to be
fully recoverable.
Plant and equipment consist of the following at December 31:
2004 2003
----------- -----------
Buildings and improvements $ 7,962,799 $ 1,453,913
Office facilities 162,522 461,526
Computer equipment and software 782,846 763,661
Equipment 6,514,151 6,126,161
Vehicles 2,771,364 1,455,991
Construction in progress 6,023,223 4,455,309
----------- -----------
Total 24,216,905 14,716,561
Less accumulated depreciation 4,016,099 3,560,293
----------- -----------
Total $20,200,806 $11,156,268
=========== ===========
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 combined
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.
See report of independent registered public accounting firm.
F-11
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued)
Recently issued accounting pronouncements
In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
03-1 includes new guidance for evaluating and recording impairment losses on
debt and equity investments, as well as new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the
FASB issued Staff Position EITF 03-1-1, which delays the effective date until
additional guidance is issued for the application of the recognition and
measurement provisions of EITF 03-1 to investments in securities that are
impaired; however, the disclosure requirements are effective for annual periods
ending after June 15, 2004. Although the Company will continue to evaluate the
application of EITF 03-1, management does not currently believe adoption will
have a material impact on the Company's financial position or results of
operations.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges..." SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this requires that allocation of fixed production
overhead to the costs of conversion be based on the normal capacity of the
production facilities.
The provisions of SFAS 151 shall be applied prospectively and are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005, with
earlier application permitted for inventory costs incurred during fiscal years
beginning after the date this Statement was issued. The Company's adoption of
SFAS No. 151 is not currently expected to have a material impact on the
Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), "Share-Based
Payment", which amends FASB Statement No. 123 and will be effective for public
companies for interim or annual periods beginning after June 15, 2005. The
revised standard requires, among other things that compensation cost for
employee stock options be measured at fair value on the grant date and charged
to expense over the employee's requisite service period for the option. Due to
the absence of observable market prices for employee stock options, the standard
indicates that the fair value of most stock options will be determined using an
option-pricing model. The Company's adoption of SFAS No. 123(R) is not currently
expected to have a material impact on the Company's financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle.
See report of independent registered public accounting firm.
F-12
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued)
This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company's adoption of SFAS No. 153 is not
expected to have a material impact on the Company's financial position or
results of operations.
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, 2004 and 2003 amounted to $39,826,675 and
$12,725,043, 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.
Accounts receivable - related parties
The Company's trade accounts receivables are 100% due from related companies.
Management believes that the accounts are fully collectible as these amounts are
being collected throughout the year. However, the Company records a provision
for accounts receivable trade which ranges from 0.3% to 0.5% of the outstanding
accounts receivable balance in accordance with generally accepted accounting
principles in the PRC.
The allowance for doubtful accounts as at December 31, 2004 and 2003 amounted to
$30,442 and none, respectively.
Other receivables
Other receivables consist of various cash advances to the Company's independent
sales representatives, unrelated companies and individuals that have business
relationships with the Company. These amounts are unsecured, non-interest
bearing and generally short term.
Inventories
Inventories are stated at the lower of cost or market using the first-in
first-out basis and consist of the following at December 31:
2004 2003
---------- ----------
Raw material $2,246,493 $1,673,405
Work-in-progress 284,458 342,252
Finished goods 2,036,467 1,988,559
---------- ----------
Total $4,567,418 $4,004,216
========== ==========
See report of independent registered public accounting firm.
F-13
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued)
Inventories (continued)
The Company reviews its inventory annually for possible obsolete goods or to
determine if any reserves are necessary for potential obsolescence. As of
December 31, 2004 and 2003, the Company has determined that no reserves are
necessary at year end.
Intangible assets
All land in the PRC 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. The Company acquired two land use rights for
fifty years from The PRC on December 1, 1999 and October 4, 2004 for $645,818 in
total. The costs of the rights are being amortized over ten years, using the
straight-line method.
At December 31, 2004 and 2003, accumulated amortization amounted to $176,053 and
$124,335, respectively, and amortization expense for the years ended December
31, 2004 and 2003 amounted to $51,718 and $47,764, respectively.
Deposits
The Company has deposited $3.59 million with a local government agency to
acquire the land use right for land in Shanghai in connection with its joint
venture project described in note 13. The land use right is for a term of 50
years and as of December 31, 2004, the Company has not legally acquired the
right from the government. The deposit is non refundable.
Capitalized interest
The Company has capitalized a portion of its interest costs as a component of
building construction costs. Total interest expense for the years December 31,
2004 and 2003 net of capitalized interest amounted to $320,565 and $464,916,
respectively. Total interest expense capitalized as part of the construction
costs for the years ended December 31, 2004 and 2003 amounted to $16,029 and
$34,459, respectively.
Fair value of financial instruments
The Company's financial instruments consist primarily of cash, trade and notes
receivable, trade payables, advances, other receivables, and debt instruments.
The carrying values of these financial instruments approximate their fair
values. The estimated fair values have been determined using appropriate market
information and valuation methodologies.
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 years ended December 31, 2004 and 2003.
See report of independent registered public accounting firm.
F-14
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued)
Earnings per share (continued)
The weighted average number of shares used calculate EPS reflect the 6.5 to 1
share split retroactively starting January 1, 2002.
The weighted average number of shares used to calculate EPS for the year ended
December 31, 2004 (71,801,819) and 2003 (44,730,609) reflect only the shares
outstanding for those periods.
On July 31, 2004, the board of directors of the Company accepted the resignation
of one of the members of the Board. The resigning director's 665,000 shares of
common stock of the Company were returned to the Company and cancelled on
September 14, 2004.
Note 3 - Short term notes payable
Short term notes payable represent amounts due to various banks and are due on
demand or normally within one year. These loans generally can be renewed with
the banks. Short term notes payable at December 31, consisted of the following:
2004 2003
---------- ----------
Loan rom Industrial Commerical Bank, due July 17, 2004
and August 5, 2002, respectively. Monthly interest
payment only at 6.372% per annum, secured by
properties and guaranteed by Tianshi Group $ -- $2,057,000
Loan from Country Credit Union, due on various dates
Monthly interest only payments at 7.965%
per annum, secured by properties -- 3,267,000
---------- ----------
Totals $ -- $5,324,000
========== ==========
Note 4 - Long term debt
Note payable - related party
On September 10, 2004, Tianshi International signed a loan agreement with
Tianyuan Capital Development Corp. Ltd. ("Tianyuan Capital") to borrow $10.65
million to fund Tianshi International's contribution due to Tiens Yihai. Mr. Li
Jin Yuan, the president and major shareholder of the Company, is a director of
Tiens Yihai and a director of Tianyuan Capital.
The principal of the loan will be paid in ten consecutive semiannual
installments of US $1,065,000 commencing December 31, 2006. The first interest
payment will be paid on December 31, 2004 at an annual interest rate of 5%.
Interest expense of $163,516 has been accrued at December 31, 2004 on this note.
See report of independent registered public accounting firm.
F-15
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Long term debt (continued)
Notes payable (continued)
-------------------------
2004 2003
----------- -----------
Note payable due to Tianyuan Capital Development
Corp. Ltd., related party $10,657,742 $ --
Loan from Agricultural Bank of China, due on various
dates in 2005. Monthly interest and principal
payment at 6.588% per annum, secured by
properties 155,442 414,955
----------- -----------
Total 10,813,184 414,955
Less current portion of long term debt 155,442 259,364
----------- -----------
Total $10,657,742 $ 155,591
=========== ===========
Total principal payments for the next five years on all long-term debt are as
follows:
Year
Ending
December 31, Amount
--------------------- -------------
2005 $ 155,442
2006 1,065,000
2007 2,130,000
2008 2,130,000
2009 2,130,000
Thereafter 3,202,742
Total interest expense for the years ended December 31, 2004 and 2003 amounted
to $336,594 and $464,916, respectively.
Note 5 - Supplemental disclosure of cash flow information
No income taxes were paid for the years ended December 31, 2004 and 2003,
respectively. Interest paid amounted to $173,078 and $464,916 for the years
ended December 31, 2004 and 2003, respectively. During the year ended December
31, 2004, the Company sold equipment for a total sale price of $709,107 and
received cash of $65,129 and a non-interest bearing receivable of $643,978 which
is disclosed as related party transaction under other receivable in Note 7. The
sale resulted in a loss of $124,536.
See report of independent registered public accounting firm.
F-16
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Supplemental disclosure of cash flow information (continued)
During the year ended December 31, 2004, the Company purchased various fixed
assets from a related party by canceling $6,913,517 of other receivables. During
the year ended December 31, 2003, the Company sold various fixed assets with net
book value of $3,238,210 to a related party (through a cancellation of)
$3,238,210 of other payables. The sale resulted in a gain of $1,791.
Note 6 - Accounts receivable and credit risk
The Company's business operations are conducted domestically in the PRC and
internationally. 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 allowance for doubtful accounts is adequate
at each year-end.
Note 7 - Related party transactions
The following is a description of the various individuals and companies
discussed in the footnotes and their relationship to the Company.
Tianshi International Holdings Group Limited - British Virgin Island Company
owned 100% by Tiens Biotech Group (USA), Inc.
Li Jinyuan - individual - President and majority shareholder
Li Baolan - individual - daughter of Li Jinyuan
Tianjin Tianshi Biological Development Co., LTD - Chinese joint venture which
Tianshi International Holdings Group Limited owns 80%
Tianshi Hong Kong International Development Co., Limited - Hong Kong Company
owned 100% by Li Jinyuan
Tianjin Tianshi Biological Engineering Co., LTD - Chinese company owned 49% by
Li Baolan and 51% by Tianjing Tianshi Group Co., Ltd.
Tianjin Tianshi Pharmaceuticals Co., LTD - a Chinese company and the majority
shareholder is Tianjin Tianshi Group Co., Ltd.
Tianjin Tianshi Group Co., Ltd. - owned 90% by Li Jinyuan and 10% by Li Baolan
Sales
The Company sells products to distributors that are related to the Company
through common ownership. The related party distributors in turn market and sell
the Company's products to independent distributors or end users of the products.
The related party distributors are solely responsible for all marketing and
payments of sales commissions to independent distributors.
See report of independent registered public accounting firm.
F-17
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Related party transactions (continued)
Sales (continued)
Related party sales amounted to $58,910,532 and $38,392,208 for the years ending
December 31, 2004 and 2003, which represent 100% of total sales for the year
ended December 31, 2004 and 2003, respectively. Related party accounts
receivable from these sales amounted to $6,058,021 and $8,533 at December 31,
2004 and 2003, respectively, net of allowances for doubtful accounts of $30,442
and $0, respectively.
Other receivables
The Company through its Chinese joint venture, Tianjin Tianshi Biological
Development Co., Ltd., is owed additional amounts classified as other
receivables from various related parties totaling $8,144,740 and $26,831,339 as
of December 31, 2004 and 2003, respectively. Detail of other receivables-related
parties are as follows:
These receivables are generated by the Company making various cash advances and
short term loans and the allocation of various expenses to related parties.
These are recurring transactions. The Company does not charge interest on these
receivables.
On March 26, 2004, Biological had entered into an agreement with Tianjin Juchao
Commercial and Trading Co., Ltd. ("Juchao") to convert various receivable
amounts into a note receivable in the amount of RMB200,000,000 or approximately
USD$24,200,000. The note was paid in four quarterly installments of
RMB50,000,000 beginning March 31, 2004. Interest in the amount of $914,760 was
charged beginning January 1, 2004 at an annual rate of 6.048%.
The receivable was secured by the personal guarantee of Li Jinyuan, President
and major shareholder of Tiens, and the pledge of 20% of his stock ownership in
Tiens or 13,167,000 shares. These shares are restricted stock (as defined in
Rule 144 of the Securities Act of 1933, as amended) and can not be traded until
September 10, 2004.
Accounts payable
Accounts payable due to related parties amounted to $209,199 and $758,570 at
December 31, 2004 and 2003, respectively. These amounts were generated from the
related parties' paying expenses on behalf of the Company.
See report of independent registered public accounting firm.
F-18
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Related party transactions (continued)
Other payables
The Company also has amounts classified as other payables due to related parties
which amounted to $945,274 and $1,312,288 as of December 31, 2004 and 2003,
respectively. These amounts arose from cash advances from related parties,
management fees due to related parties, and various non-operational transactions
incurred with related parties.
Rent expense
As of January 1, 2003, the Company had a verbal agreement with Tianshi Group,
which is a related party through ownership, to lease a portion of its office
building and manufacturing facilities. The Company had agreed to pay for certain
expenses of the Tianshi Group in lieu of a lease payment. On June 30, 2003, the
Company entered into a written lease agreement with Tianshi Group to pay annual
rent on these facilities at 1% of total gross revenues. The term of this
agreement is for five years commencing on January 1, 2003. In addition, the
Company is obligated to pay insurance, maintenance and other expenses related to
the premises. Rent expense under this agreement amounted to $595,494 and
$375,645 in 2004 and 2003, respectively.
Note 8 - Employee advances
Employee advances represent cash advances to various employees of the Company.
In the People's Republic of China, a majority of business transactions are
completed in cash. These cash advances represent monies advanced to certain
employees to pay for various expenses and purchases related to the Company's
daily operations. Employee advances amounted to $75,212 and $821,536 at December
31, 2004 and 2003, respectively.
Note 9 - Deposits - non current
The Company as of December 31, 2004 and 2003 had outstanding deposits of
$4,436,366 and $1,051,557, respectively. These amounts represent deposits with
vendors for purchases of equipment and construction in progress.
Note 10 - Retirement plan
Regulations in the People's Republic of China require the Company to contribute
to a defined contribution retirement plan for all employees. All Joint Venture
employees are entitled to a retirement pension amount calculated based upon
their salary at their date of retirement and their length of service in
accordance with a government managed pension plan. The PRC government is
responsible for the pension liability to the retired staff.
The Joint Venture is required to make contributions to the state retirement plan
at 20% of the employees' monthly salary.
Employees are required to contribute 7% of their salary to the plan. Total
pension expense incurred by the Company amounted to $89,593 and $68,717 for the
years ended December 31, 2004 and 2003, respectively.
See report of independent registered public accounting firm.
F-19
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Retirement plan (continued)
The Company also has an unemployment insurance plan for its employees. The plan
requires each employee to contribute 1% of salary to the plan. The Company
matches the contributions in an amount equal to two times the contribution of
each participant. The Company made contributions to the unemployment insurance
plan of $9,677 and $5,420 for the years ended December 31, 2004 and 2003
respectively. All contributions are paid to a PRC insurance company, which in
turn, is responsible for the liability.
On January 1, 2002, the Company introduced a basic medical insurance plan for
its employees. Pursuant to the new medical insurance plan, the Company is
required to pay an amount equal to 10% of its employees' salary to a PRC
insurance company, which amounted to $42,849 and $28,488 for the years ended
December 31, 2004 and 2003, respectively.
Note 11- Distribution of income, statutory reserves and restricted retained
earnings
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. The statutory
reserves include the surplus reserve fund, the common welfare fund, and the
enterprise fund.
Statutory reserve fund
The Company is required to transfer 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 distribution of any dividend to
shareholders.For the year ended December 31, 2004, the Company transferred
$2,845,324, representing 10% of the year's net income determined in accordance
with PRC accounting rules and regulations, to this 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.
Common welfare fund
The Company is required to transfer 5% to 10% of its net income, as determined
in accordance with the PRC accounting rules and regulations, to the statutory
common welfare fund. This fund can only be utilized on capital items for the
collective benefit of the Company's employees, such as construction of
dormitories, cafeteria facilities, and other staff welfare facilities. This fund
is non-distributable other than upon liquidation. The transfer to this fund must
be made before distribution of any dividend to shareholders. For the year ended
December 31, 2004, the directors authorized, subject to shareholders' approval,
the transfer of $1,422,661, which amounted to 5% of current year's net income,
to the statutory reserve fund.
See report of independent registered public accounting firm.
F-20
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Distribution of income, statutory reserves and restricted retained
earnings (continued)
Enterprise fund
The enterprise fund may be used to acquire fixed assets or to increase the
working capital to expend on production and operation of the business. No
minimum contribution is required. For the year ended December 31, 2004, the
board of directors authorized, subject to shareholders' approval, the transfer
of $1,422,661, which amounted to 5% of current year's net income, to the
enterprise fund.
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.
Note 12 - Minority interest distributions
Minority interest represents the outside shareholders' 20% ownership of
Biological and 0.6% ownership of Tiens Yihai. The board of directors of
Biological has authorized the following distributions to their shareholders in
direct proportion to their ownership percentages.
TIANSHI MINORITY
Date INTERNATIONAL SHAREHOLDER Totals
------------ ------------ ------------
March 22, 2004 RMB 82,430,670 RMB 20,607,668 RMB 103,038,338
June 30, 2004 80,525,905 20,131,476 100,657,381
December 31, 2004 100,000,000 25,000,000 125,000,000
------------ ------------ ------------
Total RMB 262,956,575 RMB 65,739,144 RMB 328,695,719
============ ============ ============
Total US $ 31,817,746 US $ 7,954,436 US $ 39,772,182
============ ============ ============
The amounts paid to Tianshi International have been used to invest in its new
Shanghai investment described in note 13. As of December 31, 2004, the minority
shareholder of Biological has been fully paid.
Note 13 - Investment in Tiens Yihai Co. Ltd.
On April 20, 2004, Tianshi International entered a joint venture contract (the
"Joint Venture Project") with Tianshi Pharmaceuticals to establish Tiens Yihai.
On September 15, 2004, the board of directors of Tianshi International ratified
the Joint Venture Project. Tiens Yihai is located in Shanghai, P.R.C., and is in
the business of research and development, production and marketing of
healthcare, home care and personal care products.
See report of independent registered public accounting firm.
F-21
TIENS BIOTECH GROUP (USA), INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Investment in Tiens Yihai Co. Ltd. (continued)
In the footnotes of the Company's financial statements for the quarter ended
June 30, 2004, we described this investment as Tiens Ocean Going Co., Ltd. Due
to the translation from Chinese to English, the Company has officially confirmed
that the English name is Tiens Yihai Co., Ltd.
The total amount to be invested in Tiens Yihai will amount to $400 million, of
which $200 million will be registered capital. Tianshi International will
contribute $198.8 million, representing approximately 99.4% of the registered
capital of Tiens Yihai, and Tianshi Pharmaceuticals will contribute $1.2 million
representing 0.6% of the registered capital of Tiens Yihai. Tianshi
International will secure additional financing for the remaining $200 million.
A total of 15% or approximately $30,000,000, of the registered capital is
required to be contributed by the joint venture partners, within three months
after the business license has been issued. The remaining registered capital
amounts are required to be contributed by each joint venture partner within
three years of the issuance of the business license or May 27, 2004. As of
December 31, 2004, Tianshi International has made its required capital
contribution in the amount of US $29,861,853.
See report of independent registered public accounting firm.
F-22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 31, 2005 TIENS BIOTECH GROUP (USA), Inc.
By: /s/ Jinyuan Li
---------------------------------------
Name: Jinyuan Li
Executive Officer and
President (Principal Executive Officer)
By: /s/ Wenjun Jiao
---------------------------------------
Name: Wenjun Jiao
Title: Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this Annual
Report on Form 10-KSB is signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Jinyuan Li Chief Executive Officer, President March 31, 2005
----------------------- and Director (Principal Executive
Jinyuan Li Officer)
/s/ Wenjun Jiao Chief Financial Officer and March 31, 2005
------------------------- Director (Principal Accounting
Wenjun Jiao Officer)
/s/ Yupeng Yan Executive Vice President March 31, 2005
------------------------- and Director
Yupeng Yan
/s/ Ping Bai Executive Assistant to the March 31, 2005
------------------------- President and Director
Ping Bai
/s/ Socorro M. Quintero Director March 31, 2005
-------------------------
Socorro M. Quintero
/s/ Howard R. Balloch Director March 31, 2005
-------------------------
Howard R. Balloch
/s/ Gilbert D. Raker Director March 31, 2005
-------------------------
Gilbert D. Raker
Exhibit 2.1
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered into
this 22nd day of August, 2003, to be deemed effective the 2nd day of September,
2003 (the "Effective Date"), by and among Strategika, Inc., a corporation
organized under the laws of the State of Delaware ("Strategika"); Tianshi
International Holdings Group Limited, a corporation organized under the laws of
the British Virgin Islands ("TIANSHI"); Jin Yuan Li, Jiao Wen Jun, and Yan Yu
Peng, each a Chinese national who are the sole stockholders of TIANSHI (the
"TIANSHI Stockholders").
WITNESSETH:
RECITALS
WHEREAS, the respective Boards of Directors of Strategika and TIANSHI
have adopted resolutions pursuant to which Strategika shall acquire and the
TIANSHI Stockholders shall exchange for shares of the common capital stock of
Strategika 100% of the outstanding common stock of TIANSHI ( the TIANSHI
Shares"); and
WHEREAS, the sole consideration for the exchange of the TIANSHI Shares
shall be the receipt by the TIANSHI Stockholders of shares of the common capital
stock of Strategika, $.001 par value per share, as more particularly set forth
in Exhibit "A" hereto. The shares of Strategika's common stock shall be deemed
"restricted securities" as defined in Rule 144 of the Securities Act of 1933, as
amended ( the "Act"); and
WHEREAS, on August 18, 2003, Strategika completed a 6.5-for-one forward
spilt (the "Forward Split") of its common capital stock and as such, all share
numbers contained herein that relate to the common capital stock of Strategika,
have been adjusted for the Forward Split; and
WHEREAS, the TIANSHI Stockholder shall acquire in exchange such
"restricted securities" of Strategika in a reorganization within the meaning of
Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, and/or
any other "tax free" exemptions thereunder that may be available for this
exchange, if and only to the extent that the Internal Revenue Code applies to
this Agreement and the transactions contemplated thereby;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, it is agreed:
Section 1
Exchange of Stock
1.1 Transfer and Number of Shares. The TIANSHI Stockholders agree to
transfer to Strategika at the closing (the "Closing") the TIANSHI Shares, in
exchange for 68,495,000 newly issued and restricted shares of common stock of
Strategika, as outlined in Exhibit A. After the Closing, there will be
71,998,302 outstanding shares of common stock of the reorganized Strategika,
which takes into account the cancellation of 29,000,000 shares of Strategika's
common stock held in the name of Rene Larrave as outlined in Section 1.5 hereof.
1.2 Exchange of Certificates by TIANSHI Stockholders. The transfer of
the TIANSHI Shares shall be effected by the delivery to Strategika at the
Closing of stock certificates duly endorsed in blank or accompanied by stock
powers executed in blank with all signatures witnessed or guaranteed to the
satisfaction of Strategika and with all necessary transfer taxes and other
revenue stamps affixed and acquired at the TIANSHI Stockholders' expense.
1.3 Further Assurances. At the Closing and from time to time
thereafter, the TIANSHI Stockholders shall execute such additional instruments
and take such other action as Strategika may request in order to exchange and
transfer clear title and ownership in the TIANSHI Shares to Strategika.
1.4 Cancellation of Shares in the Name of Rene Larrave. Effective
simultaneously with the Closing, Rene Larrave returned to Strategika and
Strategika duly cancelled 29,000,000 shares of Strategika's common stock held by
Mr. Larrave. These shares were canceled on the books and records of Strategika's
transfer agent, Securities Transfer Corporation at 2591 Dallas Parkway, Suite
102, Frisco, Texas 75034, and have been returned to the status of authorized and
unissued securities of Strategika.
1.5 Resignations of Present Directors and Executive Officers and
Designation of New Directors and Executive Officers. On the Effective Date, the
present directors and executive officers of Strategika shall designate the
directors and executive officers nominated by the TIANSHI Stockholders to serve
in their place and stead, until the next respective annual meeting of the
stockholders and the Board of Directors of the reorganized Strategika, and until
their respective successors shall be elected and qualified or until their
respective prior resignations or terminations. The following shall be appointed
directors and officers of Strategika upon the closing of the transactions
contemplated herein: Jin Yuan Li, Director/President and Chief Executive
Officer; Wen Jun Jiao, Director/Secretary/Chief financial Officer; Yan Yu Peng,
Director, Gangji Qian, Director, and Jiatai Deng, Director. The current
directors and executive officers shall resign, in seriatim, on the Effective
Date.
1.6 Assets and Liabilities of Strategika at Closing. Strategika shall
have no assets and no liabilities at Closing, and all costs incurred by
Strategika incident to the Agreement shall have been paid or satisfied.
1.7 Employee Stock Option Plan. Strategika agrees to recognize and
adopt the employee stock option plans of TIANSHI such that the shares of TIANSHI
reserved for issuance thereunder, shall be replaced by 13,500,000 shares of
Strategika common stock.
1.8 Present Outstanding Securities of Strategika . TIANSHI will not
contest the validity of any of the presently outstanding shares of Strategika
common stock.
1.9 Condition Precedent to the Closing. On or before the Effective Date
the following conditions will have been satisfied by TIANSHI: (a) the TIANSHI
Stockholders and TIANSHI shall have provided Strategika with
satisfactory evidence that TIANSHI has acquired eighty (80%) of the ownership of
Tianjin Tianshi Bio Development Company , a Chinese registered Sino-Foreign
Joint Venture Company ("Tianshi China"), and that the 80% ownership of Tianshi
China has been owned by TIANSHI, (b) an opinion of counsel confirming that
TIANSHI has an 80% controlling interest in Tianshi China shall be delivered to
Strategika, and (c) the TIANSHI Financial Statements (as hereinafter defined),
with the signed auditor's report, as applicable, shall be delivered to
Strategika .
1.10 Closing. This Agreement will be deemed to be completed on the
execution and delivery of the Agreement by all the parties herein (the "Closing
Date"), and the transactions contemplated herein deemed effective on the
Effective Date, subject to the satisfaction by TIANSHI of the conditions set
forth in Section 1.9 above.
Section 2
Closing
The Closing contemplated by Section 1 shall be held at the offices of
George Diamond, Esq., Suite 6000, 901 Main Street, Dallas, Texas 75202, unless
another place or time is agreed upon in writing by the parties. The Closing may
also be accomplished by wire, express mail or other courier service, conference
telephone communications or as otherwise agreed by the respective parties or
their duly authorized representatives.
Section 3
Representations and Warranties of Strategika
Strategika represents and warrants to, and covenants with, the TIANSHI
Stockholders and TIANSHI as follows:
3.1 Corporate Status: Compliance with Securities Laws. Strategika is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and is licensed or qualified as a foreign corporation
in all jurisdictions in which the nature of its business or the character or
ownership of its properties makes such licensing or qualification necessary.
Strategika is a publicly-held company; and Strategika is not in violation of any
applicable federal or state securities laws, rules or regulations. Strategika's
common stock is quoted on the OTC Bulletin Board of the National Association of
Securities Dealers, Inc. (the "NASD") under the symbol "SGKA," though there is
at present no "established trading market" for its securities. The shares of
Strategika common stock issuable to the TIANSHI Stockholders hereunder will be
eligible for resale in reliance upon Rule 144 of the Act, without registration
under the Act, after satisfaction by the TIANSHI Stockholders of the one year
holding period established by Rule 144 and other requirements imposed by each of
Rule 144, the Act, generally, and the Securities Exchange Act of 1934.
3.2 Capitalization. The current authorized capital stock of Strategika
consists of 250,000,000 shares of $.001 par value common voting stock, of which
approximately 32,503,302 shares are issued and outstanding, all fully paid and
non-assessable. Except as otherwise provided herein, there are no outstanding
options, warrants or calls pursuant to which any person has the right to
purchase any authorized and un-issued common or other securities of Strategika.
3.3 Financial Statements. The financial statements of Strategika
furnished to the TIANSHI Stockholders and TIANSHI, consisting of audited
financial statements for the years ended December 31, 2001 and 2002, and
unaudited financial statements for the period ended June 30, 2003, as on file
with the SEC and incorporated herein by reference, are correct and fairly
present the financial condition of Strategika at such dates and for the periods
involved; such statements were prepared in accordance with generally accepted
accounting principles consistently applied, and no material change has occurred
in the matters disclosed therein. Such financial statements do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
they were made, not misleading.
3.4 Undisclosed Liabilities. Strategika has no liabilities of any
nature except to the extent reflected or reserved against in its balance sheets,
whether accrued, absolute, contingent or otherwise, including, without
limitation, tax liabilities and interest due or to become due.
3.5 Interim Changes. Since the dates of its balance sheets, there have
been no (i) changes in financial condition, assets, liabilities or business of
Strategika which, in the aggregate, have been materially adverse; (ii) damages,
destruction or losses of or to property of Strategika, payments of any dividend
or other distribution in respect of any class of stock of Strategika, or any
direct or indirect redemption, purchase or other acquisition of any class of any
such stock; or (iii) increases paid or agreed to in the compensation, retirement
benefits or other commitments to its employees.
3.6 Title to Property. Strategika has good and marketable title to all
properties and assets, real and personal, reflected in its balance sheets, and
the properties and assets of Strategika are subject to no mortgage, pledge, lien
or encumbrance, with respect to which no default exists.
3.7 Litigation. There is no litigation or proceeding pending, or to the
knowledge of Strategika, threatened, against or relating to Strategika, its
properties or business. Further, no officer, director or person who may be
deemed to be an "affiliate" of Strategika is party to any material legal
proceeding which could have an adverse effect on Strategika (financial or
otherwise), and none is party to any action or proceeding wherein any has an
interest adverse to Strategika.
3.8 Books and Records. Strategika will deliver to the TIANSHI
Stockholders and TIANSHI or their respective representatives all of Strategika's
books, records, contracts and other corporate .
3.9 Tax Returns. Strategika has filed all United States federal and
state income or franchise tax returns required to have been filed by it or its
predecessors.
3.10 Confidentiality. Strategika's current directors and officers and
their representatives will keep confidential any information which they obtain
from the TIANSHI Stockholders or from TIANSHI concerning the properties, assets
and business of TIANSHI.
3.11 Corporate Authority. Strategika has full corporate power and
authority to enter into this Agreement and to carry out its obligations
hereunder and will deliver to the TIANSHI Stockholder and TIANSHI or their
respective representatives at the Closing a certified copy of resolutions of its
Board of Directors authorizing execution of this Agreement by Strategika's
officers and performance thereunder, and that the directors adopting and
delivering such resolutions are the duly elected and incumbent directors of
Strategika.
3.12 Due Authorization. Execution of this Agreement and performance by
Strategika hereunder have been duly authorized by all requisite corporate action
on the part of Strategika, and this Agreement constitutes a valid and binding
obligation of Strategika and performance hereunder will not violate any
provision of the Certificate of Incorporation or other documents, Bylaws,
agreements, mortgages or other commitments of Strategika, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application now or
hereafter in effect relating to or affecting the enforcement of creditors' right
generally and the application of general equitable principles in any action,
legal or equitable.
3.13 Environmental Matters. Strategika has no knowledge of any
assertion by any governmental agency or other regulatory authority of any
environmental lien, action or proceeding, or of any cause for any such lien,
action or proceeding related to the business operations of Strategika. In
addition, to the best knowledge of Strategika, there are no substances or
conditions which may support a claim or cause of action against Strategika or
any of Strategika' current or former officers, directors, agents or employees,
whether by a governmental agency or body, private party or individual, under any
Hazardous Materials Regulations. "Hazardous Materials" means any oil or
petrochemical products, PCB's, asbestos, urea formaldehyde, flammable
explosives, radioactive materials, solid or hazardous wastes, chemicals, toxic
substances or related materials, including, without limitation, any substances
defined as or included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials" or "toxic substances" under any applicable
federal or state laws or regulations. "Hazardous Materials Regulations" means
any regulations governing the use, generation, handling, storage, treatment,
disposal or release of hazardous materials, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act, the
Resource Conservation and Recovery Act and the Federal Water Pollution Control
Act.
3.14 Access to Information Regarding TIANSHI. Strategika acknowledges
that it has been delivered copies of what has been represented to be
documentation containing all material information respecting TIANSHI (including
its 80% owned subsidiary, Tianshi China), and TIANSHI's present and contemplated
business operations, potential acquisitions, management and other factors; that
it has had a reasonable opportunity to review such documentation and discuss it,
to the extent desired, with its legal counsel, directors and executive officers;
that it has had, to the extent desired, the opportunity to ask questions of and
receive responses from the directors and executive officers of TIANSHI, and with
the legal and accounting firms of TIANSHI, with respect to such documentation;
and that to the extent requested, all questions raised have been answered to
Strategika's complete satisfaction.
Section 4
Representations, Warranties and Covenants of TIANSHI
and the TIANSHI Stockholders
TIANSHI and the TIANSHI Stockholders represent and warrant to, and
covenant with, Strategika as follows:
4.1 Ownership of TIANSHI. The TIANSHI Stockholders own the TIANSHI
Shares free and clear of any liens or encumbrances of any type or nature
whatsoever, and have full right, power and authority to convey the TIANSHI
Shares that are owned by them without qualification.
4.2 Ownership of Tianshi China. TIANSHI owns 80% of the Tianshi China,
free and clear of any liens or encumbrances of any type or nature whatsoever,
and has full right, power and authority to convey its Tainshi China ownership
that it owns without qualification.
4.3 Corporate Status of TIANSHI. TIANSHI is a corporation duly
organized, validly existing and in good standing under the laws of British
Virgin Islands, and is licensed or qualified as a foreign corporation in all
jurisdictions or foreign countries and provinces in which the nature of
TIANSHI's business or the character or ownership of TIANSHI properties makes
such licensing or qualification necessary. It has one subsidiary that is
80%-owned, Tianshi China.
4.4 Corporate Status of Tianshi China. Tianshi China is a Sino-Foreign
Joint Venture Company duly organized, validly existing and in good standing
under the laws of the People's Republic of China, and is licensed or qualified
as a foreign corporation in all states of the United States or foreign countries
and provinces in which the nature of its business or the character or ownership
of its properties makes such licensing or qualification necessary.
4.5 Capitalization of TIANSHI. The authorized capital stock of TIANSHI
consists of 5,000,000 shares of common stock, $0.01 par value per share, of
which 684,950 shares are issued and outstanding, and which is fully paid and
non-assessable. Except for an option for 135,000 shares that was reserved to its
employees, there are no outstanding options, warrants or calls pursuant to which
any person has the right to purchase any authorized and unissued common or other
securities of TIANSHI.
4.6 Capitalization of Tianshi China. The paid-in capital of Tianshi
China is $10,000,000, all fully paid and non-assessable. There are no
outstanding options, warrants or calls pursuant to which any person has the
right to purchase any authorized and unissued common or other equities of
Tianshi China.
4.7 Financial Statements. When delivered to Strategika, The financial
statements of TIANSHI (the "TIANSHI Financial Statements"), which consist solely
of the financial statements of Tianshi China furnished to Strategika, consisting
of an audited compiled balance sheet and income statement for the period ended
December 31, 2001, 2002, and unaudited financial statements for the period ended
June 30, 2003, shall be correct and fairly present the combined financial
condition of TIANSHI and Tianshi China as of these dates and for the periods
involved; such statements shall have been prepared in accordance with generally
accepted accounting principles consistently applied, and no material change
shall have occurred in the matters disclosed therein. The TIANSHI Financial
Statements do not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements made, in light
of the circumstances under which they were made, not misleading.
4.8 Undisclosed Liabilities of TIANSHI. TIANSHI has no material
liabilities of any nature except to the extent reflected or reserved against in
the Tianshi China balance sheet, whether accrued, absolute, contingent or
otherwise, including, without limitation, tax liabilities and interest due or to
become due.
4.9 Undisclosed Liabilities of Tianshi China. Tianshi China has no
material liabilities of any nature except to the extent reflected or reserved
against in its balance sheet, whether accrued, absolute, contingent or
otherwise, including, without limitation, tax liabilities and interest due or to
become due.
4.10 Interim Changes of TIANSHI. Since the dates of its balance sheet,
there have been no (i) changes in the financial condition, assets, liabilities
or business of TIANSHI, which in the aggregate, have been materially adverse;
(ii) damages, destruction or loss of or to the property of TIANSHI, payment of
any dividend or other distribution in respect of the capital stock of TIANSHI,
or any direct or indirect redemption, purchase or other acquisition of any such
stock; or (iii) increases paid or agreed to in the compensation, retirement
benefits or other commitments to their employees.
4.11 Interim Changes of Tianshi China. Since the dates of its balance
sheet, there have been no (i) changes in the financial condition, assets,
liabilities or business of Tianshi China, which in the aggregate, have been
materially adverse; (ii) damages, destruction or loss of or to the property of
Tianshi China, payment of any dividend or other distribution in respect of the
capital stock of Tianshi China, or any direct or indirect redemption, purchase
or other acquisition of any such stock; or (iii) increases paid or agreed to in
the compensation, retirement benefits or other commitments to their employees.
4.12 Title to Property of TIANSHI. TIANSHI has good and marketable
title to all properties and assets, real and personal, proprietary or otherwise,
reflected in the Tianshi China balance sheet.
4.13 Title to Property of Tianshi China. Tianshi China has good and
marketable title to all properties and assets, real and personal, proprietary or
otherwise, reflected in its balance sheet.
4.14 Litigation of TIANSHI. There is no litigation or proceeding
pending, or to the knowledge of TIANSHI, threatened, against or relating to
TIANSHI or its properties or business. Further, no officer, director or person
who may be deemed to be an affiliate of TIANSHI is party to any material legal
proceeding which could have an adverse effect on TIANSHI (financial or
otherwise), and none is party to any action or proceeding wherein any has an
interest adverse to TIANSHI.
4.15 Litigation of Tianshi China. There is no litigation or proceeding
pending, or to the knowledge of Tianshi China, threatened, against or relating
to Tianshi China or its properties or business. Further, no officer, director or
person who may be deemed to be an affiliate of Tianshi China is party to any
material legal proceeding which could have an adverse effect on Tianshi China
(financial or otherwise), and none is party to any action or proceeding wherein
any has an interest adverse to Tianshi China.
4.16 Books and Records of TIANSHI. The TIANSHI Stockholders have given
to Strategika and its representatives full access to all of its offices, books,
records, contracts and other corporate documents and properties so that
Strategika could inspect and audit them; and (ii) furnished such information
concerning the properties and affairs of TIANSHI as Strategika has requested.
4.17 Books and Records of Tianshi China. Tianshi China has (1) given to
Strategika and its representatives full access to all of its offices, books,
records, contracts and other corporate documents and properties so that
Strategika could inspect and audit them; and (2) furnished such information
concerning the properties and affairs of Tianshi China as Strategika requested.
4.18 Tax Returns of TIANSHI. TIANSHI has filed all income or franchise
tax returns required to be filed or has received currently effective extensions
of the required filing dates.
4.19 Tax Returns of Tianshi China. Tianshi China has filed all income
or other tax returns required to be filed in China or has received currently
effective extensions of the required filing dates.
4.20 Investment Intent. The TIANSHI Stockholders are acquiring the
securities to be exchanged and delivered to them under this Agreement for
investment and not with a view to the sale or distribution thereof, and they
have no commitment or present intention to sell or distribute the Strategika
securities to be received hereunder .
4.21 Corporate Authority of TIANSHI. TIANSHI and the TIANSHI
Stockholders have full corporate power and authority to enter into this
Agreement and to carry out their obligations hereunder and will deliver to
Strategika or its representative at the Closing certified copies of resolutions
of TIANSHI'S Board of Directors authorizing execution of this Agreement by its
officers and performance thereunder.
4.22 Due Authorization. Execution of this Agreement and performance by
TIANSHI and the TIANSHI Stockholders hereunder have been duly authorized by all
requisite corporate action on the part of TIANSHI and the TIANSHI Stockholders,
and this Agreement constitutes a valid and binding obligation of TIANSHI and the
TIANSHI Stockholders and performance hereunder will not violate any provision of
the Articles of Association or other Charter documents, Bylaws, agreements,
mortgages or other commitments of TIANSHI or the TIANSHI Stockholders, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application now or
hereafter in effect relating to or affecting the enforcement of creditors' right
generally and the application of general equitable principles in any action,
legal or equitable.
4.23 Environmental Matters. TIANSHI and Tainshi China have no knowledge
of any assertion by any governmental agency or other regulatory authority of any
environmental lien, action or proceeding, or of any cause for any such lien,
action or proceeding related to the business operations of TIANSHI or its
predecessors. In addition, to the best knowledge of TIANSHI and Tianshi China,
there are no substances or conditions which may support a claim or cause of
action against TIANSHI and Tianshi China or any of its current or former
officers, directors, agents, employees or predecessors, whether by a
governmental agency or body, private party or individual, under the current
Chinese laws.
4.24 Access to Information Regarding Strategika. TIANSHI and the
TIANSHI Stockholders acknowledge that they have been delivered copies of what
has been represented to be documentation containing all material information
respecting Strategika and its present and contemplated business operations,
potential acquisitions, management and other factors, by delivery to them and/or
by access to such information in the EDGAR Archives of the Securities and
Exchange Commission at www.sec.gov; that they have had a reasonable opportunity
to review such documentation and to discuss it, to the extent desired, with
their legal counsel, directors and executive officers; that they have had, to
the extent desired, the opportunity to ask questions of and receive responses
from the sole director and executive officer of Strategika, and with the legal
and accounting firms of Strategika, with respect to such documentation; and that
to the extent requested, all questions raised have been answered to their
complete satisfaction.
Section 5
Conditions Precedent to Obligations of TIANSHI and the TIANSHI Stockholders
All obligations of TIANSHI and the TIANSHI Stockholders under this
Agreement are subject, at their option, to the fulfillment, before or at the
Closing, of each of the following conditions:
5.1 Representations and Warranties True at Closing. The representations
and warranties of Strategika contained in this Agreement shall be deemed to have
been made again at and as of the Closing and shall then be true in all material
respects and shall survive the Closing.
5.2 Due Performance. Strategika shall have performed and complied with
all of the terms and conditions required by this Agreement to be performed or
complied with by it before the Closing.
5.3 Officers' Certificate. TIANSHI shall have been furnished with a
certificate signed by the President of Strategika, in such capacity, attached
hereto as Exhibit C and incorporated herein by reference, dated as of the
Closing, certifying (i) that all representations and warranties of Strategika
contained herein are true and correct; and (ii) that since the date of the
financial statements (Exhibits B and B-1 hereto), there has been no material
adverse change in the financial condition, business or properties of Strategika,
taken as a whole.
5.4 Assets and Liabilities of Strategika. Unless otherwise agreed,
Strategika shall have no assets and no liabilities at Closing, and all costs,
expenses and fees incident to the Agreement shall have been paid.
5.5 Resignations of Present Directors and Executive Officers and
Designation of New Directors and Executive Officers. At or simultaneous with the
Closing, corporate resolutions of Strategika shall have adopted all action
necessary to accomplish the resignation of Strategika's directors and executive
officers and the designation of the nominees of the TIANSHI Stockholder to the
Board of Directors and to serve as officers as outlined in Section 1.5 hereof.
Section 6
Conditions Precedent to Obligations of Strategika
All obligations of Strategika under this Agreement are subject, at
Strategika's option, to the fulfillment, before or at the Closing or on the
Effective Date, as applicable, of each of the following conditions. It is
expressly understood by TIANSHI and the TIANSHI Stockholders that Strategika has
the right to terminate this Agreement in the event the conditions set forth in
Section 1.9 hereof are not satisfied on or before the Effective Date, and said
parties further agree to execute any and all documents and cooperate in all
manners necessary to ensure a proper unwinding of the transactions contemplated
herein.
6.1 Representations and Warranties True at Closing. The representations
and warranties of TIANSHI, the TIANSHI Stockholders and Tianshi China contained
in this Agreement shall be deemed to have been made again at and as of the
Closing and shall then be true in all material respects and shall survive the
Closing.
6.2 Due Performance. TIANSHI and the TIANSHI Stockholders shall have
performed and complied with all of the terms and conditions required by this
Agreement to be performed or complied with by them before the Closing or the
Effective Date, as applicable.
6.3 Officers' Certificate. Strategika shall have been furnished with a
certificate signed by the President of TIANSHI, in such capacity, attached
hereto as Exhibit D and incorporated herein by reference, dated as of the
Closing, certifying (i) that all representations and warranties of TIANSHI and
the TIANSHI Stockholders contained herein are true and correct; and (ii) that
since the date of the TIANSHI Financial Statements, there has been no material
adverse change in the financial condition, business or properties of TIANSHI,
taken as a whole.
Section 7
General Provisions
7.1 Further Assurances. At any time, and from time to time, after the
Closing, each party will execute such additional instruments and take such
action as may be reasonably requested by the other party to confirm or perfect
title to any property transferred hereunder or otherwise to carry out the intent
and purposes of this Agreement.
7.2 Waiver. Any failure on the part of any party hereto to comply with
any its or their obligations, agreements or conditions hereunder may be waived
in writing by the party to whom such compliance is owed.
7.3 Brokers. Each party represents to the other parties hereunder that
in the event brokers or finders in connection with this Agreement, each party
agrees to indemnify and hold harmless the other parties against any fee, loss or
expense arising out of claims by brokers or finders employed or alleged to have
been employed by he/she/it.
7.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been given if delivered in person or sent by
prepaid first-class registered or certified mail, return receipt requested, as
follows:
If to Strategika's Management Prior to Closing:
Mr. Rene Larrave
4316 Fairfax Ave.
Dallas, Texas 75205
If to TIANSHI:
P.O. Box 957
Offshore Incorporations Center
Road Town, Tortola, British Virgin Islands
With a copy to:
Charles Law, Esq.
King and Wood, LLP
39465 Paseo Padre Parkway, Suite 2000
Freemont, California 94538
If to the TIANSHI Stockholders: C/O TIANSHI
7.5 Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes and cancels any other agreement,
representation or communication, whether oral or written, between the parties
hereto relating to the transactions contemplated herein or the subject matter
hereof.
7.6 Headings. The section and subsection headings in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement
7.7 Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Delaware. Any actions
permitted hereunder shall be brought in the State of Delaware.
7.8 Assignment. This Agreement shall inure to the benefit of, and be
binding upon, the parties hereto and their successors and assigns.
7.9 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
7.10 Default. In the event of any default hereunder, the prevailing
party in any action to enforce the terms and provisions hereof shall be entitled
to recover reasonable attorney's fees and related costs.
IN WITNESS WHEREOF, the parties have executed this Agreement and Plan
of Reorganization effective the latest date hereof.
STRATEGIKA
By:_________________________________
Tianshi International Holdings Group
Limited
By:_________________________________
Jin Yuan Li
Jiao Wen Jun
Yan Yu Peng
Exhibit 14
Tiens Biotech Group (USA), Inc.
Code of Ethics
GENERAL
Tiens Biotech Group (USA), Inc., (the "Company") maintains an Employee
Policy Manual (under revising) that is applicable to all of the Company's
directors, officers and employees. The Company's officers and its senior
executives (collectively, the "Covered Officers") play an important and elevated
role in corporate governance at the Company. Each Covered Officer shall
therefore comply not only with the provisions of the Employee Policy Manual
(which sets forth standards for both business conduct and ethics), but also with
the provisions of this Code of Ethics. If any conflict should arise between the
terms of this Code of Ethics and the Employee Policy Manual, the terms of this
Code of Ethics shall govern.
This Code of Ethics is intended to be a codification of standards that is
reasonably designed to deter wrongdoing and to promote:
1. Honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
2. Avoidance of conflicts of interest, including internal disclosure of
any material transaction or relationship that reasonably could be
expected to give rise to such conflict;
3. Full, fair, accurate, timely and understandable disclosure in reports
and documents which the Company files with, or submits to, the
Securities and Exchange Commission (the "SEC") and in other public
communications made by the Company;
4. Compliance with applicable governmental laws, rules and regulations;
5. The prompt internal reporting of violations of this Code of Ethics;
6. Accountability for adherence to this Code of Ethics.
HONEST AND ETHICAL CONDUCT
Each Covered Officer shall act with honesty and integrity, including the
ethical handling of actual or apparent conflicts of interest between personal
and professional relationships. The Covered Officers are expected to act in
accordance with the highest of standards, thereby setting an example for other
officers and employees of the Company. Each Covered Officer shall comply with
each provision of the Employee Policy Manual.
AVOIDANCE OF CONFLICTS OF INTEREST
Covered Officers shall be free from the influence of any conflicting
interest when they represent the Company in negotiations or make recommendations
with respect to dealings with third parties. They are expected to deal with
suppliers, customers, contractors and all others doing business with the Company
on the sole basis of what is in the best interest of the Company, without favor
or preference to third parties based on personal considerations. In addition,
the following guidelines should be followed:
1. Covered Officers should communicate any potential or actual conflict
of interest (however immaterial) to the Chairman of the Governance
Committee, so that an objective, third party review can be made of the
matter.
2. Covered Officers who render service with or without compensation to
any person or group doing or seeking to do business with the Company,
and Covered Officers who have, or have close relatives (i.e., parent,
spouse, child or sibling) who have, a financial or other personal
interest in any organization doing or seeking to do business with the
Company, must clear this matter in writing with the Chairman of the
Governance Committee.
3. Any lease or rental of any kind of facilities or equipment to the
Company, or to any other company or individual dealing with the
Company as a contractor or supplier, by a Covered Officer (or a
Covered Officer's close relative as defined above) must be disclosed
in writing to the Chairman of the Governance Committee.
4. No Covered Officer shall seek or accept, directly or indirectly, any
personal loan or services from any individual or business concern
doing or seeking to do business with the Company, except from
financial institutions or service providers offering like loans or
services to third parties under similar terms in the ordinary course
of their respective businesses.
5. No Covered Officer shall do business with a close relative (as defined
above) on behalf of the Company, unless expressly authorized in
writing by the Chairman of the Governance Committee after the
relationship has been disclosed.
6. Prior notification to the Chairman of the Governance Committee is
required before a Covered Officer accepts a position as an officer or
director of a "for profit" corporation, or becomes a member of a
business partnership or other entity that may compromise the Covered
Officer's service to the Company.
7. Covered Officers who seek elective or appointed public offices, as
well as membership on public boards or commissions, may encounter
situations that have the potential for conflict of interest. Covered
Officers who serve in public bodies should disqualify themselves from
actions that represent, or may appear to represent, a conflict of
interest between their role as an employee of the Company and their
role in the public body. Covered Officers who serve in these
capacities shall notify the Chairman of the Governance Committee of
their appointment or election when it occurs.
PUBLIC DISCLOSURES
Each Covered Officer shall act to promote full, fair, accurate, timely and
understandable disclosure in reports and documents that the Company files with,
or submits to, the SEC and in other public communications made by the Company.
Each Covered Officer shall comply with the provisions of the Company's Employee
Policy Manual.
COMPLIANCE WITH LAWS, RULES AND REGULATIONS
Each Covered Officer shall comply with all governmental laws, rules and
regulations that are applicable to the Company and to each such Covered Officer
(in his or her capacity as an employee of the Company). Such compliance shall be
more than following the letter of the law; compliance with the spirit of the law
shall be each Covered Officer's goal. In connection with issues concerning such
compliance, each Covered Officer may consult with appropriate legal counsel or
other outside advisors (such as the Company's independent outside auditors) on
such questions as he or she deems appropriate.
REPORTING OF VIOLATIONS OF THE CODE
Each Covered Officer shall comply with the following guidelines, including
promptly reporting any violations of this Code of Ethics in accordance with the
procedures set forth below:
1. Once a year, each Covered Officer shall certify to the Chairman of the
Governance Committee that he or she has followed this Code of Ethics
and knows of no deviations from such Code by any other Covered
Officer, or shall give specific details of any such deviation.
2. Covered Officers shall disclose to the Chairman of the Governance
Committee any matter in which they are or may become involved, which
in their opinion violates, may violate, or even appear to violate the
intent of the Code of Ethics.
3. In addition to the disclosures set forth in the immediately preceding
paragraph, all Covered Officers shall report violations of this Code
of Ethics by other Covered Officers of which they have knowledge to
the Chairman of the Governance Committee .The Company will not
retaliate, and will ensure that no employee retaliates, for any report
made hereunder in good faith.
In accordance with the Sarbanes-Oxley Act of 2002, any director, officer and /
or employee may circumvent any or all of the reporting procedures contained in
this Code of Ethics by reporting any violation of this Code of Ethics, including
legal, financial, accounting and / or business conduct improprieties or possible
improprieties to the Chairman of the Governance Committee of the Board of
Directors by writing to:
Chairman of the Governance Committee
Tiens Biotech Group (USA), Inc.
# 6 Yuanquan Road
Wuqing New-Tech Industrial Park
Tianjin, Peoples Republic of China 301700
ACCOUNTABILITY FOR ADHERENCE TO THE CODE
The Company and its Board of Directors expect that each of the Covered
Officers will comply with all of the terms of this Code of Ethics. The Board of
Directors shall determine what, if any, consequences should result from a
violation of this Code of Ethics by any Covered Officer. Such consequences may
include a reduction in compensation, a reassignment of responsibilities, a loss
of such Covered Officer's current office or dismissal from the Company. In
making its determination, the Board of Directors may take into account all
relevant factors, including the type and severity of violation.
AMENDMENTS AND WAIVERS OF THE CODE
Amendments and waivers of this Code of Ethics shall be subject to the
following guidelines:
1. An amendment of this Code of Ethics may be made at any time by the
Board of Directors of the Company.
2. A grant of a waiver of the provisions of this Code of Ethics to any
particular Covered Officer may only be made by the Governance
Committee of the Board of Directors.
3. If a Covered Officer believes that application of this Code of Ethics
would be inappropriate or detrimental to the Company in a particular
instance, a request for an exception may be made to the Chairman of
the Governance Committee and disclosed to the full Board of Directors.
4. The Company shall make a public disclosure of any such amendment to,
or waiver of, this Code of Ethics within four business days on SEC
Form 8-K. As an alternative, the Company may provide this information
on the Company website within five business days of the date of
amendment or waiver, provided that the Company shall have disclosed in
its most recently filed annual report its Internet address and
intention to provide the required disclosure in this manner. Any
information so posted must remain on the Company website for an
appropriate length of time.
Exhibit 23.1
To The Board of Directors
Tiens Biotech Group (USA), Inc.
Consent of Independent Accountants
Tiens Biotech Group (USA), Inc.
Audited Financial Statements
December 31, 2004 and 2003
We consent to the incorporation in the Annual Report of Tiens Biotech Group
(USA), Inc on Form 10-K of our report dated February 26, 2005 on our audits of
the financial statements of Tiens Biotech Group (USA), Inc. and Subsidiaries as
of December 31, 2004 and 2003, and for the years then ended, which our reports
are incorporated in the Form 10-K.
/s/ Moore Stephens Wurth Frazer and Torbet
------------------------------------------
Moore Stephens Wurth Frazer and Torbet, LLP
Walnut, California
March 30, 2005
Exhibit 31.1
CERTIFICATION
I, Jinyuan Li, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Tiens Biotech Group
(USA), Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer `s ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer `s
internal controls over financial reporting.
Date: March 31, 2005 /s/ Jinyuan Li
-------------------------------------
Jinyuan Li
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION
I, Wenjun Jiao, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Tiens Biotech Group
(USA), Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the small business
issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small
business issuer and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the small business issuer,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being
prepared;
(b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's fourth fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the small business issuer's internal
control over financial reporting; and
5. The small business issuer's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the audit
committee of the small business issuer's board of directors (or persons
performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the small business issuer `s ability to record,
process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business issuer `s
internal controls over financial reporting.
CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jinyuan Li, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2004, that the Annual Report on Form
10-KSB of Tiens Biotech Group (USA), Inc. for the year ended December 31, 2004
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Annual Report on
Form 10-KSB fairly presents, in all material respects, the financial condition
and results of operations of Tiens Biotech Group (USA), Inc.
I, Wenjun Jiao, certify, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2004, that the Annual
Report on Form 10-KSB of Tiens Biotech Group (USA), Inc. for the year ended
December 31, 2004 fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 and that information contained in such
Annual Report on Form 10-KSB fairly presents, in all material respects, the
financial condition and results of operations of Tiens Biotech Group (USA), Inc.
Dated: March 31, 2005
By: /s/ Jinyuan Li
-------------------------------------
Jinyuan Li
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Wenjun Jiao
-------------------------------------
Wenjun Jiao
Chief Financial Officer
(Principal Accounting Officer)
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