-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VRk+ZxX8TrJz9pJUeF7iT8H1qtTniXRN0FhRidOah/l2fatQwfAEQVqP4tV8dzpC hgMAt1/kTvYdHLnMX7onBw== 0001010549-05-000088.txt : 20050203 0001010549-05-000088.hdr.sgml : 20050203 20050203122033 ACCESSION NUMBER: 0001010549-05-000088 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20050202 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Unregistered Sales of Equity Securities ITEM INFORMATION: Changes in Control of Registrant ITEM INFORMATION: Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20050203 DATE AS OF CHANGE: 20050203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BASIC EMPIRE CORP CENTRAL INDEX KEY: 0001166389 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 752955368 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-49608 FILM NUMBER: 05572208 MAIL ADDRESS: STREET 1: 211 WEST WALL CITY: MIDLAND STATE: TX ZIP: 79701 8-K 1 basic8k020205.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) of the SECURITIES EXCHANGE ACT OF 1934 Date of Report: February 3, 2005 Basic Empire Corporation ------------------------------ (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation) 0-49608 75-2955368 (Commission File Number) (IRS Employer Identification Number) Room 511, 5/F., Wing On Plaza, 62 Mody Road, Tsim Sha Tsui, Kowloon, Hong Kong. (Address of principal executive offices) +852 6555 1799 (Registrant's telephone number, including area code) Former Address of Registrant: 12890 Hilltop Road, Argyle, TX 76226 (Former name or former address, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (See General Instruction A.2. below): [_] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [_] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [_] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 1.01 Entry into a Material Definitive Agreement BEC, Tailong Holdings and Tailong Holdings Stockholders ------------------------------------------------------- On December 25, 2004, Basic Empire Corporation, a Delaware corporation ("BEC"); China Tailong Holdings Company Ltd., a corporation organized under the laws of Hong Kong Special Administrative Region of People's Republic of China ("Tailong Holdings"); and each of the stockholders of Tailong Holdings (the "Tailong Holdings Stockholders") entered into an Agreement and Plan of Reorganization as amended, (the "Agreement"), a copy of which is attached as an exhibit to this report. Pursuant to the Agreement, the Reorganization (as defined below) closed on the date this Form 8-K was filed which is February 3, 2005. Except as contemplated by the Agreement, there are no material relationships between BEC or its affiliates and any of the other parties to the Agreement. The Agreement provides for the acquisition by BEC from the Tailong Holdings Stockholders of all of the issued and outstanding common stock of Tailong Holdings (the "Tailong Holdings Shares") in exchange for 10,606,158 shares of newly issued restricted (as defined in Rule 144 of the Securities Act of 1933, as amended) common stock of BEC (the "Reorganization"). The Reorganization will be accounted for as a reverse merger and recapitalization of Tailong Holdings, which will be deemed the accounting acquirer. In accordance with the Agreement, on the Effective Date, as defined in the Agreement, the current director and chief executive officer, Timothy P. Halter, resigned as a director and officer of BEC and was replaced by the following directors and officers nominated by Tailong Holdings: Chang Yu, Director, President, Chief Executive Officer and Secretary; Peng Lijun, Chief Financial Officer. The Agreement also contains, among other things, standard representations, warranties, and covenants. Private Placement ----------------- On February 3, 2005, and following consummation of the reorganization transaction BEC completed the sale of 590,283 shares of its restricted common stock (the "Private Placement Shares") for $1.6941 per share for a total of $1,000,000 to accredited investors pursuant to stock purchase agreements (each a "Purchase Agreement"), the form of which is attached as an exhibit to this report. BEC's stock closed at $0.10 on February 3, 2005 on the OTC Bulletin Board. BEC's new Board of Directors accepted the terms for the sale of the Private Placement Shares after pursuing all financing alternatives. Under the Purchase Agreement, (i) BEC shall file a registration statement within 30 days of the closing of the Purchase Agreeement with the Securities and Exchange Commission ("SEC") covering the resale of the subject shares of BEC's common stock; (ii) the purchasers can require BEC to repurchase any or all of the Private Placement Shares acquired by the purchasers at the price per share paid by the purchasers thereunder at any time until the date on which the registration statement is filed by BEC for the Private Placement Shares; (iii) the purchasers shall, collectively, have the right to designate one member of BEC's Board of Directors who shall serve as its Vice Chairman; (iv) all representations, warranties, covenants, and agreements contained in the Purchaser Agreement shall survive the Closing; (v) BEC represented to the purchasers that it's after tax net income for BEC's 2004 fiscal year shall be at least $3,300,000. In the event that BEC does not generate net income of at least $3,300,000 for its 2004 fiscal year, BEC shall issue to the purchasers additional shares as set forth in the Purchase Agreement; (vi) BEC represented to the purchasers that it's after tax net income for BEC's 2005 fiscal year shall be at least $3,800,000. In the event that BEC does not generate net income of at least $3,800,000 for its 2005 fiscal year, BEC shall cause certain controlling shareholders of BEC to forfeit shares owned by them and such shares shall then be treasury shares of the Company; and (vii) BEC entered into an escrow agreement with the purchasers which sets forth certain obligations of BEC in order receive the purchase price for the Private Placement Shares. 2 The foregoing description does not purport to be a complete statement of the parties' rights and obligations under the Purchase Agreement and the transactions contemplated thereby or a complete explanation of the material terms thereof. Item 2.01 Completion of Acquisition or Disposition of Assets The information set forth above in "Item 1.01- Entry into Material Definitive Agreement" is incorporated herein by this reference. Pursuant to the Agreement, BEC received from the Tailong Holdings Stockholders all of the Tailong Holdings Shares. Tailong Holdings' primary asset is its 90% ownership of Pacific Dragon Fertilizers Ltd. ("Pacific Dragon"), whose business is described below. BEC and Its Predecessors ------------------------ BEC was originally incorporated on January 5, 1925 under the laws of the State of Nevada as Argyle Mining Company for the development of mining claims. Throughout BEC's existence, it has experienced several corporate name changes as follows: Argyle Corporation in January 1960; Basic Empire in November 1963; and Basic Empire Corporation in December 1976. In 1970, BEC experienced a change in control and focused its business activities on the development of properties in Southern California. None of these efforts were successful and BEC has been dormant since 1986. BEC has had no operations since 1986, and had no cash or liabilities at the date of acquisition of Talong Holdings other than cash in the amount of $190,000 that was received by selling certain shares of restricted common stock to Halter Financial Group, Inc. on May 25, 2004. On July 19, 2004, BEC filed an Information Statement on Schedule 14C pursuant to Section 14(c) of the Securities Exchange Act of 1934, as amended, giving notice that BEC intended to merge with and into its newly formed, wholly-owned Delaware subsidiary of the same name for the purpose of changing BEC's corporate domicile from Nevada to Delaware. This reincorporation and change in domicile was effective on August 10, 2004. As a result of the Reorganization, BEC will continue the business operations of Tailong Holdings. Tailong Holdings ---------------- Tailong Holdings was established on October 27, 2003 in Hong Kong Special Administrative Region ("HK") of People's Republic of China ("China"). On October 9, 2004, Tailong Holdings acquired 90% of Pacific Dragon, which conducts Tailong Holdings' only business operation. Pacific Dragon is a foreign invested enterprise established in China on May 20, 1994. At the time of its establishment, Pacific Dragon was a "contractual joint venture" as defined in China's laws on foreign invested enterprises. The three joint venturers were Harbing Yinlong Co. Ltd. ("Yinlong"), a Chinese domestic company, Beijing Taiming Useful Technology Institute ("Taiming"), a Chinese domestic company, and Cathay-Pacific Enterprises Ltd. (CPE), a Canadian company. Yinglong contributed $228,000, Taiming contributed a patent with a value of $140,000 and CPE contributed US$150,000 to the registered capital of the contractual joint venture. Of the total registered capital, Yinlong contributed 43%, Taiming contributed 27% and CPE contributed 30%. Yinlong, Taiming and CPE, also agreed that any profits from Pacific Dragon would be distributed 41%, 10%, and 49%, respectively. On June 8, 2004, Tailong Holdings and the three joint venturers of Pacific Dragon entered into a Transfer of Capital Contribution and Profit Agreement (the "Transfer Agreement"). Under this Transfer Agreement, CPE transferred all its 30% capital contribution and 49% profit sharing right in Pacific Dragon to Tailong Holdings; Taiming transferred all of its 27% capital contribution and 10% profit sharing right in Pacific Dragon to Tailong Holdings; and Yinlong transferred 33% of its capital contribution and 31% of its profit sharing right in Pacific Dragon to Tailong Holdings. As a result of this transfer, Pacific Dragon had only two equity holders: Tailong Holdings, which held 90% of equity interest in Pacific Dragon, and Yinlong, which held a 10% equity interest in Pacific Dragon, and the profit sharing ratio in Pacific Dragon between the two equity holders, Tailong Holdings and Yinlong, is 90% and 10%, respectively. A copy of the Transfer Agreement is attached as an exhibit to this report. Upon the execution of the Transfer Agreement and as of October 9, 2004, Pacific Dragon changed its status to become an "equity joint venture" as defined in China's laws on foreign invested enterprises. Its legal structure is similar to a limited liability company organized under state laws in the United States. The Articles of Association provide for a term of 15 years with registered capital of US$500,000 Agreement and a copy is attached as an exhibit to this report. 3 Pacific Dragon engages in the business of manufacturing and marketing a series of compound liquid fertilizer products, including a series of liquid organic fertilizers and crop-specific fertilizers. The products have various types, among which, most commonly used are "LvLingBao II" and "LvLingBao III", "Tailong Liquid Fertilizer I" and other crop special fertilizers customized by the company according to its clients' specifications. All of the products are residue and hormone free and can be used in organic agricultural production. Pacific Dragon has established an annual production capacity of 5000 Metric Tons of liquid compound fertilizers in Heilongjiang Province of China. These products are then marketed and sold to farmers throughout the 11 provinces of China. Currently 46.55 % of fertilizer sales are made through about ten distributors. Pacific Dragon owns the Chinese trademark of "Tailong", No 836192, until May 6, 2006. It also obtained an Official Registration of Fertilizer Certificate No. 218, issued by the Ministry of Agriculture of China which expires in December 2007. A trademark extension may be obtained before the expiration date. Pacific Dragon conducts on-going research and development to further improve existing products and develop new compound fertilizers. It conducts soil and vegetation surveys on a regular basis and provides technical support to customers. Prior to the launching of any new compound fertilizers, testing fields are established and data are collected for further studies. The tests are conducted in collaboration with customers and the test results are certified by customers. Some research work is done in close cooperation with universities and governmental research labs and branches such as Heilongjiang Soil and Fertilizer Station and institutions under the China Academy of Agricultural Science. Principles Followed in Determining Consideration ------------------------------------------------ The consideration for the Reorganization was determined through arms length negotiations between the management of BEC and Tailong Holdings. The criteria followed in determining the consideration include the relative value of the assets of Tailong Holdings, Tailong Holdings' present and past business operations, and the future potential of Tailong Holdings, Tailong Holdings' management, and the potential benefit to the shareholders of BEC. Item 3.02 Unregistered Sales of Equity Securities The information set forth above in "Item 1.01- Entry into Material Definitive Agreement" is incorporated herein by this reference. BEC, Tailong Holdings and Tailong Holdings Stockholders ------------------------------------------------------- BEC issued 10,606,158 restricted shares of common stock (as defined in Rule 144 of the Securities Act of 1933, as amended) to Tailong Holdings Stockholders in exchange for all of the Tailong Holdings Shares. No underwriter participated in the transaction. The transaction was exempt from registration under the Securities Act of 1933, as amended, based upon the provisions of Regulation S and Section 4(2) promulgated thereunder. The issuance was made in an "offshore transaction" as defined in Regulation S, to a person other than a "U.S. Person." The Tailong Holdings Stockholders represented to BEC that they would resell the Tailong Holdings Shares only in accordance with Regulation S, and the certificates evidencing the Tailong Holdings Shares bear a legend restricting transfer except pursuant to Regulation S. Private Placement ----------------- The Private Placement Shares were issued to accredited investors in a private placement transaction exempt from registration under the Securities Act of 1933, as amended, pursuant to Rule 506 of Regulation D promulgated thereunder. The purchasers had access to all relevant information necessary to evaluate the investment, and represented to BEC that the securities were being acquired for investment purposes. The Private Placement Shares have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws and may not be offered or sold in the United States absent registration under the Securities Act of 1933, as amended, and applicable state securities laws or an applicable exemption from registration requirements. BEC has agreed to file a registration statement with the SEC covering the resale of the subject shares of BEC's common stock underlying such securities within 30 days of the Closing of the Reorganization. 4 Item 4.01 Changes in Registrant's Certifying Accountant Effective on January 26, 2005, SW Hatfield ("SW") was dismissed as the principal accountant engaged to audit the financial statements of BEC. SW reviewed BEC's financial statements for the fiscal quarter ended September 30, 2004. During this period, and the subsequent interim period prior to their dismissal, there were no disagreements with SW on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of SW would have caused them to make reference to this subject matter of the disagreements in connection with their report, nor were there any "reportable events" as such term is defined in Item 304(a)(1)(iv) of Regulation S-B, promulgated under the Securities Exchange Act of 1934, as amended ("Regulation S-B"). BEC has requested SW to furnish it with a letter addressed to the SEC stating whether it agrees with the statements made above by BEC. A copy of such letter, dated January 26, 2005, is filed with this Form 8-K. Effective on January 26, 2005, BEC engaged Weinberg & Co., P.A. whose address is 1925 Century Park East, Suite 1120, Los Angeles, CA, 90067, to audit BEC's financial statements. During BEC's most recent fiscal year, and the subsequent period prior to such appointment, BEC has not consulted the newly engaged accountant regarding the application of accounting principals to a specified transaction or the type of audit opinion that might be rendered on BEC's financial statements, nor on any matter that was either the subject of a disagreement or a reportable event. The Board of Directors of BEC approved the change in accountants described herein on January 26, 2005. During BEC's two most recent fiscal years (ended December 31, 2004 and 2003) and from January 1, 2005 to the date of this Report, there were no disagreements with BEC's independent registered accounting firms on any matter of accounting principles or practices, financial disclosure, or auditing scope or procedure. There were no reportable events, as described in Item 304(a)(1)(iv)(B) of Regulation S-B, during BEC's two most recent fiscal years (ended December 31, 2004 and 2003) and from January 1, 2005 to the date of this Report. Item 5.01 Changes in Control of Registrant The information set forth above under "Item 2.01 -Completion of Acquisition or Disposition of Assets" is incorporated herein by this reference. Identity of Persons Acquiring Control of the Registrant ------------------------------------------------------- Pursuant to the Agreement and on the Effective Date as defined in the Agreement, as consideration for the exchange of the Tailong Holdings Shares, BEC issued 10,606,158 restricted shares of its common stock to the Tailong Holdings Stockholders, representing 90% of the issued and outstanding common stock of BEC following the time of the issuance. There are currently 11,784,620 issued and outstanding shares of common stock of the reorganized BEC. Four shareholders now have majority control of BEC, namely Chang Yu, Teng Xiao Yong, Wong Tak Shing Eddie, and China Tailong Group Limited ("Group Limited"). In addition, Chang Yu, the President, Tsoi Tik Man, the Vice President and Liang Tao own 65%, 30% and 5% of Group Limited respectively. The new sole director of the reorganized BEC is Chang Yu. The following table sets forth the beneficial ownership of persons who owned more than five percent of BEC's common capital stock following the closing of the Reorganization and the share holdings of the new members of management, based on 11,784,620 outstanding shares of common stock. 5 - ----------------------- ------------------------ ----------- ------------------- Name Positions Held Percentage Number of Shares Held Beneficially Owned - ----------------------- ------------------------ ----------- ------------------- Chang Yu (1) Director/President/ 81% 9,545,544 CEO/Secretary - ----------------------- ------------------------ ----------- ------------------- Teng Xiao Yong Vice President 4.5% 530,308 - ----------------------- ------------------------ ----------- ------------------- Wong Tak Shing Eddie Vice President 4.5% 530,308 - ----------------------- ------------------------ ----------- ------------------- China Tailong Group None 72% 8,484,926 Ltd. - ----------------------- ------------------------ ----------- ------------------- Peng Lijun Chief Financial Officer 0% 0 - ----------------------- ------------------------ ----------- ------------------- - ----------------------- ------------------------ ----------- ------------------- Tsoi Tik Man (2) Vice President 0% 0 - ----------------------- ------------------------ ----------- ------------------- Halter Financial None 6% 714,285 Group, Inc. (3) - ----------------------- ------------------------ ----------- ------------------- Timothy P. Halter (3) None 6.8 % 803,570 - ----------------------- ------------------------ ----------- ------------------- (1) Includes 1,060,618 shares of common stock held by Chang Yu as an individual and 8,484,926 shares of common stock of Group Limited in which Chang Yu owns 65% of such entity. (2)Tsoi Tik Man holds no shares of common stock as an individual; however, Mr. Tsoi does own 30% of Group Limited which owns 8,484,926 shares of common stock of BEC. (3) Includes 714,285 shares of common stock owned by Halter Financial Group, Inc., and 89,285 shares of common stock owned by Timothy P. Halter owner of Halter Financial Group, Inc. (4) This table excludes the private placement shares and any additional shares, if any, to be issued pursuant to the purchase agreement. Former Controlling Shareholders ------------------------------- As a result of the Reorganization, Halter Financial Group, Inc. ("HFG") now holds approximately 6% of the total shares of BEC common stock issued and outstanding. Prior to the Reorganization, HFG owned approximately 60% of BEC. Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers On the Effective Date, Timothy P. Halter, BEC's sole officer and director resigned from all positions with BEC and the following director and executive officers of BEC were newly appointed: - ----------- ----------------- ---- -------- ------------------------------------ Name Title Age Term of Biography Office - ----------- ----------------- ---- -------- ------------------------------------ Chang Yu Director and 49 5 President/CEO/ Graduated from training school Secretary majoring in Chinese language. Department Director of Agriculture Bank of Heilongjiang Province from 1974 to 1978 and professor of Chinese Language Department of Forestry Cadre Management Institute from 1978 to 1983. Chairman of Board of Directors of Harbin Yinlong Industry Co., Ltd. from 1992 to 1994. Chairman of Board of Directors of Pacific Dragon from May 1994 to the present. - ----------- ----------------- ---- -------- ------------------------------------ - ----------- ----------------- ---- -------- ------------------------------------ Peng Lijun Chief Financial 63 5 April 1990 - July 1996, Director of Officer Auditing Department of Harbin Institute of Technology. August 1997 - present, Chief Accountant of Pacific Dragon. - ----------- ----------------- ---- -------- ------------------------------------ 6 There are no family relationships between any director and executive officer. Item 9.01 Financial Statements and Exhibits a) Financial Statements of Businesses Acquired. The Combined Financial Statements of China Tailong Holdings Company Limited and Pacific Dragon Fertilizers Limited, as of and for the years ended December 31, 2003 and December 31, 2002 (Audited) and for the nine month period ended September 30, 2004 (Unaudited) are attached hereto as Exhibit 99.1 and incorporated herein by this reference. b) Pro Forma Financials The Unaudited Proforma Combined Balance Sheet as of September 30, 2004 and the Unaudited Proforma Combined Statement of Operations for the nine month period ended September 30, 2004 and the Unaudited Proforma Combined Statement of Operations for the year ended December 31, 2003 prepared to give effect to the acquisition of China Tailong Holdings Company Limited are attached hereto as Exhibit 99.2 and incorporated herein by this reference c) Exhibits: The following exhibits are furnished in accordance with Item 601 of Regulation S-B: - --------------------- ---------------------------------------------------------- EXHIBIT NO. DESCRIPTION - --------------------- ---------------------------------------------------------- 2.1 Agreement and Plan of Reorganization, dated as of December 25, 2004, by and among BEC, Tailong Holdings and Tailong Holdings Stockholders. 4.1 Transfer Agreement, dated as of June 8, 2004, by and among shareholders of Pacific Dragon 4.2 Articles of Associations of Tailong Holdings 4.3 Articles of Associations of Pacific Dragon 10.1 Stock Purchase Agreement dated as of February 3, 2005 by and among BEC and the purchasers 16.1 Letter from accountant dated January 26, 2005 99.1 Combined Financial statements of China Tailong Holdings Company Limited and Pacific Dragon Fertilizers Limited, as of and for the year ended December 31, 2003 and December 31, 2002 (Audited) and for the nine month period ended September 30, 2004 (Unaudited). 99.2 Unaudited Proforma Combined Balance Sheet as of September 30, 2004 and the Unaudited Proforma Combined Statement of Operations for the nine month period ended September 30, 2004 and the Unaudited Proforma Combined Statement of Operations for the year ended December 31, 2003 prepared to give effect to the acquisition of China Tailong Holdings Company Limited. 99.3 Press Release dated February 3, 2005. 7 Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereto duly authorized. Date: February 3, 2005 Basic Empire Corporation A Delaware Corporation /s/ Chang Yu By: Chang Yu President 8 EX-2.1. 2 basic8kex21020205.txt AGREEMENT AND PLAN OF REORGANIZATION Exhibit 2.1 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered into this 25th of December, 2004, by and among Basic Empire Corporation, a corporation organized under the laws of the State of Delaware ("BEC"); China Tailong Holdings Company Ltd., a corporation organized under the laws of Hong Kong Special Administrative Region, People's Republic of China ("Tailong Holdings"); and three individuals and a company who are the stockholders of Tailong Holdings (the "Tailong Holdings Stockholders", a list of whom is attached hereto as Exhibit "A"). WITNESSETH: RECITALS WHEREAS, the respective Boards of Directors of BEC and Tailong Holdings have adopted resolutions pursuant to which BEC shall acquire and the Tailong Holdings Stockholders shall exchange for shares of the common capital stock of BEC 100% of the outstanding common stock of Tailong Holdings (the "Tailong Holdings Shares"); and WHEREAS, the sole consideration for the exchange of the Tailong Holdings Shares shall be the receipt by the Tailong Holdings Stockholders of shares of the common capital stock of BEC, $0.001 par value per share, as more particularly set forth in Exhibit "B" hereto. The shares of BEC's common stock shall be deemed "restricted securities" as defined under Rule 144 of the Securities Act of 1933, as amended (the "Act"); and WHEREAS, the Tailong Holdings Stockholders shall acquire in exchange such "restricted securities" of BEC 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 Tailong Holdings Stockholders agree to transfer to BEC at the closing (the "Closing") the Tailong Holdings Shares, in exchange for newly issued and restricted shares of common stock of BEC as outlined in Exhibit "C". In connection with the acquisition of the Tailong Holdings Shares, BEC shall issue to the Tailong Stockholders an aggregate of Ten Million Six Hundred and Six Thousand and One Hundred Fifty Eight (10,606,158) shares of BEC common stock, and such shares at the Closing shall equal ninety percent (90%) of the issued and outstanding shares of BEC, and shall be issued and/or transferred as set forth on Exhibit D attached hereto. After the Closing, there will be 11,784,620 outstanding shares of common stock of the reorganized BEC. 1.2 Exchange of Certificates by Tailong Holdings Stockholders. The transfer of the Tailong Holdings Shares shall be effected by the delivery to BEC 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 BEC and with all necessary transfer taxes and other revenue stamps affixed and acquired at the Tailong Holdings Stockholders' expense. 1 1.3 Further Assurances. At the Closing and from time to time thereafter, the Tailong Holdings Stockholders shall execute such additional instruments and take such other action as BEC may request in order to exchange and transfer clear title and ownership in the Tailong Holdings Shares to BEC. 1.4 Closing. The Closing shall be deemed to have occurred on the Effective Date (as hereinafter defined). As used in this Agreement, the term Closing Date shall be defined to be the same as the Effective Date. 1.5 Effective Date. The transactions contemplated by this Agreement shall be deemed consummated at such time as the Company shall have filed with the US Securities and Exchange Commission ("SEC") a Current Report on Form 8-Kwhich reports the change in control transaction effected by this Agreement and includes therein, all required audited financial information of Tailong Holdings and its controlled subsidiary (the "Current Report"). If the Current Report is not filed on or before January 10, 2005, the Company shall have the right, in its sole discretion, to either deem this Agreement terminated or provide Tailong Holdings with an extension for filing the Current Report. The effective date (the "Effective Date") of this Agreement shall thus be the date the Company files the Current Report with the SEC. In addition, for the Closing to be deemed to have occurred as of the Effective Date, all of the other conditions precedent to the obligations of each of the parties hereto as hereinafter set forth shall have been satisfied or shall have been waived. . 1.6 Resignations of Present Executive Officers and Designation of New Directors and Executive Officers. On the Closing Date, the present directors and executive officers of BEC shall designate the directors and executive officers nominated by the Tailong Holdings 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 BEC, 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 BEC upon the closing of the transactions contemplated herein: Yu Chang, Director/President/Chief Executive Officer/Secretary, Peng Lijun, Chief financial Officer. The current directors and executive officers shall resign, in seriatim, on the Closing Date. Section 2 Closing The Closing shall be effected by telephone and facsimile on the Closing Date 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 BEC Except as set forth in BEC's disclosure schedule, BEC represents and warrants to, and covenants with, the Tailong Holdings Stockholders and Tailong Holdings as follows: 3.1 Corporate Status; Compliance with Securities Laws. BEC 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 2 ownership of its properties makes such licensing or qualification necessary. BEC is a publicly-held company with a trade symbol "BSEC" on the OTCBB, and BEC is not in violation of any applicable federal or state securities laws, rules or regulations. Except as set forth above, there is at present no established trading market for BEC's securities. 3.2 Capitalization. The authorized capital stock of BEC at Closing will consist of 10,000,000 shares of preferred stock, of which none has been issued and outstanding; and 100,000,000 shares of common voting stock, of which 1,178,462 shares are issued and outstanding, all fully paid and non-assessable. There are no subscriptions, warrants, rights or calls or other commitments or agreements to which BEC is a party or by which it is bound, pursuant to which BEC is or may be required to issue or deliver securities of any class. Other than as set forth in BEC's disclosure schedule, there are no outstanding securities convertible or exchangeable, actually or contingently, into common stock or any other securities of BEC. After the Closing, there will be 11,784,620, outstanding shares of common stock, on a fully diluted basis, of BEC. 3.3 Financial Statements. The financial statements of BEC furnished to the Tailong Holdings Stockholders and Tailong Holdings, consisting of audited financial statements for the years ended December 31, 2002, 2003, and audited interim financial statements for the nine months ending September 30, 2004, as filed with the SEC and incorporated herein by reference, are correct and fairly present the financial condition of BEC 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. BEC 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 September 30, 2004, there have been no (i) changes in financial condition, assets, liabilities or business of BEC which, in the aggregate, have been materially adverse; (ii) damages, destruction or losses of or to property of BEC, payments of any dividend or other distribution in respect of any class of stock of BEC, 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. BEC has good and marketable title to all properties and assets, real and personal, reflected in its balance sheets, and the properties and assets of BEC are not subject to any 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 BEC, threatened, against or relating to BEC, its properties or business. Further, no officer, director or person who may be deemed to be an "affiliate" of BEC is party to any material legal proceeding which could have an adverse effect on BEC (financial or otherwise), and none is party to any action or proceeding wherein any has an interest adverse to BEC. 3.8 Books and Records. BEC has delivered to legal counsel for the Tailong Holdings Stockholders and Tailong Holdings all of BEC's books, records, contracts and other corporate documents which are true and correct in all material respects. 3 3.9 Tax Returns. BEC has duly filed all tax returns required to be filed by it other than tax returns (individually and in the aggregate) where the failure to file would have no material adverse effect on the business or prospects of BEC. All such tax returns were, when filed, and to the knowledge of BEC are, accurate and complete in all material respects and were prepared in conformity with applicable laws and regulations. BEC has paid or will pay in full or has adequately reserved against all taxes otherwise assessed against it through the Closing Date. BEC is not a party to any pending action or proceeding by any governmental authority for the assessment of any tax, and, to the knowledge of BEC, no claim for assessment or collection of any tax related to BEC has been asserted against BEC that has not been paid. There are no tax liens upon the assets of BEC. There is no valid basis, to BEC's knowledge, for any assessment, deficiency, notice, 30-day letter or similar intention to assess any tax to be issued to BEC by any governmental authority. 3.10 Confidentiality. BEC's current directors and officers and their representatives will keep confidential any information which they obtain from the Tailong Holdings Stockholders or from Tailong Holdings concerning the properties, assets and business of Tailong Holdings. 3.11 Corporate Authority. BEC has full corporate power and authority to enter into this Agreement and to carry out its obligations hereunder and will deliver to the Tailong Holdings Stockholders and Tailong Holdings or their respective representatives at the Closing a certified copy of resolutions of its Board of Directors authorizing execution of this Agreement by BEC's officers and performance thereunder, and that the directors adopting and delivering such resolutions are the duly elected and incumbent directors of BEC. 3.12 Due Authorization. At closing, the execution of this Agreement and performance by BEC hereunder will have been duly authorized by all requisite corporate action on the part of BEC, and this Agreement will constitute a valid and binding obligation of BEC and performance hereunder will not violate any provision of the Articles of Incorporation or other documents, Bylaws, agreements, mortgages or other commitments of BEC, 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. BEC 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 BEC. There are no substances or conditions which may support a claim or cause of action against BEC or any of BEC' s 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 Tailong Holdings. BEC acknowledges that it has been delivered copies of documentation containing all material information respecting Tailong Holdings (including its 90% owned subsidiary, 4 PACIFIC DRAGON Fertilizer Co., Ltd ("PACIFIC DRAGON"), and Tailong Holdings' present and contemplated business operations, potential acquisitions, and management; 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 Tailong Holdings, and with the legal and accounting firms of Tailong Holdings, with respect to such documentation; and that to the extent requested, all questions raised have been answered to BEC's complete satisfaction. 3.15 Assets and Liabilities of BEC at Closing. BEC shall have no assets and no liabilities on the Closing Date. BEC has good and marketable title to all of the assets and properties as reflected on its most recent balance sheet. 3.16 Rule 144. To the best knowledge of BEC, the shares of BEC issued in exchange for the Tailong Holdings Shares to the Tailong Holdings Stockholders shall be eligible for resale pursuant to Rule 144, without registration under the Act, after satisfaction by the Tailong Holdings Stockholders and BEC of the provisions established by Rule 144, generally, and the Securities Exchange Act of 1934. 3.17 Contracts and Other Commitments. Except as set forth in BEC's public filings, BEC is not a party to any contracts or agreements. 3.18 Compliance with Laws and Regulations. BEC has complied and is presently complying, in all material respects, with all laws, rules, regulations, orders and requirements (federal, state and local and foreign) applicable to it in all jurisdictions where the business of BEC is conducted or to which BEC is subject. 3.19 No Omissions or Untrue Statements. To the best of BEC's knowledge no representation or warranty made by BEC in this Agreement, the BEC disclosure schedule or in any certificate of BEC officer required to be delivered pursuant to the terms of this Agreement, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading as of the date hereof and as of the Closing Date. Section 4 Representations, Warranties and Covenants of Tailong Holdings and the Tailong Holdings Stockholders Except as set forth in Tailong Holdings and Tailong Holdings Stockholders disclosure schedule, Tailong Holdings and the Tailong Holdings Stockholders represent and warrant to, and covenant with, BEC as follows: 4.1 Ownership of Tailong Holdings. The Tailong Holdings Stockholders own the Tailong Holdings 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 Tailong Holdings Shares that are owned by them without qualification. 4.2 Ownership of PACIFIC DRAGON. Tailong Holdings owns 90% of PACIFIC DRAGON, free and clear of any liens or encumbrances of any type or nature whatsoever, and has full right, power and authority to convey the PACIFIC DRAGON ownership that it owns without qualification. 5 4.3 Corporate Status of Tailong Holdings. Tailong Holdings is a corporation duly organized, validly existing and in good standing under the laws of Hong Kong, People's Republic of China, and is licensed or qualified as a foreign corporation in all jurisdictions or foreign countries and provinces in which the nature of Tailong Holdings' business or the character or ownership of Tailong Holdings' properties makes such licensing or qualification necessary. 4.4 Corporate Status of PACIFIC DRAGON. PACIFIC DRAGON is an Equity Joint Venture Enterprise 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 Tailong Holdings. The authorized capital stock of Tailong Holdings consists of 10,000,000 shares of common stock, $1.00 par value per share, of which 100 shares are issued and outstanding, and which are 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 securities of Tailong Holdings. 4.6 Capitalization of PACIFIC DRAGON. The paid-in capital of PACIFIC DRAGON is US$500,000.00, 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 PACIFIC DRAGON. 4.7 Financial Statements. The financial statements of Tailong Holdings, which includes the financial statements of PACIFIC DRAGON, furnished to BEC, consisting of an audited compiled balance sheet and income statement for the year ended December 31, 2002 and 2003, and unaudited financial statements for the nine month period ended September 30, 2004, attached hereto as Exhibit "D" and "D-1", respectfully, and incorporated herein by reference, are correct and fairly present the combined financial condition of Tailong Holdings and PACIFIC DRAGON as of these dates and for the periods involved; such statements were prepared in accordance with US generally accepted accounting principles consistently applied, and no material change has occurred in the matters disclosed therein. These 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 Tailong Holdings. Tailong Holdings 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. 4.9 Undisclosed Liabilities of PACIFIC DRAGON. PACIFIC DRAGON 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 Tailong Holdings. Since September 30, 2004, there have been no (i) changes in the financial condition, assets, liabilities or business of Tailong Holdings, which in the aggregate, have been materially adverse; (ii) damages, destruction or loss of or to the property of Tailong Holdings, payment of any dividend or other distribution in respect of the capital stock of Tailong Holdings, 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. 6 4.11 Interim Changes of PACIFIC DRAGON. Since September 30, 2004, there have been no (i) changes in the financial condition, assets, liabilities or business of PACIFIC DRAGON, which in the aggregate, have been materially adverse; (ii) damages, destruction or loss of or to the property of PACIFIC DRAGON, payment of any dividend or other distribution in respect of the capital stock of PACIFIC DRAGON, 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 Tailong Holdings. Tailong Holdings has good and marketable title to all properties and assets, real and personal, proprietary or otherwise, reflected in the Tailong Holdings balance sheet. 4.13 Title to Property of PACIFIC DRAGON. PACIFIC DRAGON 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 Tailong Holdings. There is no litigation or proceeding pending, or to the knowledge of Tailong Holdings, threatened, against or relating to Tailong Holdings or its properties or business. Further, no officer, director or person who may be deemed to be an affiliate of Tailong Holdings is party to any material legal proceeding which could have an adverse effect on Tailong Holdings (financial or otherwise), and none is party to any action or proceeding wherein any has an interest adverse to Tailong Holdings. 4.15 Litigation of PACIFIC DRAGON. There is no litigation or proceeding pending, or to the knowledge of PACIFIC DRAGON, threatened, against or relating to PACIFIC DRAGON or its properties or business. Further, no officer, director or person who may be deemed to be an affiliate of PACIFIC DRAGON is party to any material legal proceeding which could have an adverse effect on PACIFIC DRAGON (financial or otherwise), and none is party to any action or proceeding wherein any has an interest adverse to PACIFIC DRAGON. 4.16 Books and Records of Tailong Holdings. The Tailong Holdings has (i) given to BEC and its representatives full access to all of its offices, books, records, contracts and other corporate documents and properties so that BEC could inspect and audit them; and (ii) furnished such information concerning the properties and affairs of Tailong Holdings as BEC has requested. 4.17 Books and Records of PACIFIC DRAGON. PACIFIC DRAGON has (i) given to BEC and its representatives full access to all of its offices, books, records, contracts and other corporate documents and properties so that BEC could inspect and audit them; and (ii) furnished such information concerning the properties and affairs of PACIFIC DRAGON as BEC requested. 4.18 Tax Returns of Tailong Holdings. Tailong Holdings has filed all income tax or other tax returns required to be filed in Hong Kong or has received currently effective extensions of the required filing dates. 4.19 Tax Returns of PACIFIC DRAGON. PACIFIC DRAGON 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 Tailong Holdings 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 BEC securities to be received hereunder. 7 4.21 Corporate Authority of Tailong Holdings. Tailong Holdings and the Tailong Holdings Stockholders have full corporate power and authority to enter into this Agreement and to carry out their obligations hereunder and will deliver to BEC or its representative at the Closing certified copies of resolutions of Tailong Holdings' 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 Tailong Holdings and the Tailong Holdings Stockholders hereunder have been duly authorized by all requisite corporate action on the part of Tailong Holdings and the Tailong Holdings Stockholders, and this Agreement constitutes a valid and binding obligation of Tailong Holdings and the Tailong Holdings 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 Tailong Holdings or the Tailong Holdings 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' rights generally and the application of general equitable principles in any action, legal or equitable. 4.23 Environmental Matters. Tailong Holdings and PACIFIC DRAGON 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 Tailong Holdings or its predecessors. In addition, to the best knowledge of Tailong Holdings and PACIFIC DRAGON, there are no substances or conditions which may support a claim or cause of action against Tailong Holdings and PACIFIC DRAGON 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 BEC. Tailong Holdings and the Tailong Holdings Stockholders acknowledge that they have been delivered copies of what has been represented to be documentation containing all material information respecting BEC 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 directors and executive officers of BEC, and with the legal and accounting firms of BEC, with respect to such documentation; and that to the extent requested, all questions raised have been answered to their complete satisfaction. 4.25 Residency of Tailong Holdings Stockholders. Each of the Tailong Holdings Stockholders is a non-resident of the United States. Section 5 Conditions Precedent to Obligations of Tailong Holdings and the Tailong Holdings Stockholders All obligations of Tailong Holdings and the Tailong Holdings Stockholders under this Agreement are subject, at their option, to the fulfillment, before or at the Closing, of each of the following conditions: 8 5.1 Representations and Warranties True at Closing. The representations and warranties of BEC 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. BEC 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. Tailong Holdings shall have been furnished with a certificate signed by the President of BEC, in such capacity, attached hereto as Exhibit "E" and incorporated herein by reference, dated as of the date hereof, and updated as necessary as of the Closing, certifying (i) that all representations and warranties of BEC contained herein are true and correct; and (ii) that since the date of the financial statements as described in Section 3.3, 3.4, 3.6, and 3.7 of this Agreement, there has been no material adverse change in the financial condition, business or properties of BEC, taken as a whole 5.4 Assets and Liabilities of BEC. BEC 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 Documents. All documents and instruments required hereunder to be delivered by BEC at the Closing shall be delivered in form and substance reasonably satisfactory to Tailong Holdings and Tailong Holdings Stockholders and their counsel. 5.6 Litigation. No litigation seeking to enjoin the transactions contemplated by this Agreement or to obtain damages on account hereof shall be pending or threatened. 5.7 Material Adverse Change. Except for operations in the ordinary course of business, no material adverse change shall have occurred subsequent to September 30, 2004 in the financial position, results of operations, assets, or liabilities of BEC, nor shall any event or circumstance have occurred which would result in a material adverse change in the financial position, results of operations, assets, or liabilities of BEC. 5.8 Approval Board of Directors. The board of directors of BEC shall have approved this Agreement and the transactions contemplated hereby. 5.9 Satisfaction with Due Diligence. Tailong Holdings shall have been satisfied with its due diligence review of BEC, its subsidiaries and their operations. 5.10 Resignations of Present Executive Officers and Designation of New Directors and Executive Officers. On the Closing Date, the present director and executive officers of BEC shall resign and the following individuals shall be appointed the director and executive officers of BEC: Yu Chang, Director/President/Chief Executive Officer/Secretary and Peng Lijun, Chief Financial Officer. 5.11 Regulatory Compliance. BEC shall have received any and all regulatory approvals and consents required to complete the transactions contemplated hereby Section 6 Conditions Precedent to Obligations of BEC In addition to the filing of the Current Report, all obligations of BEC under this Agreement are subject, at BEC's option, to the fulfillment, before or at the Closing, of each of the following conditions: 9 6.1 Representations and Warranties True at Closing. The representations and warranties of Tailong Holdings, the Tailong Holdings Stockholders and PACIFIC DRAGON 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. Tailong Holdings and the Tailong Holdings 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. 6.3 Officers' Certificate. BEC shall have been furnished with a certificate signed by the President of Tailong Holdings, in such capacity, attached hereto as Exhibit "F" and incorporated herein by reference, dated as of the date hereof, and updated as necessary as of the Closing, certifying (i) that all representations and warranties of Tailong Holdings and the Tailong Holdings Stockholders contained herein are true and correct; and (ii) that since the date of the financial statements (Exhibit D & D-1), there has been no material adverse change in the financial condition, business or properties of Tailong Holdings, taken as a whole. Section 7 General Provisions 7.1 Further Assurances. At any time, and from time to time, after the Closing, the parties 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 only 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 there are no brokers or finders are retained 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 BEC's Management Prior to Closing: c/o George L. Diamond Jackson Walker, LLP 901 Main Street, Suite 6000 Dallas, Texas 75202 If to Tailong Holdings: Charles Law King and Wood LLP 39365 Paseo Padre Parkway, #2100 Fremont, CA 94538 510-353-1888 510-226-5913 fax 10 If to the Tailong Holdings Stockholders: Charles Law King and Wood LLP 39365 Paseo Padre Parkway, #2100 Fremont, CA 94538 510-353-1888 510-226-5913 fax 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. 7.11 Expenses. Each party shall each pay its own expenses incident to the negotiation, preparation, and carrying out of this Agreement, including legal and accounting and audit fees. BEC's expenses shall be paid prior to the Closing. Section 8 Additional Covenants 8.1 Reverse Stock Split. The Tailong Holdings Stockholders acknowledge and agree that they will ensure that BEC effects a 1.14-for-one forward stock split (the "Forward Split") of its common stock within 30 days of the Effective Date. This Section 8.1 shall survive the Closing. 8.2 Registration Rights. BEC hereby agrees to use its best efforts to cause the shares of BEC's common stock held by Halter Financial Group, Inc. ("HFG")(the "Registrable Securities") to be registered under the Securities Act of 1933 (the "Act") pursuant to a registration statement on a suitable form to be submitted to the SEC (the " Registration Statement"). BEC shall file the Registration Statement by no later than January 20, 2005. Until such time as all the Registrable Shares have been sold into the market, or are available for resale pursuant to the provisions of Rule 144 under the Act, BEC agrees to keep the Registration Statement effective and to prepare and file with the SEC such 11 amendments as may be necessary, and to comply with the provisions of the Act with respect to the sale or other disposition of all securities proposed to be registered in the Registration Statement or any prospectus (including any preliminary prospectus and any amended or supplemented prospectus) in conformity with the requirements of the Act, and to prepare and file such other documents as HFG may reasonably request in order to effect the offering and sale of the Registrable Securities to be offered or sold. Except as otherwise prohibited by applicable law, BEC will pay all fees and expenses, including, without limitation, printing and reproduction costs and fees and expenses of counsel for HFG, incurred in connection with the registration of the Registrable Securities; provided, that transfer taxes, if any, solely attributable to the sale of the Registrable Securities, shall be borne by HFG. In addition, BEC agrees that it shall provide HFG copies of the preliminary prospectus and prospectus included in the Registration Statement and each amendment and supplement thereto; use its best efforts to register or qualify the Registrable Securities for resale under state law and to keep such registration or qualification in effect for so long as the Registration Statement remains in effect; and notify HFG at any time when a prospectus is required to be delivered by HFG under the Act, upon discovery by BEC that the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, whereupon HFG shall suspend any offers or sales of the Registrable Securities until such time as such prospectus, as amended or supplemented from time to time, shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. HFG agrees to cooperate fully with BEC in connection with effecting the registration pursuant to this Section, including, but not limited to, furnishing such information as BEC may from time to time reasonably request and as shall be required by law or by the SEC in connection with such registration. This Section 8.2 shall survive the Closing, and the Tailong Holdings Stockholders acknowledge and agree to ensure the satisfaction of the obligations of this Section 8.2. IN WITNESS WHEREOF, the parties have executed this Agreement and Plan of Reorganization effective the latest date hereof. Basic Empire Corporation /s/ Timothy P. Halter - --------------------- By: Timothy P. Halter, President Date: 12/25/04 China Tailong Holdings Company Ltd. /s/ Chang Yu - ------------ By: Chang Yu, Chairman Date: 12 Stockholders of China Tailong Holdings Company Ltd. /s/ Chang Yu - ------------ Chang Yu /s/ Teng Xiao Yong - ------------------ Teng Xiao Yong /s/ Wong Tak Shing Eddie - ------------------------ Wong Tak Shing Eddie /s/ Chang Yu - ------------ Chang Yu, Its President China Tailong Group Limited Halter Financial Group, Inc. (solely for the purposes of Section 8.2 hereof) /s/ Timothy P. Halter - --------------------- By: Timothy P. Halter, President Date: 12/25/04 13 FIRST AMENDMENT AND SUPPLEMENT TO AGREEMENT AND PLAN OF REORGANIZATION THIS FIRST AMENDMENT AND SUPPLEMENT TO AGREEMENT AND PLAN OF REORGANIZATION SUPPLEMENT, is dated as of February 2, 2005 (this "First Amendment") amends that certain AGREEMENT AND PLAN OF REORGANIZATION, dated as of December 25, 2004 (the "Reorganization Agreement"), by and among Basic Empire Corporation, a corporation organized under the laws of the State of Delaware ("BEC"); China Tailong Holdings Company Ltd., a corporation organized under the laws of Hong Kong Special Administrative Region, People's Republic of China ("Tailong Holdings"); and three individuals and a company who are the stockholders of Tailong Holdings (the "Tailong Holdings Stockholders"), a list of whom is attached to Exhibit A of the Reorganization Agreement. RECITALS WHEREAS, the parties wish to amend the Reorganization Agreement with respect to a Section 8.2 thereof as provided herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: SECTION 1. Section 1.5. Section 1.5 of the Reorganization Agreement is hereby amended and restated in its entirety to read as follows: "1.5 Effective Date. The transactions contemplated by this Agreement shall be deemed consummated at such time as the Company shall have filed with the US Securities and Exchange Commission ("SEC") a Current Report on Form 8-Kwhich reports the change in control transaction effected by this Agreement and includes therein, all required audited financial information of Tailong Holdings and its controlled subsidiary (the "Current Report"). If the Current Report is not filed on or before February 5, 2005, the Company shall have the right, in its sole discretion, to either deem this Agreement terminated or provide Tailong Holdings with an extension for filing the Current Report. The effective date (the "Effective Date") of this Agreement shall thus be the date the Company files the Current Report with the SEC. In addition, for the Closing to be deemed to have occurred as of the Effective Date, all of the other conditions precedent to the obligations of each of the parties hereto as hereinafter set forth shall have been satisfied or shall have been waived." SECTION 2. Section 8.2. Section 8.2 of the Reorganization Agreement is hereby amended and restated in its entirety to read as follows: "8.2 Registration Rights. BEC hereby agrees to use its best efforts to cause the shares of BEC's common stock held by Halter Financial Group, Inc. ("HFG")(the "Registrable Securities") to be registered for resale under the Securities Act of 1933, as amended (the "Act") pursuant to a registration statement on a suitable form to be submitted to the SEC (the "Registration Statement"). BEC shall file the Registration Statement by no later than thirty (30) days after the Effective Date. Until such time as all the Registrable Shares have been sold into the market, or are available for resale pursuant to the provisions of Rule 144 under the Act, BEC agrees to keep the Registration Statement effective and to prepare and file with the SEC such amendments as may be necessary, and to comply with the provisions of the Act with respect to the sale or other disposition of all securities proposed to be registered in the Registration Statement or any prospectus (including any preliminary prospectus and any amended or supplemented prospectus) in conformity with the requirements of the Act, and to prepare and file such other documents as HFG may reasonably request in order to effect the offering and sale of the Registrable Securities to be offered or sold. Except as otherwise prohibited by applicable law, BEC will pay all fees and expenses, including, without limitation, printing and reproduction costs and fees and expenses of counsel for HFG, incurred in connection with the registration of the Registrable Securities; provided, that transfer taxes, if any, solely attributable to the sale of the Registrable Securities, shall be borne by HFG. In addition, BEC agrees that it shall provide HFG copies of the preliminary prospectus and prospectus included in the Registration Statement and each amendment and supplement thereto; use its best efforts to register or qualify the Registrable Securities for resale under state law and to keep such registration or qualification in effect for so long as the Registration Statement remains in effect; and notify HFG at any time when a prospectus is required to be delivered by HFG under the Act, upon discovery by BEC that the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, whereupon HFG shall suspend any offers or sales of the Registrable Securities until such time as such prospectus, as amended or supplemented from time to time, shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. HFG agrees to cooperate fully with BEC in connection with effecting the registration pursuant to this Section, including, but not limited to, furnishing such information as BEC may from time to time reasonably request and as shall be required by law or by the SEC in connection with such registration. This Section 8.2 shall survive the Closing, and the Tailong Holdings Stockholders acknowledge and agree to ensure the satisfaction of the obligations of this Section 8.2. SECTION 3. Defined Terms. Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Reorganization Agreement. SECTION 4. Governing Law. This First Amendment shall be governed by, and construed in accordance with, the laws of the State of Delaware. SECTION 5. Counterparts. This First Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. SECTION 6. Effectiveness. This First Amendment shall be effective as of the date of the Reorganization Agreement. IN WITNESS WHEREOF, the parties have caused this First Amendment to be duly executed as of the date first above written. Basic Empire Corporation /s/ Timothy P. Halter - --------------------- Timothy P. Halter, President CHINA TAILONG HOLDINGS COMPANY LTD. /s/ Chang Yu - ------------ Chang Yu, Chairman STOCKHOLDERS OF CHINA TAILONG HOLDINGS COMPANY LTD. /s/ Chang Yu - ------------ Chang Yu /s/ Teng Xiao Yong - ------------------ Teng Xiao Yong /s/ Wong Tak Shing Eddie - ------------------------ Wong Tak Shing Eddie CHINA TAILONG GROUP LIMITED Chang Yu - -------- Chang Yu, President HALTER FINANCIAL GROUP, INC. /s/ Timothy P. Halter - --------------------- Timothy P. Halter, President EX-4.1 3 basic8kex41020205.txt TRANSFER AGREEMENT Exhibit 4.1 Agreement of Transfer of Capital Contributions and Profit Sharing Right This Agreement of Transfer of Capital Contributions and Profit Sharing Right (the "Agreement") is made by and among: Party A: China Tailong Holdings Company Limited Address: Flat/RM 808 8/F Tung Ying Bldg 100 Nathan Rd, Tsim Sha Tsui KL Legal representative: Yu Chang Position: Board Chairman Nationality: China Party B: Cathy-Pacific Enterprises Ltd. Address: Suite213-22188 Lougheed, Hwy. Maple Ridge, B.C. Canada V2X 2S8 Legal representative: Elmer Walske Position: Board Chairman Nationality: Canada Party C: Beijing Taiming Applied Technology Institute Address: No.43, Fengtai Road, Fengtai District, Beijing, China Legal representative: Xihe Yu Position: Board Chairman Nationality: China Party D: Harbin Ying Long Industrial Ltd. Address: West side of Dalian Road, Jizhong District, Haping Road, Development Zone, Harbin, China Legal representative: Yu Chang Position: Board Chairman Nationality: China Whereas: 1. The PACIFIC DRAGON FERTILIZERS LTD., HARBIN (hereinafter referred as to "Tailong Company") is a Chinese-Foreign contractual joint venture company established under the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Venture, and its business scope includes research, development, production, and distribution of fertilizers. Moreover, Tailong Company holds the Business License for Enterprises as Legal Persons of PRC (No.00059) issued by the State Administration for Industry and Commerce. And its registered capital is RMB 4350,000 (USD500,000); 2. Party A is a limited company established under the Company Law of Hong Kong, which is the transferee of capital contribution and profit sharing right in Tailong Company; 1 3. Party B is a limited company established under the Company Law of Canada, which are both the foreign party and the transferor of capital contribution and profit sharing right in Tailong Company; 4. Party C is a collectively owned corporation, which holds the Business License for Enterprises as Legal Persons issued by the Administration for Industry and Commerce of Fengtai District, Beijing, and its business scope covers fertilizers productions, and whole set of technology equipment, biology engineering, refined chemical productions, and new type of high-energy fuel and related equipments, medical apparatus, development of optical engineering productions, transfer and sale of technology. Further, it is Chinese party and transferor of capital contribution and profit sharing right in Tailong Company; 5. Party D is a limited company established under the Company Law of China, which holds the Business License for Enterprises as Legal Persons issued by the Administration for Industry and Commerce of Harbin city, and its business scope covers wholesale and retail of construction material, automobile parts, mechanical equipments, and woods. Further, it is Chinese party and transferor of capital contribution and profit sharing right in Tailong Company; 6. Party B consents to transfer all its 30% capital contribution, i.e. USD1,500,000 (equivalent to RMB 1,305,000) and 49% profit sharing right in Tailong Company to Party A; Party C consents to transfer all its 27% capital contribution, i.e. RMB 1160,000 and 10% profit sharing right in Tailong Company to Party A; Party D consents to transfer 33% of its capital contribution, i.e. RMB 1,435,500, and 31% of its profit sharing right in Tailong Company to Party A; And Party A accepts the above transfer of capital contribution and profit sharing rights in Tailong Company. Therefore, in accordance with the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Venture and the Contract Law of PRC, this Agreement is entered into by and among the Parties mentioned above: Article 1. This Agreement is entered into in accordance with the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Venture and the Contract Law of PRC. Article 2. Party B consents to transfer all its 30% capital contribution, i.e. USD1,500,000 (equivalent to RMB 1,305,000) and 49% profit sharing right in Tailong Company to Party A; Party C consents to transfer all its 27% capital contribution, i.e. RMB 1160,000 and 10% profit sharing right in Tailong Company to Party A; Party D consents to transfer 33% of its capital contribution, i.e. RMB 1,435,500, and 31% of its profit sharing right in Tailong Company to Party A; And Party A accepts the above transfer of capital contribution and profit sharing rights in Tailong Company. All other parties except for Party A forfeit their rights of first refusal to purchase the above capital contribution and profit sharing rights. 2 Article 3. After these transfers, Party A owns 90% capital contribution and 90% profit sharing right of Tailong Company, and Party D owns 10% capital contribution and 10% profit sharing right of Tailong Company. Neither Party B nor Party C has any capital contribution or interest in Tailong Company. Article 4. Party A shall remit $50,000.00 (USD fifty thousand only), which is the outstanding of Party B's capital contribution to Tailong Company, into Tailong Company's account in 30 days after the transfer contemplated herein is approved by the relevant examination and approval authority of China. Since Party C's capital contribution to Tailong Company was a patent appraised to be worth RMB1,160,000, after the transfer contemplated herein, Party C will withdraw its patent. Accordingly, Party A shall contribute RMB 1,160, 000 to Tailong Company's account within 30 days after the examination and approval authority issued the approval documents concerning the transfer Party A shall remit RMB 1,450,000.00, which is transfer price of the Party D's capital contribution and profit sharing right in Tailong Company (33% and 31% respectively), into Party D's bank account, in 30 days after the transfer is approved by the examination and approval authority of China. Article 5. Except as otherwise provided for in this Agreement, no Party shall claim any right or interest against Tailong Company after this Agreement becomes effective. Article 6. After the Agreement becomes effective, Tailong Company's former Joint Venture Contract and Articles of Association should be terminated immediately. Party A and Party D shall draft a new joint venture contract and Articles of Association. Article 7. Both the Party A and Party D shall enjoy rights and perform duties as prescribed by the Joint Venture Contract and Articles of Association after they accept the transfers. Article 8. Neither Party of this Agreement shall unilaterally modify or rescind the Agreement. Failure to perform this Agreement by any Party shall constitute breach of this Agreement. The Defaulting Party shall pay 10% of total transfer price to the non-defaulting party as a penalty for breach of this Agreement, and compensate the loss of non-defaulting party. Where a Party breaches this Agreement, the other Party may terminate this Agreement without any liability, or demand the Defaulting Party to continue performing this Agreement. Continuing to perform this Agreement will not release the breaching Party's liability to compensate for breaching this Agreement. Should both Parties breach the Agreement, each shall bear its respective share of the responsibility for breaching this Agreement. 3 Article 9. All issues concerning the establishment and management of Tailong Company in this Agreement shall be governed by the Law of the People's Republic of China on Chinese-Foreign Contractual Joint Venture and relevant laws of the PRC; the clauses concerning Party A and Party B shall be governed by general international practices; the clauses concerning Parties A, C, and D shall be governed by the Contract Law of PRC. Article 10. During the term of this Agreement, if any disaster, such as earthquake, flood and so on, or other relevant material accident occurs, which may make the purpose of the Agreement impossible to be realized, then, the Parties of this Agreement may delay or terminate to perform this Agreement on the basis of the principles of equality and mutual benefit. Article 11. In the event that any dispute arises out of, under or in connection with this Agreement, it shall be first settled through negotiation among the Parties. In the event that the Parties are unable to settle the dispute, the Parties may enter into an arbitration agreement and submit the dispute to an arbitration body or bring a lawsuit in a competent court. Article 12. The issues that are not provided for in this Agreement may be provided for in a supplemental agreement upon both Parties' agreement. Such supplemental agreement shall be an integral part of this Agreement and of the same legal force. Article 13. This Agreement shall become effective upon execution by both Parties and approval by government authority in charge of foreign investment. This Agreement may be modified, rescinded, and terminated in advance on the basis of the principles of equality and mutual benefit. Article 14. This Agreement is written in both Chinese and English. Should any provisions in this Agreement be susceptible to several interpretations, they shall be interpreted in accordance with the Chinese version of this Agreement. Article 15. This Agreement has four original copies, and each Party holds one of them, the rest shall be sent to government authority in charge of foreign investment to apply for the changes provided herein. Article 16. This Agreement is signed on June 8, 2004 in Hong Kong, China. Party A: China Tailong Holdings Company Limited The authorized representative: /s/Teng Xiao Yong 4 Party B: Cathy-Pacific Enterprises Ltd. The authorized representative: /s/Elmer Walske Party C: Beijing Taiming Applied Technology Institute The authorized representative:/s/ Xihe Yu Party D: Harbin Ying Long Industrial Ltd. The authorized representative: /s/ Chang Yu 5 EX-4.2 4 basic8kex42020205.txt ARTICLES OF ASSOCIATIONS OF TAILONG HOLDINGS ================================================================================ Exhibit 4.2 MEMORANDUM AND ARTICLES OF ASSOCIATION OF CHINA TAILONG HOLDINGS COMPANY LIMITED ------------------- ------------------- Incorporated the 27th day of October, 2003 HONG KONG ================================================================================ ================================================================================ No. 867903 [COPY] COMPANIES ORDINANCE (CHAPTER 32) CERTIFICATE OF INCORPORATION I hereby certify that CHINA TAILONG HOLDINGS COMPANY LIMITED Is this day incorporated in Hong Kong under the Companies Ordinance, and that this company is limited. Issued by the undersigned on 27 October 2003. (Sd.) MISS R. CHEUNG .................................... For Registrar of Companies Hong Kong ================================================================================ THE COMPANIES ORDINANCE (CHAPTER 32) --------------------------------------- Private Company Limited by Shares --------------------------------------- MEMORANDUM OF ASSOCIATION OF CHINA TAILONG HOLDINGS COMPANY LIMITED --------------------------------------- First: The name of the Company is "CHINA TAILONG HOLDINGS COMPANY LIMITED" Second: The Registered Office of the Company will be situated in Hong Kong. Third: The liability of the Members is limited. Fourth: The Share Capital of the Company is HK$10,000,000,00 divided into 10,000,000 shares of HK$1.00 each with the power for the company to increase or reduce the said capital and to issue any part of its capital, original or increased, with or without preference, priority or special privileges, or subject to any postponement of rights or to any conditions or restrictions and so that, unless the conditions of issue shall otherwise expressly declare, every issue of shares, whether declared to be preference or otherwise, shall be subject to the power hereinbefore contained. 1 We, the several persons, whose names, addresses and descriptions are hereto subscribed, are desirous of being formed into a Company in pursuance of this Memorandum of Association, and we respectively agree to take the number of shares in the capital of the Company set opposite to our respective names: - -------------------------------------------------------------------------------- Number of Shares Names, Addresses and Descriptions of Subscribers taken by each subscriber - -------------------------------------------------------------------------------- (Sd.) Chang Yu 1 Room 808, 8F., Tung Ying Building, 100 Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong. Merchant (Sd.) Teng Xiao Yong 1 Room 808, 8F., Tung Ying Building, 100 Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong. Merchant - -------------------------------------------------------------------------------- Total Number of Shares Taken.... 2 - -------------------------------------------------------------------------------- Dated the 21st day of October, 2003 WITNESS to the above signatures: (Sd.) Mr. Chan Kam Ki Company Secretary Room 808, 8F., Tung Ying Building, 100 Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong. 2 THE COMPANIES ORDINANCE (CHAPTER 32) --------------------------------------- Private Company Limited by Shares --------------------------------------- ARTICLES OF ASSOCIATION OF CHINA TAILONG HOLDINGS COMPANY LIMITED --------------------------------------- PRELIMINARY 1. Subject as hereinafter provided, the regulations contained in Table "A" in the First Schedule to the Companies Ordinance (Chapter 32) shall apply to this Company, and be deemed to be incorporated with these Presents. 2. The following clauses of Table "A" namely, 24, 41 inclusive, 55, 60, 64, 77, 78, 79, 81, 82, 90 to 99 inclusive, 101, and 114 to 123 inclusive, and 128, shall not apply or are modified as hereinafter appearing. 3. The Company is a Private Company and accordingly; (a) the right to transfer shares is restricted in manner hereinafter prescribed; (b) the number of members of the company (exclusive of persons who are in the employment of the company and of persons who having been formerly in the employment of the company were while in such employment and have continued after the determination of such employment to be members of the company) is limited to 50. Provided that where 2 or more persons hold one or more shares in the company jointly they shall for the purpose of this regulation be treated as a single member; (c) any invitation to the public to subscribe for any shares or debentures of the company is prohibited; (d) the company shall not have power to issue share warrants to bearer. TRANSFER OF SHARES 4. Clause 24 of Table "A" is hereby modified as follows: The directors may, in their absolute discretion and without assigning any reason therefore, decline to register any transfer of any share, whether or not it is a fully paid share. 3 DIRECTORS 5. Unless otherwise determined by the Company in General Meeting, the number of Directors shall not be less than two. The first directors of the company shall be nominated in writing by the subscribers to the memorandum of association. 6. A Director shall hold office until either: (a) He is removed from office by a special resolution of the Company, or (b) Notice is given to the Company by any Member at least seven days before the Annual General Meeting of intention to propose a resolution that some other person be appointed in his place and such resolution is duly passed as an ordinary resolution. 7. It shall not be required for a Director to hold any qualification shares. Residence in Hong Kong shall not be a requisite qualification. 8. Unless otherwise determined by the Directors, the quorum of a Directors' Meeting shall be two Directors personally present or represented by their substitutes appointed under Articles 11 hereof. 9. A resolution in writing signed by all the directors shall be as valid and effectual as if it had been passed at a meeting of directors duly called and constituted. 10. The office of a Director shall be vacated if the Director: (a) Resigns his office by notice in writing to the Company; or (b) Becomes bankrupt or makes any arrangement with his creditors generally; or (c) Becomes of unsound mind. 11. Subject to the approval of the Board, a Director may appoint any person to act for him as a substitute Director during his absence, and such appointment shall have effect and such appointee whilst he holds office as a substitute Director shall be entitled to notice of meetings of Directors, and to attend and vote thereat accordingly; but he shall not require any qualification, and he shall ipso facto vacate office if and when the appointor returns to Hong Kong or vacates office as a Director, or removes the appointee from office, and any appointment and removal under this Clause shall be effected by notice in writing under the hand of the Director making the same. 12. Any causal vacancy occurring in the Board of directors may be filled up by the Directors. 13. The Directors shall have power at any time, and from time to time, to appoint a person as an additional Director. 14. The Company may by a special resolution remove any Director and may by an ordinary resolution appoint another person in his stead, provided that the minimum number of Directors shall not, in any circumstances, be less than two. 15. Any Director may be employed by or hold any office of profit under the Company, except that of Auditors of the company, and may act either personally or as a member of a firm or render any professional service to the Company, and may receive remuneration from the Company for so doing in addition to any remuneration payable to him as a Director. 4 GENERAL MANAGEMENT 16. The Board of Directors shall be entrusted with the general management and carrying on of the business of the Company, and shall have full power to do all such acts and things and enter into such contracts and engagements on behalf of the Company as he may consider necessary or desirable and may also appoint and remove or suspend any officers, clerks, accountants, agents, servants and other employees. POWERS OF DIRECTORS 17. The Directors, in addition to the powers and authorities by these Articles or otherwise expressly conferred upon them, may exercise all such powers and do all such acts and things as may be exercised or done by the Company in General Meeting subject nevertheless to the provisions of the Companies Ordinance, (Chapter 32), to these Articles, and to any regulations from time to time made by the Company in General Meeting, provided that no regulation so made shall invalidate any prior act of the Directors which would have been valid if such regulation had not been made. 18. Without prejudice to the general powers conferred by the last preceding Article and the other powers conferred by these Articles, it is hereby expressly declared that the Directors shall have the following powers, that is to say, power: (a) To pay the costs, charges and expenses preliminary and incidental to the promotion, formation, establishment and registration of the Company. (b) To purchase or otherwise acquire for the Company or sell or otherwise dispose of any property, rights or privileges which the company is authorized to acquire at such price and generally on such terms and conditions as they shall think fit. (c) To engage, dismiss, and fix the salaries or emoluments of the employees of the Company. (d) To institute, conduct, defend, compromise or abandon any legal proceedings by or against the Company or its officers, or otherwise concerning the affairs of the Company, and also to compound and allow time for payment or satisfaction of any debts due to and of any claims or demands by or against the Company. (e) To refer any claims or demands by or against the Company to arbitration and observe and perform the awards. (f) To make and give receipts, releases, and other discharges for money payable to the Company, and for claims and demands of the Company. (g) To invest, lend or otherwise deal with any of the moneys or property of the Company in such manner as they think fit, having regard to the Company's Memorandum of Association and from time to time to vary or realize any such investment. (h) To borrow money, arrange for banking facilities, on behalf of the Company, and to pledge, mortgage or hypothecate any of the property of the Company. (i) To open a current account with themselves for the Company and to advance any money to the Company with or without interest and upon such terms and conditions as they shall think fit. 5 (j) To enter into all such negotiations and contracts, and rescind and vary all such contracts, and execute and do all such acts, deeds and things in the name and on behalf of the Company as they may consider expedient for, or in relation to, any of the matters aforesaid, or otherwise for the purpose of the Company. (k) To give to any Director, officer or other person employed by the Company a commission on the profits of any particular business or transaction, and such commission shall be treated as part of the working expenses of the Company, and to pay commissions and make allowance (either by way of a share in the general profits of the Company or otherwise) to any persons introducing business to the Company or otherwise promoting or serving the interest thereof. (l) To sell, improve, manage, exchange, lease, let, mortgage or turn to account all or any part of the land, property, rights and privileges of the Company. (m) To employ, invest or otherwise deal with any reserve Fund or Reserve Funds in such manner and for such purposes as the Directors may think fit. (n) To execute, in the name and on behalf of the Company, in favour of any Director or other person who may incur or be about to incur any personal liability for the benefit of the Company, such mortgages of the Company's property (present or future) as they think fit, and any mortgages may contain a power of sale and such other powers covenants and provisions as shall be agreed upon. (o) From time to time to provide for the management of the affairs of the Company abroad in such manner as they think fit, and in particular to appoint any persons to be the Attorneys or agents of the Company with such powers (including power to subdelegate) and upon such terms as they think fit. (p) From time to time to make, vary or repeal rules and by-laws for the regulation of the business of the Company, its officers and servants. (q) To delegate any or all of the powers herein to any Director or other person or persons as the Directors may at any time think fit. SEAL AND CHEQUES 19. The Seal of the Company shall be kept by the Directors and shall not be used except with their authority. 20. Unless otherwise determined by the Directors, every document required to be sealed with the Seal of the Company shall be deemed to be properly executed if sealed with the Seal of the Company and signed by such person or persons as the Board of Directors shall from time to time appoint. 21. All cheques, bills or exchange, promissory notes and other negotiable instruments issued or required to be signed, endorsed or accepted or otherwise negotiated by the Company shall be signed by such person or persons as the Board of Directors shall from time to time appoint. GENERAL MEETINGS 22. For all purposes, the quorum for all general meetings shall be two members personally present or by proxy and no business shall be transacted at any general meeting unless the requisite quorum be present at the commencement of the business. 6 23. A resolution in writing signed by all the shareholders shall be as valid and effectual as a resolution passed at a general meeting duly convened and held. VOTES OF MEMBERS 24. Unless a poll is demanded, all voting of members in respect of any matter or matters shall be by show of hands, and in the case of a poll, every member shall have one vote for each share of which he is the holder. DIVISION OF PROFITS 25. The net profits of the Company in each year shall be applied in or towards the formation of such reserve fund or funds and in or towards the payment of such dividends and bonuses as the Directors subject to the approval of the Company in General Meeting may decide. 26. No dividend shall be payable except out of the profits of the Company, and no dividend shall carry interest as against the Company. 27. A transfer of shares shall not pass the right to any dividend declared thereon before the registration of the transfer. 28. If two or more persons are registered as joint holders of any share, any one of such persons may give effectual receipts for any dividend or for other moneys payable in respect of such share. 29. The Directors may retain any interest or dividends on which the Company has a lien, and may apply the same in or towards satisfaction of the debts, liabilities or engagements in respect of which the lien exists. 30. All dividends unclaimed for one year after having been declared may be invested or otherwise made use of by the Directors for the benefit of the Company until claimed. NOTICES 31. All notices required to be given to the shareholders under these Articles must be in the Chinese or English language or both. SECRETARY 32. The first Secretary of the Company shall be Regent Secretarial and Tax Consultants Limited who may resign from this office upon giving notice to the Company of such intention and such resignation shall take effect upon the expiration of the period specified in such notice or its earlier acceptance. 7 - -------------------------------------------------------------------------------- Names, Addresses and Descriptions of Subscribers - -------------------------------------------------------------------------------- (Sd.) Chang Yu Room 808, 8F., Tung Ying Building, 100 Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong. Merchant (Sd.) Teng Xiao Yong Room 808, 8F., Tung Ying Building, 100 Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong. Merchant - -------------------------------------------------------------------------------- Dated the 21st day of October 2003. WITNESS to the above signatures (Sd.) Mr. Chan Kam Ki Company Secretary Room 808, 8F., Tung Ying Building, 100 Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong. 8 EX-4.3 5 basic8kex43020205.txt SUMMARY OF THE ARTICLES OF ASSOCIATIONS Exhibit 4.3 ARTICLES OF ASSOCIATION OF PACIFIC DRAGON FERTILIZERS LTD. June 2004 Chapter 1 General provisions Article 1 In January 1994, in accordance with "Law of the People's Republic of China on Economic Contract Involving Foreign Interest ", "Law of the People's Republic of China on Chinese-Foreign Contractual Joint Venture", "The Law of the People's Republic of China on Patent" and other relevant PRC laws and regulations, and based on the principle of equality and mutual benefit and mutual negotiation, Harbing Yin Long Industry Ltd. (hereinafter referred to as Party A), Beijing Taiming Applied Technology Institute, and Cathay-Pacific Enterprises Ltd. of Canada entered into the Contractual Joint Venture Contract for the Pacific Dragon Fertilizers Ltd. and Articles of Association of Pacific Dragon Fertilizers Ltd. upon sufficient and friendly negotiation. The parties agreed to invest and establish the Pacific Dragon Fertilizers Ltd. (hereinafter referred as to JV) to produce and operate "LvLingBao" a highly concentrated combined fertilizer in Harbin City, Heilongjiang Province, China. Then, the JV obtained Approval Certificate for Foreign-funded Enterprise on May 3, 1994 and completed registration with the administration for industrial and commerce as well. On June 8, 2004, "the Agreement on Transfer of Capital Contributions and Profit Sharing Rights" was entered into by and among China Tailong Holding Co., Ltd. (hereinafter referred as to Party B); Party A; and Beijing Taiming Applied Technology Institute, Cathay--Pacific Enterprises Ltd. According to this "Agreement", Cathay--Pacific Enterprises Ltd. transfers all the capital contribution it invested in the JV (30%), and the profit sharing right (49%) of the JV to Party B; Beijing Taiming Applied Technology Institute transfers all the capital contribution it invested (27%) in JV and profit sharing right (10%) of the JV to Party B; Party A transfers its 33% capital and 31% profit sharing right of the JV to Party B; Party B accepts these transferred contributions and profit sharing right. After the said transfer, Neither Cathay--Pacific Enterprises Ltd. nor Beijing Taiming Applied Technology Institute have any capital contribution or any right or interest in the JV. Party A owns 10% capital contribution and profit sharing right of the JV, Party B owns 90% capital contribution and profit sharing right of the JV. At the same time, the JV's former Joint Venture Contract and Articles of Association should be terminated. 1 In accordance with the "Law of the People's Republic of China on Equity Joint Ventures", and its "Implementing Regulations" and other relevant PRC laws and regulations on the other hand, Party A and Party B, adhering to the principles of equality and mutual benefit and through friendly negotiations, therefore agree to formulate this "Articles of Association" and both parties shall continue to operate the JV as an equity joint venture. Article 2 The name of the JV is Pacific Dragon Fertilizers Ltd. The legal address is Yifayuan, Haping Road, Harbin, Heilongjiang Province, China. Article 3 Parties Party A: Harbin Yin Long Industry Ltd., Legal address: 192 Changchun Street, Harbin, Heilongjiang Province, China. Legal representative: Yu Chang Position: Board Chairman Post code: 150020 Tel: (0451)82627769 Fax: (0451)82627769 Party B: China Tailong Holdings JV Limtied Legal address: Flat/RM 808, 8/F Tung Ying Bldg 100 Nathan Rd Tsim Sha Tsui, KL Legal representative: Yu Chang Position: Board Chairman Nationality: China Tel: (00852)65252022 Fax: (00852)65252022 Article 4 The JV shall be a limited liability JV under the laws of the PRC. Article 5 The JV shall be the Legal Person of China, and all of the activities of the JV shall comply with applicable PRC Laws. Chapter 2 purpose and scope of business Article 6 The purpose of the JV is to use efficient and advanced technology and management to produce "LvLingBao" and to obtain satisfactory economic benefits for the Parties. Article 7 Scope of Business of the JV shall be to produce and sell liquid fertilizers. Article 8 Scale of production of the JV shall be to produce and sell 2500 ton fertilizers per year. When appropriate, the JV will expand production within the province and nationwide. 2 Chapter 3 Total Investment and Registered Capital Article 9 The total amount of investment shall be US Dollar 500,000 (equivalent to RMB 4350, 000). Article 10 The registered capital of the JV shall be US Dollar 500,000 (equivalent to RMB 4350, 000). Article 11 The capital contribution of each party is as follows: Party A: US Dollar 50, 000 (equivalent to RMB 435, 000), which accounts for 10% of the registered capital. Party B: US Dollar 450,000 (equivalent to RMB 3,915, 000), which accounts for 90% of the registered capital. Article 12 Any change in the registered capital of the JV and the transfer of Parties' capital contributions shall be approved by the Board of Directors. Without such approval, neither party may transfer or in any other way dispose of all or part of its capital contribution to the other party and/or the third party. If a party wishes to transfer all or part of its capital contribution, the other Party shall have the right of first refusal to purchase the transfer. In the mean time, the JV shall report to the examination and approval authority for approval, and register the change with the administrative authorities for industry and commerce. Chapter 4 Board of Directors Article 13 The date of registration of the JV shall be the date on which the Board of Directors of the JV is established. Article 14 The Board of Directors shall consist of 3 members, including one Chairman and one Vice Chairman, of whom one shall be appointed by Party A and two shall be appointed by Party B. The Chairman of the Board of Directors shall be appointed by Party B, its Vice-Chairman by Party A. The Board Chairman and all the Directors shall have a term of office of 5 years and they may remain in office if continuously appointed by their appointing parties. Article 15 The Board of Directors is the authority of the JV enjoying the highest power, which decides all the major issues of the JV. Decisions on the following items shall be made only after being unanimously agreed upon by the directors: 3 (1) amendment to the articles of association of the JV; (2) termination or dissolution of the JV; (3) increase or transfer of the registered capital of the JV; (4) merger of the JV with other economic organizations; (5) annual final accounting report, bonus distribution plan, annual financial budget report; (6) other items that the Board of Directors considers shall be made after being unanimously agreed upon by the directors present at the Board Meeting. Decision on other matters shall be passed by two-third of the directors, but, all decisions must be approved by at least one director appointed by Party A. Article 16 The chairman of the board is the legal representative of the JV. Should the chairman be unable to perform his duties, he shall authorize the vice-chairman of the board or a director to perform his duties. Article 17 The Board of Directors shall convene at least once a year. The chairman may convene an interim meeting on the suggestion of more than one-third of the directors. The meeting shall be called and presided over by the chairman of the board, and the minutes of the meeting shall be filed and reserved. The time, process and proposal shall be notified to foreign directors by express mail and Fax or Telegram one month in advance when the material issue shall be discussed. Chapter 5 Management Article 18 The management consists of a general manager, recommended by Party B, and a vice general manager, recommended by Party A. The general manager and vice general manager shall be hired by the Board of Directors for a term of 5 years. The employment may be renewed. Article 19 The management consists of the Department of Production, Department of Operation, Department of Financial Affairs, and Office in charge of the JV's daily business and management. 4 Article 20 The duty of the general manager is to carry out the decisions of the Board of Directors, and organize the JV's daily business and management. Vice general manager shall assist the general manager. There are chief engineer and chief accountant under the general manager who will oversee the technical and financial work respectively under the leadership of general manager and vice general manager. The management may have several department managers in charge of the work of each department. They carry out the work assigned by the general manager and vice general manager and shall be directly responsible to the general manager and vice general manager. Article 21 Where the general manager or vice general manager engages in malpractices for private purposes or is seriously negligent in performing their duties, or seriously unfit for their jobs, they may be changed any time upon a decision by the Board of Directors. Chapter 6 Finance and Accounting Article 22 All the matters concerning foreign exchange of the JV shall be handled in accordance with the Foreign Exchange Administrative Regulations of the People's Republic of China and relevant regulations of the foreign exchange administrative authority. Article 23 The JV shall pay all taxes in accordance with relevant Chinese laws and regulations. Article 24 The employees of JV shall pay individual income tax in accordance with the Individual Income Tax Law of the People's Republic of China. Article 25 The JV shall allocate to the reserve fund, development fund and employees bonus and welfare fund in accordance with the Sino-foreign Equity Joint Venture Law. The percentage shall be determined by the Board of Directors depending on the operation each year. Article 26 The accounting year of the JV starts on January 1 and ends on December 31. All accounting invoices, financial statements and books shall be written in Chinese. Article 27 The JV shall engage the certified Chinese accountant to conduct the financial audit on the JV and report to the Board of Directors and the general manager. If 5 Party B considers it necessary to engage a foreign auditor to conduct the annual audit, Party A shall consent. Party B shall bear all expenses incurred in doing so. Article 28 In the first three months of each business year, the general manager shall formulate the statement of assets and liabilities, calculation of profits and losses, and profits distribution plan of the preceding year and submit them to the Board of Directors for examination and approval. Chapter 7 Distribution of Profits Article 29 After payment of income tax of the JV each year, the Board shall determine the amount from the after-tax net profits to be allocated into the JV's reserve fund, enterprise expansion fund, and the employee bonus and welfare fund to be set up in accordance with PRC Laws. The total annual allocation to the funds mentioned above shall not decided by the Board. Article 30 After paying taxes and making allocations to the reserve funds, expansion funds, bonuses and welfare funds for staff workers, the JV's remaining profits shall be distributed between the Parties according to the Parties' ratio (Party A: 10%; Party B: 90%). Chapter 8 Employment Management Article 31 The recruitment, dismissal, salary, labor protection, benefits and award and punishment of the JV shall be decided by the Board of Directors in accordance with the Regulations on the Administration of Sino-foreign Joint Ventures' Employment of the People's Republic of China and its implementing measures. The employment contracts, upon execution, shall be filed with the Employment Administrative Agency for record. Article 32 The Board of Directors shall meet and decide the recruitment, salary, social security, benefit, and traveling standard of the senior management personnel. Chapter 9 Trade Union Article 33 The employees of the JV shall establish trade union lawfully, carry out the trade union's activities and protect the legitimate interest of the employees. 6 Article 34 The trade union of the JV is the representative of the employees. Its mission is to protect the employees' interest, negotiate with the JV, unite and educate the employees, ensure production, comply with disciplines and carry out the employment contracts. Article 35 The JV's trade union shall participate in the settlement of the dispute between the employees and the JV. Article 36 The JV shall pay 2% of the total salary of the employees of the JV as trade union fund every month, which shall be used in accordance with the relevant laws and regulations of the People's Republic of China. Chapter 10 Article 37 The duration of the JV shall be 15 years, starting from the date of issuance of its business license. Article 38 Upon suggestion by either party of the JV and unanimous approval of the Board of Directors of the JV, the JV may apply for an extension of the JV with the original examination and approval authority six months prior to the expiration date of the term of the JV. Article 39 In the case of expiration or earlier termination of the JV, the JV shall conduct liquidation lawfully. The net asset after the liquidation shall be distributed according to the ratio of the capital contribution of Party A and Party B. Article 40 In case of liquidation, the Board of Directors shall propose the liquidation procedure, principle and candidates of the liquidation committee, and organize the liquidation committee. The mission of the liquidation committee is to conduct a thorough check of the assets, rights and debts, formulate statement of assets and liabilities and category of assets, formulate a liquidation plan and submit them to the Board of Directors for approval and implement them. Article 41 During liquidation, the liquidation committee will sue and be sued on behalf of the JV. 7 Article 42 During liquidation, the liquidation committee shall reevaluate the JV's assets according to the depreciation on the book and take into account the current price. The liquidation committee shall try to sell the assets at the best possible price. Article 43 Liquidation expenses and the remuneration of the members of the liquidation committee shall be paid from the liquidated assets of the JV as a priority. Article 44 At the end of the liquidation, the JV shall report to the original examination and approval agency and register the liquidation of the JV with the registration administration and hand in the business license. In the mean time, it shall announce to the public of its liquidation Article 45 After termination of the JV, the original of all books shall be kept by Party A. Party B may keep all the copies. Chapter 11 Rules and Regulations Article 46 JV has enacted the following rules and regulations through the Board of Directors: 1. operation and management rules, including the power of the administration department and working procedures. 2. rules for the employees. 3. salary. 4. work attendance, promotion, and award. 5. employees benefits. 6. financial system. 7. liquidation procedure at dissolution of the JV. 8. other necessary rules and regulations. Chapter 12 Miscellaneous Article 48 The amendment to these Articles of Associations must be unanimously approved by the Board of Directors, Article 49 These Articles of Associations are written in Chinese. Article 50 These Articles of Associations shall become effective upon approval by the examination and approval authority. 8 Party A: Harbin Yin Long Industry Ltd., Legal representative (Authorized representative): Yu Chang Party B: China Tailong Holdings JV Limtied Legal representative (authorized representative): Teng Xiao Yong June 9, 2004 9 EX-10.1 6 basic8kex101020205.txt STOCK PURCHASE AGREEMENT Exhibit 10.1 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of the 3rd day of February, 2005, by and between Chinamerica Fund, LLP and the other purchasers set forth on Schedule A hereto (collectively, the "Purchasers") and Basic Empire Corporation, a Delaware corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Company desires to sell to the Purchasers and the Purchasers desire to purchase from the Company shares of Common Stock of the Company, par value $.001 per share (the "Shares"), in reliance upon Rule 506 of Regulation D under the Securities Act of 1933, as amended (the "Act") and upon the terms, provisions, and conditions and for the consideration hereinafter set forth. NOW, THEREFORE, for and in consideration of the premises and mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby represent, warrant, covenant, and agree as follows: Section 1. Issuance and Sale of Shares. Based upon the representations, warranties, and covenants and subject to the terms, provisions, and conditions contained in this Agreement, the Company agrees to sell, issue and deliver to the Purchasers the Shares, free and clear of all liens, pledges, encumbrances, security interests, and adverse claims, and the Purchasers agree to purchase the Shares from the Company for the consideration hereinafter set forth. Section 2. Number of Shares; Purchase Price; Adjustments; and Use of Proceeds. Upon execution hereof, the Purchasers shall purchase, and the Company shall sell, issue and deliver to the Purchasers, up to 590,283 Shares at a purchase price of $1.6941 per Share. The total purchase price of $ 1,000,000 shall be placed into escrow by the filing date of an 8-K with SEC for the transaction of a reverse merger between the Company and China Tailong Holding Company, Ltd. Upon the filing of a registration statement covering the shares subscribed for by the Purchasers in a manner more fully described in Section 7 herein, the total purchase price shall be released from escrow. Once released, $750,000 shall be wired to the Company at its designated bank account and the $250,000 shall be deposited into an escrow according to this Section as described below. The Company hereby represents to the Purchasers that it's after tax net income ("Net Income") for the Company's fiscal year ending 2004 shall be at least $3,300,000. In the event that the Company does not generate Net Income of at least $3,300,000 (the "Target Income") for its fiscal year ending 2004 (based upon audited financial statements for the same period), the Company shall issue 1 to the Purchasers additional Shares. The number of additional Shares to be issued by the Company to the Purchasers shall be determined by (a) dividing $1,000,000 by the product of the Target Income multiplied by six (6) and increased by $1,000,000 then multiplying the percentage obtained thereby (the "Target Percentage") times the total number of Shares then outstanding; and (b) dividing $1,000,000 by the product of actual Net Income for the fiscal year ending 2004 multiplied by six (6) and increased by $1,000,000 then multiplying the percentage obtained thereby (the "Target Percentage") times the total number of Shares then outstanding. The Company shall then issue that number of shares equal to the difference between the number of Shares issued under Subsections (a) and (b) above. Each Purchaser shall be entitled to receive a portion of the additional shares based upon its pro rata ownership of the initial Shares issued to it hereunder. Example: -------- If the audited net income for fiscal 2004 was reported to be $ 3 MM instead of $ 3.3 MM, the shares issued to the investors would be calculated as follows: Targeted pre-money value ($ 3.3 MM x 6 = $ 19.80) $ 1 MM investment thus represents $ 1 MM / $ 20.80 MM = 4.77 % Actual Pre-money value based on $ 3 MM net income ($ 3 MM x 6 = $ 18 MM) $ 1 MM investment should thus represent $ 1 MM / $ 19 MM = 5.26 % An adjustment would thus be made to adjust the investor's fully diluted ownership up to 5.26 % of the Company. The Company hereby represents to the Purchasers that it's after tax net income ("Net Income") for the Company's fiscal year ending 2005 shall be at least $3,800,000. In the event that the Company does not generate Net Income of at least $3,800,000 for its fiscal year ending 2005 (based upon audited financial statements for the same period), the Company shall cause the shareholders of the Company listed on Schedule B hereto (the "Controlling Shareholders"), to forfeit Shares owned by them (pro rata based on their respective percentages of ownership of all of the then outstanding Shares). The number of Shares to be forfeited by the Controlling Shareholders shall be determined based upon the earnings the Company ("Earnings"). Earnings shall be determined within 15 days of the receipt by the Company of its audited 2005 Net Income but in no event later than April 1, 2006. Upon receipt of the audits, the Net Income reflected in the audit will be compared to $ 3,800,000. To the extent that the audited Net Income is less than $ 3,800,000, a number of shares equal to the Forfeited Amount shall be retired by the Controlling Shareholders. The Forfeited Amount shall be calculated as follows: The total number of shares at risk shall be equal to 33 % of the fully diluted shares held by the Controlling Shareholders as of the date of the adjustment (if any). To this number will be applied a percentage calculated by taking 1 - (the actual net income for 2005 / $ 3.8 MM). It shall be a condition to the Purchasers' acquisition of the Shares that the Controlling Shareholders agree in writing to the provisions of this Section 2. 2 Example: -------- If the audited net income for fiscal 2005 were reported to be $ 3.5 MM instead of the targeted number of $ 3.8 MM, the following adjustment to the shares outstanding would be made by having the controlling shareholders retire the indicated number of shares to the treasury. Total shares held by controlling shareholders = 10,000,000 (this is an assumption for the purpose of this illustration). Percentage that the actual net income was under the targeted net income = 1-(Actual Net / Target Net) = 1-(3,500,000 / 3,800,000) = 1- (.9211) = .0789 = 7.89 % An adjustment would then be made to the shares total shares held by the controlling shareholders by taking .0789 x 10,000,000 (their total shares) = 789,000 shares. This is the number of shares that would be retired to treasury. In no event, no matter what the actual net income turned out to be, would the adjustment be greater than 33 % of the shares held by the Controlling shareholders. The Company hereby agrees to use the proceeds of the purchase of the Shares hereunder by the Purchasers for: (a) expansion of the business of the Company; (b) general working capital purposes, including the costs associated with this transaction and contemplated corporate restructuring transactions; (c) regulatory compliance and public reporting obligations under the Act and the Exchange Act of 1934, as amended; and (d) implementation and execution of a corporate communications program; provided, however, that with respect to the proceeds to be expended by the Company in connection with corporate communications program, the Company hereby agrees: (x) to expend $250,000 of the proceeds of the Purchasers' acquisition of Shares on such program (the "Program Funds"); and (y) the Program Funds will be held back by the Escrow Agent (defined below) and not released unless and until the Company shall have entered into a separate escrow agreement with the Escrow Agent (to which each Purchaser is a party), providing for the retention of the Program Funds and timely and orderly disposition thereof. It is expressly understood that under such separate escrow agreement the Company shall have the sole authority to select the recipients of such program funds and the approximate timing of their disbursement by the escrow agent. Section 3. The Closing. Upon execution of this Agreement, the Company shall deliver to the Purchasers certificates evidencing the Shares determined to be purchased by the Purchasers hereunder. Such certificates shall be issued in the name of Purchasers as set forth on Schedule A hereto (the "Closing"). Immediately upon Closing and delivery to the Purchasers of the foregoing certificates, the Purchasers shall deliver to Securities Transfer Corporation, as the Company's escrow agent (the "Escrow Agent") the aggregate purchase price payable for the Shares acquired by the Purchasers hereunder (the "Purchase Price"). The release of the Purchase Price to the Company shall be effected in accordance with the terms of this Agreement and an escrow agreement to be entered into by and among the Escrow Agent, the parties hereto and such other parties referenced therein (the "Escrow Agreement"). 3 Section 4. Representations and Warranties of the Purchasers. Each Purchaser acknowledges and understands that the Shares are being acquired for investment in a transaction undertaken in reliance upon the exemption from registration under Rule 506 of Regulation D under the Act. Each Purchaser hereby represents and warrants to the Company that: a) The Purchaser is acquiring the Shares solely for investment purposes and not with a view to, or for resale in connection with, any distribution thereof or with any present intention of distributing or selling any of the Shares, except in accordance with applicable provisions of the Act. b) The Purchaser will hold the Shares subject to all of the applicable provisions of the Act, and Purchaser will not at any time make any sale, transfer, or other disposition of the Shares in contravention of said Act (references herein to the Act shall include the rules and regulations thereunder). c) The Purchaser acknowledges that it must bear the economic risk of its investment in the Shares for an indefinite period of time since issuance of the Shares has not been registered under the Act and that the Shares therefore cannot be sold or transferred unless such sale or transfer is registered under the Act or an exemption from the registration requirements of the Act is available. d) The sale of the Shares to Purchaser is being made without any public solicitation or advertisements. Section 5. Representations and Warranties of the Company. The Company hereby represents and warrants to each Purchaser as follows, it being understood that each reference to the Company hereafter with respect to each such representation and warranty shall pertain to the Company and any direct and indirect subsidiaries: 5.1. Organization, Standing and Power. The Company is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated. The Company has the requisite corporate power and authority to carry on its business as now being conducted. The Company is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, other than in such jurisdictions where the failure to be so qualified or licensed (individually or in the aggregate) would not have a Company Material Adverse Effect (defined below). For purposes of this Agreement, the term "Company Material Adverse Effect" means any material adverse effect with respect to the Company, taken as a whole, or any change or effect that adversely, or is reasonably expected to adversely, affect the ability of the Company to maintain its current business operations or to consummate the transactions contemplated by this Agreement in any material respect. 4 5.2. Validity of Transaction; Consents. This Agreement and each other agreement contemplated hereby to which the Company is a party (the "Ancillary Agreements") are valid and legally binding obligations of the Company, enforceable in accordance with their respective terms against the Company, except as limited by bankruptcy, insolvency and similar laws affecting creditors generally, and by general principles of equity. At the time that the Shares are sold, assigned, transferred and conveyed to Purchasers pursuant to this Agreement, the Shares will be duly authorized, validly issued, fully paid and nonassessable. The execution, delivery and performance of this Agreement have been duly authorized by the Company and will not violate any applicable federal or state law, any order of any court or government agency or the articles or certificate of incorporation of the Company. The execution, delivery and performance of this Agreement and each Ancillary Agreement by the Company will not result in any breach of or default under, or result in the creation of any encumbrance upon any of the assets of the Company pursuant to the terms of any agreement by which the Company or any of its respective assets may be bound. No consent, approval or authorization of, or registration or filing with any governmental authority or other regulatory agency, is required for the validity of the execution and delivery by the Company of this Agreement, any Ancillary Agreement or any other documents related hereto or thereto. 5.3. Capital Structure. The authorized capital stock of the Company consists of 100 million shares of common stock, par value $.001 per share (previously defined as the "Shares"). On the date of Closing (the "Closing Date"), there will be 12,374,903 Shares issued and outstanding. The Shares and any other outstanding shares of capital stock of the Company will have been duly authorized and validly issued, and will be fully paid and nonassessable and not subject to preemptive or similar rights. No bonds debentures, notes or other indebtedness of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which the stockholders of the Company may vote are issued or outstanding. The Company does not have, and at Closing will not have, any outstanding option, warrant, call, subscription or other right, agreement or commitment which either (a) obligates the Company to issue, sell or transfer, repurchase, redeem or otherwise acquire or vote any shares of the capital stock of the Company, or (b) restricts the voting, disposition or transfer of shares of capital stock of the Company. There are no outstanding stock appreciation rights or similar derivative securities or rights of the Company. 5.4. Authority: Noncontravention. The Company has the requisite corporate power and authority to enter into this Agreement and any Ancillary Agreements. The Company has the requisite corporate power and authority to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and any Ancillary Agreements by the Company and the consummation by the Company of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company and, assuming this Agreement constitutes the valid and binding agreement of Purchaser, constitutes a valid 5 and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies and to general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). The execution and delivery of this Agreement and any Ancillary Agreements do not, and the consummation of the transactions contemplated hereby and thereby and compliance with the provisions hereof and thereof will not, (a) conflict with any of the provisions of the charter documents or bylaws of the Company, (b) subject to the governmental filings and other matters referred to in the following sentence, conflict with, result in a breach of or default (with or without notice or lapse of time, or both) under, or give rise to a right of first refusal, termination, cancellation or acceleration of any obligation (including to pay any sum of money) or loss of a benefit under, or require the consent of any person under, any indenture or other agreement, permit, concession, ground lease, franchise, license or similar instrument or undertaking to which the Company is a party or by which the Company or any of the assets of either entity are bound, result in the creation or imposition of a material Lien or other restriction or encumbrance on any material asset of the Company, which, singly or in the aggregate, would have a Company Material Adverse Effect, or (c) subject to the governmental filings and other matters referred to in the following sentence, violate any domestic or foreign law, rule or regulation or any order, writ, judgment, injunction, decree, determination or award currently in effect except for such violations, which, singly or in the aggregate, would only have an immaterial effect. Except as otherwise required by applicable state or federal securities laws, no consent, approval or authorization of, or declaration or filing with, or notice to, any domestic or foreign governmental agency or regulatory authority (a "Governmental Entity") or any third party which has not been received or made, is required by or with respect to the Company in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated hereby, except for consents, approvals, authorizations, declarations, filings and notices that, if not obtained or made, will not, individually or in the aggregate, result in a Company Material Adverse Effect. "Lien" means, collectively, all material pledges, claims, liens, charges, mortgages, conditional sale or title retention agreements, hypothecations, collateral assignments, security interests, easements and other encumbrances of any kind or nature whatsoever. 5.5. Absence of Certain Changes or Events; No Undisclosed Material Liabilities. The Company does not have any loans or liabilities from any financial institutions in any jurisdictions. 5.6. Compliance with Applicable Laws. The Company has and after giving effect to the transactions contemplated hereby will have in effect all federal, state, local and foreign governmental approvals, authorizations, certificates, filings, franchises, licenses, notices, permits and rights ("Permits") necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted, and to the knowledge of the Company there has occurred no default under any such Permit, except for the lack of Permits and for defaults under Permits which individually or in the aggregate would not have a Company Material Adverse Effect. To the Company's knowledge, the Company is in compliance with, 6 and has no liability or obligation under, all applicable statutes, laws, ordinances, rules, orders and regulations of any Governmental Entity, including any liability or obligation to undertake any remedial action under hazardous substances laws, except for instances of non-compliance, liabilities or obligations, which individually or in the aggregate would only have an immaterial effect. 5.7. Litigation, etc. As of the date hereof, (a) there is no suit, claim, action or proceeding (at law or in equity) pending or, to the knowledge of the Company, threatened against the Company (including, without limitation, any product liability claims) before any court or governmental or regulatory authority or body, and (b) the Company is not subject to any outstanding order, writ, judgment, injunction, order, decree or arbitration order that, in any such case described in clauses (a) and (b), (i) could reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect or (ii) involves an allegation of criminal misconduct or a violation of the Racketeer and Influenced Corrupt Practices Act, as amended. As of the date hereof, there are no suits, actions, claims or proceedings pending or, to the Company's knowledge, threatened, seeking to prevent, hinder, modify or challenge the transactions contemplated by this Agreement. 5.8. Disclosure. The representations and warranties and statements of fact made by the Company in this Agreement are accurate, correct and complete in every respect and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained herein not false or misleading. Section 6. Survival of Representations and Warranties. All representations, warranties, covenants, and agreements contained herein shall not be discharged or dissolved upon, but shall survive the Closing and shall be unaffected by any investigation made by any party at any time. Section 7. Registration Rights 7.1. Registration by the Company. (a) Mandatory Registration. As promptly as practicable (but in no event later than 30 days after the Closing, the Company shall file a registration statement (the "Registration Statement") with the Commission under the Act for the registration of the Shares. Further, in the event additional shares are issuable hereunder (i.e. Section 2.2) at the time of filing of the Registration Statement, the Company shall piggy-back such additional shares in the next available Registration Statement. Any possible income tax incurred between the market price of the stock per share when the Registration Statement is filed for such additional shares and the current $1.6941 per Share shall be born by the Company, if there is any. 7 (b) Registration Statement Form. Registrations under this Section 7.1 shall be on such appropriate registration form of the Commission as shall be reasonably selected by the Company and approved by each Purchaser, which approval shall not be unreasonably withheld. The Company shall provide drafts of the Registration Statement proposed to be filed by it to the Purchasers in advance of the filing thereof and provide the Purchasers with a reasonable amount of time to review and comment on the same prior to its filing. (c) Effective Registration Statement. A registration required pursuant to this Section 7.1 shall not be deemed to have been effected unless the Registration Statement has been declared effective by the Securities and Exchange Commission (the "Commission") and has remained effective in compliance with the provisions of the Act with respect to the disposition of all of the Shares covered by such Registration Statement until such time as all of the Shares have been disposed of in accordance with the intended methods of disposition by each Purchaser set forth in such Registration Statement (unless the failure to so dispose of such Shares shall be caused solely by reason of a failure on the part of the Purchaser). 7.2. Priority Registrations. Notwithstanding anything else set forth herein and subject to the limitations set forth below, the Registration Statement may include, in addition to the Shares, other securities of the Company which are proposed to be sold for the account of the Company or any other stockholders thereof. 7.3. Registration Procedures. The Company shall, as expeditiously as possible: a) prepare and file with the Commission the requisite Registration Statement to effect such registration and thereafter use its reasonable best efforts to cause such Registration Statement to be declared effective by the Commission; b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Act with respect to the disposition of all the Shares covered by such Registration Statement until the earlier of the time as all of such Shares have been disposed of in accordance with the intended methods of disposition by the Purchasers set forth in such Registration Statement or the date that the Shares are eligible for resale pursuant to the provisions of Rule 144 under the Act; c) furnish such number of conformed copies of such Registration Statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such Registration Statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Act, in conformity with the requirements of the Act, and such other documents, as the Purchasers may reasonably request; 8 d) use its reasonable best efforts (i) to register or qualify the Shares under such other securities or blue sky laws of such States of the United States of America where an exemption is not available and as Purchaser shall reasonably request, (ii) to keep such registration or qualification in effect for so long as such Registration Statement remains in effect, and (iii) to take any other action which may be reasonably necessary or advisable to enable the Purchasers to consummate the disposition in such jurisdictions of the securities to be sold by the Purchasers, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (d) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; e) use its reasonable best efforts to cause all Shares covered by such Registration Statement to be registered with or approved by such other federal or state governmental agencies or authorities as may be necessary in the opinion of counsel to the Company and counsel to the Purchasers to enable the Purchasers to consummate the disposition of such Shares; f) notify the Purchasers at any time when a prospectus relating thereto is required to be delivered under the Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and at the request of the Purchasers promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; g) otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the Commission, and, if required, make available to its security holders simultaneously with its disclosure to the public, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Act and Rule 158 promulgated thereunder, and promptly furnish to Purchaser a copy of any amendment or supplement to such Registration Statement or prospectus; h) provide and cause to be maintained a transfer agent and registrar (which, in each case, may be the Company) for all the Shares covered by such Registration Statement from and after a date not later than the effective date of such registration; and i) use its reasonable best efforts to list the Shares on any national securities exchange on which the shares of the same class covered by 9 such Registration Statement are then listed and, if no such shares are so listed, on any national securities exchange on which the common stock is then listed. Each Purchaser agrees by acquisition of the Shares that, upon receipt of any notice from the Company of the happening of any event of the kind described in subdivision (f) of this Section 7.3, such holder will forthwith discontinue such disposition of the Shares pursuant to the Registration Statement until Purchaser's receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (f) of this Section 7.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to the Shares current at the time of receipt of such notice. 7.4. Indemnification. (a) Indemnification by the Company. The Company will, and hereby does, indemnify and hold harmless, in the case of the Registration Statement filed pursuant to Section 7.1, each Purchaser and its respective directors, officers, partners, agents and affiliates, against any losses, claims, damages or liabilities, joint or several, to which such Purchaser or any such director, officer, partner, agent, affiliate or controlling person may become subject under the Act or otherwise, including, without limitation, the fees and expenses of legal counsel, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or untrue statement of any material fact contained in any Registration Statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, and the Company will reimburse such Purchaser and each such director, officer, partner, agent, affiliate and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Purchaser, specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Purchaser or any such director, officer, partner, agent, affiliate or controlling person and shall survive the transfer of such securities by the Purchaser. (b) Indemnification by the Purchasers. As a condition to including the Shares in the Registration Statement, the Company shall have received an undertaking from each Purchaser, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 7.4(a)) each other seller, if any, the Company, and each director of the 10 Company and each officer of the Company, with respect to any statement or alleged statement in or omission or alleged omission from such Registration Statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Purchaser specifically stating that it is for use in the preparation of such Registration Statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, however, that the liability of such indemnifying party under this Section 7.4(b) shall be limited to the amount of proceeds received by such indemnifying party giving rise to such liability. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such Purchaser. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Section 7.4 (a) or (b), such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 7.4, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that any indemnified party may, at its own expense, retain separate counsel to participate in such defense. Notwithstanding the foregoing, in any action or proceeding in which both the Company and an indemnified party is, or is reasonably likely to become, a party, such indemnified party shall have the right to employ separate counsel at the Company's expense and to control its own defense of such action or proceeding if (a) there are or may be legal defenses available to such indemnified party or to other indemnified parties that are different from or additional to those available to the Company or (b) any actual conflict exists between the Company and such indemnified party that would make such separate representation advisable; provided, however, that the Company may limit the fees and expenses that it pays in any one legal action or group of related legal actions to those fees and expenses of one firm of attorneys (together with appropriate local counsel), which firm of attorneys (together with appropriate legal counsel) shall be designated in writing by a majority of the indemnified parties who are a party to, or are reasonably likely to become parties to, such legal action or group of related legal actions. No indemnifying party shall be liable for any settlement of any action or proceeding effected without its written consent, which consent shall not be unreasonably withheld or delayed. No indemnifying party shall, without the consent of the indemnified party, which consent shall not be unreasonably withheld or delayed, consent to entry of any judgment or enter into any settlement 11 which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation or which requires action other than the payment of money by the indemnifying party. (d) Contribution. If the indemnification provided for in this Section 7.4 shall for any reason be held by a court to be unavailable to an indemnified party under Section 7.4(a) or (b) hereof in respect of any loss, claim, damage or liability, or any action in respect thereof, then, in lieu of the amount paid or payable under Section 7.4(a) or (b), the indemnified party and the indemnifying party under Section 7.4(a) or (b) shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating the same), (i) in such proportion as is appropriate to reflect the relative fault of the Company and the Purchaser which resulted in such loss, claim, damage or liability, or action or proceeding in respect thereof, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action or proceeding in respect thereof, as well as any other relevant equitable considerations or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect the relative benefits received by the Company and each Purchaser from the offering of the securities covered by such Registration Statement, provided, that for purposes of this clause (ii), the relative benefits received by each Purchaser shall be deemed not to exceed the amount of proceeds received by such Purchaser. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Each Purchaser's obligation to contribute as provided in this Section 7.4(d) is several in proportion to the relative value of its respective Shares covered by such Registration Statement and not joint. In addition, no person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or claim effected without such person's consent, which consent shall not be unreasonably withheld. (e) Other Indemnification. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 7.4 (with appropriate modifications) shall be given by the Company and each Purchaser with respect to any required registration or other qualification of securities under any federal or state law or regulation of any governmental authority other than the Act. (f) Indemnification Payments. The indemnification and contribution required by this Section 7.4 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. Section 8. Put Option (a) Subject to the provisions of subparagraphs (b) and (c) or this Section 8, the Company hereby grants to the Purchasers the right to require the Company to repurchase any or all of the Shares acquired by the Purchasers hereunder at the price per Share paid by the Purchasers hereunder (the "Put Option"). 12 (b) The Put Option may be exercised at any time after the Closing and shall expire upon the date on which the Registration Statement is filed by the Company with the Commission (the "Expiration Date"). (c) The Put Option may be exercised by written notice given by the Purchaser to the Company and the Escrow Agent exercising the Put Option. If the Put Option is not exercised by the Expiration Date, then the Put Option will terminate, and be null, void and of no further effect immediately following the Expiration Date. Section 9. Board Representation. Upon Closing, the Purchasers shall, collectively, have the right to designate one member of the Company's board of directors who shall serve as its Vice Chairman and, to the extent that such designation requires the consent of the Company's shareholders under applicable state law, the Company shall promptly submit such designee for approval of the Company's shareholders, shall support and recommend such designee's appointment to the board of directors and shall use its best efforts to cause such designee to be elected by the Company's shareholders. Section 10. Entirety and Modification. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any and all prior agreements and understandings, whether oral or written, between the parties hereto relating to such subject matter. No modification, alteration, amendment, or supplement to this Agreement shall be valid or effective unless the same is in writing and signed by all parties hereto. Section 11. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective parties hereto, their successors and permitted assigns, heirs, and personal representatives. Section 12. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have duly executed this agreement as of the date first written above. PURCHASERS: CHINAMERICA FUND, LLP By: /s/ Beau Johnson --------------------------------- Name: Title: 13 ADDITIONAL PURCHASERS By: /s/ Gary C. Evans --------------------------------- Name: Title: By: --------------------------------- Name: Title: COMPANY: BASIC EMPIRE CORPORATION By: /s/ Chang Yu --------------------------------- 14 SCHEDULE A - --------------------------- ------------------------- -------------------------- PURCHASER NUMBER OF SHARES PURCHASING PRICE - --------------------------- ------------------------- -------------------------- CHINAMERICA FUND, LLP 531,256 US$900,000 - --------------------------- ------------------------- -------------------------- GARY C. EVANS 59,028 US$100,000 - --------------------------- ------------------------- -------------------------- 15 SCHEDULE B CONTROLLING SHAREHOLDERS China Tailong Group Ltd. 16 EX-16.1 7 basic8kex161020205.txt LETTER FROM ACCOUNTANT DATED JANUARY 26, 2005 Exhibit 16.1 January 26, 2005 U. S. Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549 Gentlemen: On January 26, 2005, this Firm received a draft copy of a Form 8-K to be filed by Basic Empire Corporation (SEC File #0-49608, CIK #1166389) (Company) reporting an Item 4.01 - Changes in Registrant's Certifying Public Accountant. We have no disagreements with the statements made in the draft Form 8-K, Item 4.01 disclosures which we read. Yours truly, /s/ S. W. Hatfield, CPA - ----------------------- S. W. Hatfield, CPA Dallas, Texas EX-99.1 8 basic8kex991020205.txt CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Exhibit 99.1 CHINA TAILONG HOLDINGS COMPANY LIMITED AND PACIFIC DRAGON FERTILIZERS LIMITED INDEX TO COMBINED FINANCIAL STATEMENTS Pages Report of Independent Registered Public Accounting Firm 2 Combined Balance Sheets 3 Combined Statements of Operations 4 Combined Statements of Changes in Stockholders' and Partners' Equity 5 Combined Statements of Cash Flows 6 Notes to Combined Financial Statements 7 - 15 Report of Independent Registered Public Accounting Firm TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF CHINA TAILONG HOLDINGS COMPANY LIMITED AND PACIFIC DRAGON FERTILIZERS LIMITED We have audited the accompanying combined balance sheets of China Tailong Holdings Company Limited and Pacific Dragon Fertilizers Limited as of December 31, 2003 and 2002 and the combined statements of operations, changes in stockholders' and partners' equity and cash flows for the years then ended. These combined financial statements are the responsibility of the management of China Tailong Holdings Company Limited and Pacific Dragon Fertilizers Limited. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial positions of China Tailong Holdings Company Limited and Pacific Dragon Fertilizers Limited as of December 31, 2003 and 2002 and the combined 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. Weinberg & Company, P.A Boca Raton, Florida January 17, 2005 2
CHINA TAILONG HOLDINGS COMPANY LIMITED AND PACIFIC DRAGON FERTILIZERS LIMITED COMBINED BALANCE SHEETS ASSETS September 30, December 31, December 31, 2004 2003 2002 ------------- ------------- ------------- (Unaudited) Current Assets Cash $ 10,130 $ 10,601 $ 752 Accounts receivable, net of allowance for doubtful accounts of $48,193, $48,193 and $7,627, respectively 7,594,856 1,977,584 1,025,938 Inventories 1,782,288 983,679 2,918,270 Prepayments and other receivables 116,981 634,333 268,754 Amount due from a related company 7,833 -- 19,991 Amounts due from directors 1,506 27,311 4,894 Receivable from joint venture partner 899,188 2,409,639 -- ------------- ------------- ------------- Total Current Assets 10,412,782 6,043,147 4,238,599 Property, plant and equipment, net of accumulated depreciation of $196,760, $142,062 and $59,300, respectively 1,149,878 1,256,302 133,682 ------------- ------------- ------------- $ 11,562,660 $ 7,299,449 $ 4,372,281 ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL Current Liabilities Current portion of installment loan $ 3,790 $ 9,639 $ 9,639 Accounts payable 1,895,321 262,096 589,466 Accrued liabilities and other payables 486,656 278,573 75,054 Amounts due to related companies 43,388 875,941 174,084 Amounts due to shareholders 6,820 -- -- Amounts due to directors 115,953 -- 20,283 Amount due to a joint venture partner -- 342,424 326,847 Loan payable to a joint venture partner -- 59,036 -- Bank overdraft -- -- 178,630 Income taxes payable 820,972 536,301 894 ------------- ------------- ------------- Total Current Liabilities 3,372,900 2,364,010 1,374,897 Loan payable to a joint venture partner -- -- 59,036 Installment loan, net of current portion -- -- 9,639 ------------- ------------- ------------- Total Liabilities 3,372,900 2,364,010 1,443,572 ------------- ------------- ------------- Commitments and Contingencies -- -- -- Stockholders' Equity and Partners' Capital Common stock; $0.1 par value; 10,000,000 shares authorized; 2 shares issued and outstanding respectively, 1 1 1 Partners' capital 450,575 450,575 450,575 Accumulated earnings 7,717,470 4,463,149 2,456,419 Accumulated other comprehensive income 21,714 21,714 21,714 ------------- ------------- ------------- Total Stockholders' Equity and Partners' Capital 8,189,760 4,935,439 2,928,709 ------------- ------------- ------------- $ 11,562,660 $ 7,299,449 $ 4,372,281 ============= ============= =============
The accompanying notes are an integral part of these combined financial statements. 3
CHINA TAILONG HOLDINGS COMPANY LIMITED AND PACIFIC DRAGON FERTILIZERS LIMITED COMBINED STATEMENTS OF OPERATIONS Nine months ended Year ended Year ended September 30, December 31, December 31, 2004 2003 2002 ------------- ------------- ------------- (Unaudited) Sales $ 13,007,651 $ 12,179,847 $ 6,411,015 Cost of goods sold (6,863,833) (6,450,245) (2,673,176) ------------- ------------- ------------- Gross profit 6,143,818 5,729,602 3,737,839 Selling expenses (1,083,122) (1,867,311) (710,569) Operating and administrative expenses (297,860) (835,715) (553,559) ------------- ------------- ------------- Income from operations 4,762,836 3,026,576 2,473,711 ------------- ------------- ------------- Other income (expense) Other income 275 -- -- Other expenses (36,141) -- -- Finance costs (1,022) (3,269) (3,111) ------------- ------------- ------------- Total other expense (36,888) (3,269) (3,111) ------------- ------------- ------------- Income before income taxes 4,725,948 3,023,307 2,470,600 Provision for income taxes (1,471,627) (1,016,577) (792,637) ------------- ------------- ------------- Net income $ 3,254,321 $ 2,006,730 $ 1,677,963 ============= ============= =============
The accompanying notes are an integral part of these combined financial statements. 4
CHINA TAILONG HOLDINGS COMPANY LIMITED AND PACIFIC DRAGON FERTILIZERS LIMITED COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' AND PARTNERS' EQUITY Accumulated Common stock other ----------------------------- Partners' Accumulated comprehensive Shares Amount capital earnings income Total ------------- ------------- ------------- ------------- ------------- ------------- Balance at January 1, 2002 2 $ 1 450,575 $ 778,456 21,714 $ 1,250,746 Net income for the year ended December 31, 2002 -- -- -- 1,677,963 -- 1,677,963 ------------- ------------- ------------- ------------- ------------- ------------- Balance at December 31, 2002 2 1 450,575 2,456,419 21,714 2,928,709 Net income for the year ended December 31, 2003 -- -- -- 2,006,730 -- 2,006,730 ------------- ------------- ------------- ------------- ------------- ------------- Balance at December 31, 2003 2 1 450,575 4,463,149 21,714 4,935,439 Net income for the nine months ended September 30, 2004 (Unaudited) -- -- -- 3,254,321 -- 3,254,321 ------------- ------------- ------------- ------------- ------------- ------------- Balance at September 30, 2004 (Unaudited) 2 $ 1 450,575 $ 7,717,470 21,714 $ 8,189,760 ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these combined financial statements. 5
CHINA TAILONG HOLDINGS COMPANY LIMITED AND PACIFIC DRAGON FERTILIZERS LIMITED COMBINED STATEMENTS OF CASH FLOWS Nine months ended Year ended Year ended September 30, December 31, December 31, 2004 2003 2002 ------------- ------------- ------------- (Unaudited) Cash flows from operating activities Net income $ 3,254,321 $ 2,006,730 $ 1,677,963 Adjustment to reconcile net income to net cash provided by (used in) operating activities: Depreciation 77,625 82,762 20,847 Loss on disposal of property, plant and equipment 35,756 -- -- Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable, net (5,617,272) (951,646) (216,803) Inventories (798,609) 1,934,591 (1,791,600) Prepayments and other receivables 517,351 (365,579) (215,903) (Decrease) increase: Accounts payable 1,633,225 (327,370) 107,767 Accrued liabilities and other payables 208,083 203,519 (10,187) Income taxes payable 284,671 535,407 (26,255) ------------- ------------- ------------- Net cash (used in) provided by operating activities (404,849) 3,118,414 (454,171) ------------- ------------- ------------- Cash flows from investing activities Amounts due from directors and related companies 17,972 (2,426) (440) Amounts due to directors 115,953 (20,283) 15,399 Loan receivable from a joint venture partner 2,409,639 (2,409,639) -- Amount due from a joint venture partner (899,188) -- -- Amounts due to related companies and a joint venture partner (1,174,977) 717,434 474,624 Loan payable to a joint venture partner (59,036) -- -- Amounts due to shareholders 6,820 -- -- Amounts due from shareholders 1 -- -- Proceeds from sale of property, plant and equipment 204 -- -- Purchase of property, plant and equipment (7,161) (1,205,382) (33,044) ------------- ------------- ------------- Net cash provided by (used in) investing activities 410,227 (2,920,296) 456,539 ------------- ------------- ------------- Cash flows from financing activities (Decrease) increase in bank overdraft -- (178,630) 178,630 Repayment of installment loan (5,849) (9,639) -- Repayment of bank loans -- -- (180,723) ------------- ------------- ------------- Net cash used in financing activities (5,849) (188,269) (2,093) ------------- ------------- ------------- Net (decrease) increase in cash (471) 9,849 275 Cash, beginning of year 10,601 752 477 ------------- ------------- ------------- Cash, end of year $ 10,130 $ 10,601 $ 752 ============= ============= ============= Supplemental disclosure information Finance costs paid $ 1,022 $ 3,269 $ 3,111 ============= ============= ============= Income taxes paid 1,186,955 515,753 800,849 ============= ============= ============= Non-cash transaction Purchase of a motor vehicle financed by an installment loan $ -- $ -- $ 19,277 ============= ============= =============
The accompanying notes are an integral part of these combined financial statements. 6 CHINA TAILONG HOLDINGS COMPANY LIMITED AND PACIFIC DRAGON FERTILIZERS LIMITED NOTES TO THE COMBINED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002 AND FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 (UNAUDITED) ------------------------------------------------------------------ 1. DESCRIPTION OF BUSINESS AND PRINCIPLESS OF COMBINATION ------------------------------------------------------ China Tailong Holdings Company Limited ("China Tailong") was incorporated with limited liability on October 27, 2003 in Hong Kong. China Tailong did not commence operations until June 8, 2004, at which time it entered into an agreement to acquire a 90% equity interest in a Pacific Dragon Fertilizers Limited ("Pacific Dragon"), which was closed on October 9, 2004 (see Note 11). Pacific Dragon is a related entity registered in the People's Republic of China ("PRC") as a sino-foreign cooperative joint venture. According to the joint venture agreement and the business license, the tenure of operation of the Company is 15 years from May 20, 1994 to May 19, 2009. The Company is engaged in the production and sale of liquid compound fertilizers. All current operations of the Company are in the PRC. China Tailong and Pacific Dragon are under common control as the shareholders of China Tailong are also the owners of Pacific Dragon (see Note 11). Accordingly, the accompanying combined financial statements herein consist of the combined accounts of China Tailong and Pacific Dragon for the year ended December 31, 2003 and the nine months ended September 30, 2004, and those of Pacific Dragon for the year ended December 31, 2002. Intercompany amounts and balances have been eliminated in the combination. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ a. Basis of presentation --------------------- The accompanying combined financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. b. Cash and cash equivalents ------------------------- Cash and cash equivalents include cash on hand, demand and time deposits with banks and liquid investments with an original maturity of three months or less. All of the Company's cash on hand and certain bank deposits are denominated in Renminbi ("RMB") and translated at the rate of US$1 to RMB8.3 (See Note 2(g)). c. Inventories ----------- Inventories are stated at the lower of cost, as determined on a first-in, first-out basis, or net realizable value. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. d. Property, plant and equipment ----------------------------- Property, plant and equipment are recorded at cost. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of plant, property and equipment are capitalized. These capitalized costs may include structural improvements, equipment and fixtures. All ordinary repair and maintenance costs are expensed as incurred. 7 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) ------------------------------------------ d. Property, plant and equipment (cont'd) ----------------------------- Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets: 5 to 10 years for plant and machinery; 30 years for factory building, 5 to 10 years for office equipment; and 3 to 5 years for motor vehicles. The carrying value of property, plant and equipment is assessed annually and when factors indicating impairment is present, the carrying value of the fixed assets is reduced by the amount of the impairment. The Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest charges) and comparing such amount to the net asset carrying value. An impairment loss, if exists, is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. e. Revenue recognition ------------------- Revenues of the Company include sales of fertilizers. Sales are recognized when the goods are delivered to the customers, customers accept delivery, and collection is reasonably assured. f. Income taxes ------------ The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes". SFAS No. 109 requires an asset and liability approach for financial accounting and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. g. Foreign currency translation ---------------------------- The Company maintains its books and accounting records in Renminbi ("RMB"), the PRC's currency. Translation of amounts of all items, except for the paid-up capital, from RMB to United States dollars ("US$") has been made at the single rate of exchange of US$1.00: RMB8.30. The exchange rate was consistent at this rate during the years ended December 31, 2003 and 2002. No representation is made that RMB amounts have been, or could be, converted into US$ at that rate. The paid-up capital has been translated at rate of US$1.00:RMB8.70, as specified in the joint venture agreement, resulting in a translation gain of $21,714 which has been classified as accumulated other comprehensive income in the combined financial statements. On January 1, 1994, the PRC government introduced a single rate of exchange as quoted daily by the People's Bank of China (the "Unified Exchange Rate"). This quotation of exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. Approval of foreign currency payments by the Bank of China or other institutions required submitting a payment application form together with invoices, shipping documents and signed contracts. 8 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) ------------------------------------------ h. Accounts and other receivables ------------------------------ Accounts and other receivables are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company uses the allowance method to account for uncollectible receivable balances. Under the allowance method, if needed, an estimate of uncollectible customer balances is made based upon specific account balances that are considered uncollectible. Factors used to establish an allowance include the credit quality of the customer, whether the balance is significant and whether attempts for collection have been made by legal or other means, the amount is considered uncollectible and is written off against the allowance balance. At December 31, 2003 and 2002, accounts receivables were net of allowances of $48,193 and $7,627, respectively, and $48,193 as of September 30, 2004 (unaudited). i. Fair values of financial instruments ------------------------------------ The Company values its financial instruments as required by SFAS No. 107, "Disclosures about Fair Value of Financial Instruments". The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of amounts that the Company could realize in a current market exchange. The Company's financial instruments primarily consist of cash, accounts receivable, related party receivables, installment loan, accounts payable and accrued expenses and short term and long-term related party borrowings. As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented due to the short maturities of these instruments and that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective year ends. j. Related parties --------------- Related party transactions are disclosed in the financial statements and notes thereto. Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party. k. Use of estimates ---------------- The preparation of combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. 9 3. CONCENTRATIONS OF CREDIT RISK ----------------------------- Financial instruments, which potentially expose the Company to concentrations of credit risk, consist of cash and accounts receivable at December 31, 2003. The Company performs ongoing evaluations of its cash position and credit evaluations to ensure collections and minimize losses. As of September 30, 2004 and December 31, 2003, the Company's bank deposits were all placed with banks in the PRC where there is currently no rule or regulation in place for obligatory insurance of bank accounts. For the years ended December 31, 2003 and 2002, and nine-month period ended September 30, 2004 all of the Company's sales arose in the PRC. In addition, all accounts receivable as at September 30, 2004, December 2003 and 2002 also arose in the PRC. The largest three customers in the year 2003 accounted for approximately 11.7%, 9.6% and 7.9%, respectively of the Company's total revenues for 2003, while the largest three customers in 2002 accounted for 24.3%, 23.7% and 18.4% of the Company's total revenues for 2002. The largest three customers in the nine-month period ended September 30, 2004 accounted for approximately 7.36%, 6.89% and 5.37%, respectively of the Company's total revenues for the nine-month period ended September 30, 2004 (unaudited). The largest three vendors in the year 2003 accounted for approximately 37.3%, 25.3% and 22.1%, respectively of the Company's total purchases for 2003, while the largest three vendors in 2002 accounted for 58.0%, 32.6% and 8.5%, respectively of the Company's total purchases for 2002. The largest three vendors in the nine-month ended September 30, 2004 accounted for approximately 54.31%, 25.13% and 9.3% of the Company's total purchases for the nine-month ended September 30, 2004 (unaudited). 4. INVENTORIES ----------- September 30, December 31, December 31, 2004 2003 2002 ------------- ------------- ------------- (Unaudited) Raw materials $ 812,828 $ 757,775 $ 1,616,033 Packing materials 344,869 81,624 1,276,871 Finished goods 622,153 142,105 23,434 Consumables 2,438 2,175 1,932 ------------- ------------- ------------- $ 1,782,288 $ 983,679 $ 2,918,270 ============= ============= ============= 5. AMOUNTS DUE FROM DIRECTORS -------------------------- The amounts due from directors of $27,311 and $4,894 as of December 31, 2003 and 2002, and $1,506 as of September 30, 2004 (unaudited) respectively are unsecured, non-interest bearing advances and have no fixed repayment term. 6. RECEIVABLES FROM A JOINT VENTURE PARTNER ---------------------------------------- The loan receivable from a joint venture partner, Harebing Yinlong Co. Ltd., of $2,409,639 as of December 31, 2003 was for a term of six months from December 15, 2003 to June 15, 2004. It bore interest at an annual interest rate of 1% and secured by properties owned by the joint venture partner. The loan was repaid during the period from January to August 2004. The loan receivable from a joint venture partner, Harebing Yinlong Co. Ltd., of $899,188 as of September 30, 2004 (unaudited) was unsecured, non-interest bearing and repayable upon demand. 10
7. PROPERTY, PLANT AND EQUIPMENT ----------------------------- Property, plant and equipment consists of the following: September 30, December 31, December 31, 2004 2003 2002 ------------- ------------- ------------- (Unaudited) Plant and machinery $ 1,130,440 $ 1,127,883 $ 55,303 Factory building -- 55,781 55,781 Office equipment 78,140 76,642 8,539 Motor vehicles 138,058 138,058 73,359 ------------- ------------- ------------- 1,346,638 1,398,364 192,982 Less: Accumulated depreciation (196,760) (142,062) (59,300) ------------- ------------- ------------- $ 1,149,878 $ 1,256,302 $ 133,682 ============= ============= =============
Depreciation expense for the years ended December 31, 2003 and 2002 was $82,762 and $20,847, respectively, and $77,625 for the nine months ended September 30, 2004 (unaudited). 8. INSTALLMENT LOAN ---------------- The installment loan was obtained for the purpose of acquiring a motor vehicle and bears interest at an annual rate of 5.49%. The loan is repayable by 24 monthly installments from January 2003 to December 2004. Each installment is $803 plus interest on the outstanding principal. 9. AMOUNTS DUE TO SHAREHOLDERS, DIRECTORS, RELATED COMPANY AND A JOINT VENTURE --------------------------------------------------------------------------- PARTNER ------- The amounts due to shareholders, directors, related company and to the joint venture partner of Pacific Dragon, Haerbing Yinlong Co. Ltd., are unsecured, non-interest bearing advances that and have no fixed repayment date. 10. LOAN PAYABLE TO A JOINT VENTURE PARTNER --------------------------------------- The loan payable to the joint venture partner of Pacific Dragon, Haerbing Yinglong Co. Ltd. of $59,036 as of December 31, 2003 bore interest at a monthly rate of 0.53625% (see Note 13) and was secured by the Company's plant and machinery. The loan was repaid in April 2004. 11. CAPITAL ------- Pacific Dragon Fertilizers Limited ---------------------------------- Pacific Dragon was a "cooperative joint venture" as defined in China's laws on foreign invested enterprises. The three venture partners were Haerbing Yinlong Co. Ltd. ("Yinlong"), a Chinese domestic company owned by Mr Chang Yu and Mr Teng Xiao Yong, Beijing Taiming Useful Technology Institute ("Taiming"), a Chinese domestic company, and Cathay-Pacific Enterprises Ltd. (CPE), a Canadian company. As of December 31, 2003 and 2002, the partners had contributed capital of $450,575. 11 11. CAPITAL (Cont'd) ------- On June 8, 2004, China Tailong Holdings Company Limited., a private company owned by Mr Chang Yu and Mr Teng Xiao Yong and the three joint venturers of Pacific Dragon entered into a Transfer of Capital Contribution and Profit Agreement (the "Transfer Agreement"). The effect of this transaction was that CPE and Taiming ceded their interests in Pacific Dragon without consideration to China Tailong Holdings Company Limited. These venture partners never participated in the management of Pacific Dragon, received any profits or complied with the requirements of their capital contribution under the terms of the joint venture agreement. Upon closing of the Transfer Agreement on October 9, 2004, Pacific Dragon changed its status to become an "equity joint venture" as defined in the PRC's laws on foreign invested enterprises. Although Pacific Dragon was legally owned by three venture partners before the transfer of interest to China Tailong, in substance, it has been controlled and managed by the same owners since its establishment. As such, China Tailong and Pacific Dragon are considered to be under common control as the shareholders of China Tailong are also the shareholders of Yinlong, the remaining joint venture partner of Pacific Dragon. China Tailong Holdings Company Limited -------------------------------------- China Tailong Holdings Company Limited ("China Tailong") was incorporated with limited liability on October 27, 2003 in Hong Kong. China Tailong was incorporated with authorized common stock of HK$10,000,000. At the time of incorporation, 2 shares of common stock of HK$1 ($1U.S.) each were issued, for cash at par, and fully paid up to form the capital base of China Tailong. 12. INCOME TAXES ------------ The Company is subject to PRC Enterprise Income Tax at a rate of 33% on the net income. The provision for taxes on earnings for the years ended December 31, 2003 and 2002 and the nine-month period ended September 30, 2004 consisted of: Nine months ended Year ended Year ended September 30, December 31, December 31, 2004 2003 2002 ------------- ------------- ------------- (Unaudited) PRC Enterprise Income Tax 1,471,627 1,016,577 792,637 ============= ============= ============= No provision for deferred tax (benefit) has been made as no deferred tax liabilities or assets existed as of September 30, 2004, December 31, 2003 or 2002. 12
13. RELATED PARTY TRANSACTIONS -------------------------- During the years ended December 31, 2003 and 2002 and the nine-month period ended September 30, 2004, the Group paid the following expenses or charges to related parties: Nine month ended Year ended Year ended September 30, December 31, December 31, 2004 2003 2002 ------------- ------------- ------------- (Unaudited) Interest expenses paid to a holding company (see Note 10) $ 941 $ 3,904 $ 3,926 ============= ============= ============= Rental expenses paid to a related company (see Note 15) $ 70,482 $ 20,843 $ 8,434 ============= ============= =============
14. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS --------------------------------------------------- The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. 15. LEASE COMMITMENT ---------------- The Company has entered into a non-cancelable operating lease agreement for the lease of its factory and office premises from Haerbing Yinlong Co. Ltd., a related party, for a period of ten years from January 1, 2004 to December 31, 2013. The related lease commitments for the next five years and thereafter are as follows: Remainder 2004 $ 36,145 Year 2005 144,578 Year 2006 144,578 Year 2007 144,578 Year 2008 144,578 Year 2009 144,578 Year 2010 and thereafter 578,314 ---------- $1,337,349 ========== 13 16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ----------------------------------------- In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150 changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS No. 150 requires that those instruments be classified as liabilities in the balance sheet. SFAS No. 150 affects the issuer's accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options and forward purchase contracts, which involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this SFAS is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers' shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. Most of the provisions of Statement 150 are consistent with the existing definition of liabilities in FASB Concepts Statement No. 6, "Elements of Financial Statements". The remaining provisions of this SFAS are consistent with the FASB's proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own shares. This SFAS shall be effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a non-public entity, as to which the effective date is for fiscal periods beginning after December 15, 2004. In January 2003, and as revised in December 2003, the FASB issued Interpretation No. 46R, "Consolidation of Variable Interest Entities" "Interpretation No. 46R"), an interpretation of Accounting Research Bulletin ("ARB") No. 51", "Consolidated Financial Statements". Interpretation No. 46R addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated support from other parties, which is provided through another interest that will absorb some or all of the expected losses of the entity; (ii) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: the direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights; or the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; the right to receive the expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected losses. Interpretation No. 46R also requires expanded disclosures by the primary beneficiary (as defined) of a variable interest entity and by an enterprise that holds a significant variable interest in a variable interest entity but is not the primary beneficiary. Interpretation No. 46R, applies to small business issuers no later than the end of the first reporting period that ends after December 15, 2004. This effective date includes those entities to which Interpretation No. 46 had previously been applied. However, prior to the required application of Interpretation No. 46, a public entity that is a small business issuer shall apply Interpretation No. 46 to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003. 14 16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Cont'd) ----------------------------------------- Interpretation No. 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. In June 2003, the FASB issued an Exposure Draft for proposed SFAS entitled "Qualifying Special Purpose Entities ("QSPE") and Isolation of Transferred Assets", an amendment of SFAS No. 140 ("The Exposure Draft"). The Exposure Draft is a proposal that is subject to change and as such, is not yet authoritative. If the proposal is enacted in its current form, it will amend and clarify SFAS 140. The Exposure Draft would prohibit an entity from being a QSPE if it enters into an agreement that obliged a transferor of financial assets, its affiliates, or its agents to deliver additional cash or other assets to fulfill the special-purposes entity's obligation to beneficial interest holders. The management of the Company does not expect these recent pronouncements to have a material impact on the Company's financial position or results of operations. 17. SUBSEQUENT EVENTS ----------------- In January 2005, Basic Empire Corporation ("Basic Empire"), an inactive public company with no operations incorporated under the laws of the State of Delaware, entered into a share transfer agreement with China Tailong. Pursuant to the share transfer agreement, Basic Empire acquired 100% interest in China Tailong and in exchange, the former owners of China Tailong acquired a 90% interest in Basic Empire. The business combination will be accounted for as a reverse merger and recapitalization of China Tailong, which will be deemed the accounting acquirer. 15 EX-99.2 9 basic8kex992020205.txt UNAUDITED PROFORMA CONSOLIDATED BALANCE SHEET Exhibit 99.2 The pro-forma unaudited combined financial statements reflect the effect of the Transfer Agreement between Basic Empire Corporation and China Tailong Holdings Company as of September 30, 2004, for Balance Sheet purposes, and for the year ended December 31, 2003 and the nine-month period ended September 30, 2004 for Statement of Operations purposes. The unaudited pro-forma combined financial data and the notes thereto should be read in conjunction with our historical combined financial statements. The unaudited pro-forma combined financial data is based upon certain assumptions and estimates of management that are subject to change. The unaudited pro-forma combined financial data is presented for illustrative purposes only and is not necessarily indicative of any future results of operations or the results that might have occurred if the transactions had actually occurred on the indicated date.
BASIC EMPIRE CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET SEPTEMBER 30, 2004 China Tailong Holdings Pro Forma Basic Empire Company Adjustments Pro Forma Limited (4) (Unaudited) (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 174,857 $ 10,130 $ 184,987 Accounts receivable, net -- 7,594,856 7,594,856 Prepayments and other receivables -- 116,981 116,981 Amounts due from directors -- 1,506 1,506 Amount due from a related company -- 7,833 7,833 Receivable from joint venture partner -- 899,188 899,188 Inventories -- 1,782,288 1,782,288 ------------ ------------ ------------ Total current assets 174,857 10,412,782 10,587,639 PROPERTY, PLANT AND EQUIPMENT, net -- 1,149,878 1,149,878 ------------ ------------ ------------ $ 174,857 $ 11,562,660 $ 11,737,517 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Installment loan $ -- $ 3,790 $ 3,790 Accounts payable -- 1,895,321 1,895,321 Accrued liabilities and other payables -- 486,656 486,656 Amounts due to shareholders -- 6,820 6,820 Amounts due to related companies -- 43,388 43,388 Amounts due to director -- 115,953 115,953 Income tax payable -- 820,972 820,972 ------------ ------------ ------------ Total current liabilities -- 3,372,900 3,372,900 (3) 325,435 MINORITY INTEREST -- -- (2) 493,544 818,979 ------------ ------------ ------------ -- 3,372,900 4,191,879 ------------ ------------ ------------ STOCKHOLDERS' EQUITY Common stock 1,089 1 (1) 10,695 11,785 Additional paid-in capital 389,406 450,575 (1) (226,333) 568,590 (2) (45,058) Accumulated other comprehensive income -- 21,714 (2) (2,171) 19,543 Accumulated earnings (deficit) (215,638) 7,717,470 (2) (446,315) 6,945,720 ------------ ------------ ------------ (3) (325,435) Total stockholders' equity 174,857 8,189,760 (1) 215,638 7,545,638 ------------ ------------ ------------ $ 174,857 $ 11,562,660 $ 11,737,517 ============ ============ ============
Notes to Unaudited Pro Forma Balance Sheet 1. To reflect issuance of common stock to shareholders of China Tailong 2. To record the 10% minority interest on beginning accumulated earnings 3. To record the 10% minority interest share of income 4. Includes the combined balance sheet of China Tailong Holding and Pacific Dragon Fertilizers Limited.
BASIC EMPIRE CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 China Tailong Holdings Pro Forma Basic Empire Company Adjustments Pro Forma Limited (2) (Unaudited) (Unaudited) Revenue $ -- $ 13,007,651 $ 13,007,651 Cost of revenue -- (6,863,833) (6,863,833) ------------ ------------ ------------ Gross profit -- 6,143,818 6,143,818 Operating expenses Selling expenses -- (1,083,122) (1,083,122) Administrative expenses -- (297,860) (297,860) ------------ ------------ ------------ Total Operating expenses -- (1,380,982) (1,380,982) ------------ ------------ ------------ Income from operations -- 4,762,836 4,762,836 Other operating expenses (44,143) (36,141) (80,284) ------------ ------------ ------------ Income from operations (44,143) 4,726,695 4,682,552 Non-operating income (expense) Other revenue -- 275 275 Finance costs -- (1,022) (1,022) ------------ ------------ ------------ Income (loss) before minority interest and (44,143) 4,725,948 4,681,805 income taxes Minority interest -- -- (1) (325,435) (325,435) ------------ ------------ ------------ Income (loss) before income taxes (44,143) 4,725,948 4,356,370 Income tax -- (1,471,627) (1,471,627) ------------ ------------ ------------ Net income (loss) $ (44,143) $ 3,254,321 $ 2,884,743 ============ ============ ============ Income (loss) per weighted-average share of common stock outstanding, computed on net income (loss) - basic and fully diluted Nil 0.25 ============ ============ Weighted-average number of shares outstanding - basic and fully diluted 11,359,273 11,359,273 ============ ============
Notes to Unaudited Pro Forma Statement of Operations 1. To record the 10% minority interest share of income 2. Includes the combined operations of China Tailong Holdings and Pacific Dragon Fertilizers Limited.
BASIC EMPIRE CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 China Tailong Holdings Pro Forma Basic Empire Company Adjustments Pro Forma Limited (2) (Unaudited) (Unaudited) Revenue $ -- $ 12,179,847 $ 12,179,847 Cost of revenue -- (6,450,245) (6,450,245) ------------ ------------ ------------ Gross profit -- 5,729,602 5,729,602 Operating expenses Selling expenses -- (1,867,311) (1,867,311) Administrative expenses -- (835,715) (835,715) ------------ ------------ ------------ Total Operating expenses -- (2,703,026) (2,703,026) ------------ ------------ ------------ Income from operations -- 3,026,576 3,026,576 Other operating expenses -- -- -- ------------ ------------ ------------ Income from operations -- 3,026,576 3,026,576 Non-operating expenses Finance costs -- (3,269) (3,269) ------------ ------------ ------------ Income before minority interest and income taxes -- 3,023,307 3,023,307 Minority interest -- -- (1) (200,673) (200,673) ------------ ------------ ------------ Income before income taxes -- 3,023,307 2,822,634 Income tax -- (1,016,577) (1,016,577) ------------ ------------ ------------ Net income $ -- $ 2,006,730 $ 1,806,057 ============ ============ ============ Income per weighted-average share of common stock outstanding, computed on net income - basic and fully diluted Nil $ 0.16 ============ ============ Weighted-average number of shares outstanding - basic and fully diluted 11,359,273 11,359,273 ============ ============
Notes to Unaudited Pro Forma Statement of Operations 1. To record the 10% minority interest share of income 2. Includes the combined operations of China Tailong Holdings and Pacific Dragon Fertilizers Limited. EX-99.3 10 basic8kex993020205.txt PRESS RELEASE DATED FEBRUARY 3, 2005 Exhibit 99.3 Contact: China Tailong Holdings Company, LTD. Carl Thompson CTA Public Relations 1-303-665-4200 carl@ctapr.com China Tailong, LTD. Completes Going Public Transaction Heilongjiang Province, China--(BUSINESS WIRE)--February 3, 2005--Basic Empire Corporation. (OTCBB: BSEC.OB) ("BSEC") announced today the closing of a stock exchange transaction with China Tailong Holdings Company, LTD., a Hong Kong company ("Tailong"). The companies will operate on a consolidated basis, executing upon the current business plan of Tailong's 90% owned subsidiary located in the People's Republic of China ("PRC"). As a result of the share exchange transaction, Tailong's stockholders were issued 10,606,158 shares of BSEC's common stock representing in the aggregate 90% of BSEC's 11,784,620 issued and outstanding shares of common stock immediately following the closing. As a result of the exchange transaction, Mr. Yu Chang was appointed to the Board of Directors of BSEC, and Mr. Chang, as well as other senior management of Tailong, were elected as executive officers of BSEC upon the resignation of the company's sole executive. BSEC's shares are listed on the Over-the-Counter (OTC) Bulletin Board under the symbol, BSEC.OB. Tailong, through its 90% owned PRC subsidiary, manufactures and markets a series of compound liquid fertilizer products, including a series of liquid organic fertilizers and crop-specific fertilizers, customized to its clients' specifications. All of the products are residue and hormone free and can be used in organic agricultural production. Based on the unaudited proforma consolidated financials for the nine month period ended September 30, 2004, Tailong generated approximately $13.01 million in gross revenues and $2.93 million in net income. For the year ended December 31, 2003, Tailong had revenues of approximately $12.18 million and net income of $1.81 million. In 2002 revenues were approximately $6.41 million and net income was $1.51 million. Mr. Yu Chang, Chief Executive Officer of BSEC, stated, "We want to thank our financial advisor, Halter Financial Group, for their assistance with the going public transaction. We believe that by being given the opportunity to access the US capital markets we can capitalize on what we believe to be growth opportunities in our business." FORWARD LOOKING STATEMENTS This release contains certain "forward-looking statements" relating to the business of BSEC and its subsidiary companies, which can be identified by the use of forward-looking terminology such as "believes, expects" or similar expressions. Such forward looking statements involve known and unknown risks and uncertainties, including all business uncertainties relating to product development, marketing, regulatory actions or delays, the ability to obtain or maintain intellectual property protection, market acceptance, third party reimbursement, future capital requirements, competition in general and other factors that may cause actual results to be materially different from those described herein as anticipated, believed, estimated or expected. Certain of these risks and uncertainties are or will be described in greater detail in our filings with the Securities and Exchange Commission. BSEC is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements whether as a result of new information, future events or otherwise. -----END PRIVACY-ENHANCED MESSAGE-----