10-K 1 v031666_10ksb.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 

 
FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)
 
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2005
OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________________

Commission file number 0-31049

CHINA ENERGY SAVINGS TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)

Nevada
86-0995730
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
Central Plaza, 18 Harbour Road, Suite 3203A, 32nd Floor
Hong Kong, China
(Address of principal executive offices) (Zip Code)

852-2588-1228
(Issuer's telephone number)

All Correspondence to:

Kevin K. Leung, Esq.
Richardson & Patel, LLP
10900 Wilshire Blvd. Suite 500
Los Angeles, CA 90024
(310) 208-1182

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
None
 
None

Securities registered pursuant to Section 12(g) of the Act:

Common stock, no par value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issue, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 14(d) of the Act. Yes o No x
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The aggregate market value of the voting and non-voting common equity held by nonaffiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter (March 31, 2005) is $84,606,471*, based upon the closing sale price of $9.00 per share on March 31, 2005.
 
*
Without asserting that any of the issuer's directors or executive officers or the entities that own 16,018,134 of common stock are affiliates, the shares of which they are beneficial owners have been deemed to be owned by affiliates solely for this calculation.
   
As of December 19, 2005, there were 24,699,753 shares of our common stock issued and outstanding.
 

 
TABLE OF CONTENTS
TO ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED SEPTEMBER 30, 2005



PART I
 
Page
Item 1.
Description of Business
4
Item 1A.
Risk Factors
13
Item 1B.
Unresolved Staff Comments
15
Item 2.
Description of Property
15
Item 3.
Legal Proceedings
15
Item 4.
Submission of Matters to a Vote of Security Holders
15
 
PART II
 
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
15
Item 6.
Selected Financial Data
17
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operation
18
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
24
Item 8.
Financial Statements and Supplementary Data
24
Item 9.
Changes in and Disagreements on Accounting and Financial Disclosure
24
Item 9A.
Controls and Procedures
24
Item 9B.
Other Information
26
 
PART III
 
 
Item 10.
Directors and Executive Officers of the Registrant
26
Item 11.
Executive Compensation
29
Item 12.
Security Ownership of Certain Beneficial Owners and Management
30
Item 13.
Certain Relationships and Related Transactions
31
Item 14.
Principle Accounting Fees and Services
31

PART IV
 
 
Item 15.
Exhibits, Financial Statement Schedules
32
   
 
Signatures
 
33
Exhibits
 
 
 
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
 
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CAUTION REGARDING FORWARD-LOOKING INFORMATION

All statements contained in this Form 10-K, other than statements of historical facts, that address future activities, events or developments are forward-looking statements, including, but not limited to, statements containing the words "believe," "anticipate," "expect" and words of similar import. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results will conform to the expectations and predictions of management is subject to a number of risks and uncertainties that may cause actual results to differ materially.

Such risks include, among others, the following: international, national and local general economic and market conditions: our ability to sustain, manage or forecast our growth; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings.

Consequently, all of the forward-looking statements made in this Form 10-K are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations.

As used in this Form 10-K, unless the context requires otherwise, "we" or "us" or the "Company" means China Energy Savings Technology, Inc. and its subsidiaries.


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PART I

ITEM 1. DESCRIPTION OF BUSINESS

INTRODUCTION

We are a Nevada corporation headquartered in Hong Kong, China that invests in, develops, markets, distributes and manufactures energy saving products for use in commercial and industrial settings. As of September 30, 2004, we owned a 50% interest in Starway Management Limited, a British Virgin Islands corporation (“Starway”) which owns all of the equity interests in Shenzhen Dicken Industrial Development Limited, a company incorporated in the Republic of China on November 20, 1996 ("SDID") which in turns owns all of the equity interest in Shenzhen Dicken Technology Development Limited, a company incorporated in the Republic of China on November 9, 1999 (“SDID”). SDID and SDID develops, markets distributes and manufactures energy saving products for use in commercial and industrial settings in China. Subsequently, on November 17, 2004, the Company completed on acquisition of an additional 15% interest in Starway. Prior to the acquisition, the Company owned 50% of the outstanding shares of capital stock of Starway. After the acquisition, the Company owned a total of 65% of the outstanding shares of Starway capital stock. The Company acquired the additional 15% interest in Starway from Eurofaith Holdings, Inc., a British Virgin Islands Corporation (“Eurofaith”). The sole director of Eurofaith is also a director and Corporate Secretary of the Company.

The Company acquired the remaining 35% interest (the “Acquisition”) in Starway Management Limited (“Starway”) from Sky Beyond Investments Limited (“Sky Beyond”) on February 1, 2005 by issuing a total of 7,807,569 shares of common stock of the Company. Sky Beyond had acquired the 35% interest in Starway from Golden Resorts Group Limited (formerly known as “Meditech Group Company Limited”). The amount of consideration given by the Company for the Acquisition was determined with reference to the acquisitions of the 50% and subsequently the 15% interest in Starway as reported in the Company’s Form 8-K filed on June 30, 2004 and November 18, 2004, respectively. The closing of the Acquisition (the “closing”) occurred on February 1, 2005 and as a result of the Acquisition, the Company owns 100% of Starway.

Public information concerning the Company is also made available through our website at: www.cesv-inc.com.

CORPORATE HISTORY

We were originally incorporated under the laws of the State of Nevada on February 14, 2000 as "Rim.com, Inc." On April 6, 2000, we closed our acquisition of Rimmer Computer Inc., an Arizona corporation which had been in business in Phoenix, Arizona for over 13 years ("Rimmer").

Rimmer is an approved technical service provider for computer hardware and software system manufacturers such as Novell, Microsoft, IBM, Compaq, Hewlett Packard, Cisco and others. Rimmer employed five people and the individual technicians have received certifications such as Microsoft Certified System Engineer and Certified NetWare Engineer. All of Rimmer's customers were located in the Phoenix, Arizona area. Rimmer, however, did not generate a profit for the Company was only a marginal operating entity without expenditure of substantial marketing capital. On June 6, 2002, we amended our Articles of Incorporation to change our corporate name to Rim Holdings Inc.

On June 18, 2004, three of our stockholders namely Christina M. Strauch, Michael K. Hair, P.C. and Robert H. Korndorffer (collectively, the "Selling Shareholders") sold 8,888,224 shares of the common stock of the Company for $225,000 (the "Sale") to Best Development Company, Ltd., a British Virgin Islands corporation ("Best Development") and Jie Zhu, an individual ("Zhu"). In connection with this transaction, we also redeemed 1,000,000 shares of our common stock held by Ms. Strauch and transferred all of our interest in Rimmer to Ms. Strauch. The sale of the 8,888,224 shares represented approximately 50.1% of the total outstanding stock of the Company. In connection with this transaction, Ms. Strauch resigned as our Chairman, Chief Executive Officer, Treasurer and Chief Financial Officer and Mr. Korndorffer resigned from our Board of Directors effective as of June 22, 2004. Mr. Lee Kam Man was appointed as our CEO as of June 22, 2004 and Mr. Lee Kam Man and Mr. Li Shilong were appointed as directors of the Company.

The proceeds from the Sale were then loaned to the Company by the Selling Shareholders. We used such proceeds to pay off our current liabilities. Both Christina M. Strauch and Robert Korndorffer were issued convertible promissory notes as consideration for the loans which were convertible into 3,993,700 and 1,126,300 shares, respectively, of the Company's restricted common stock. Michael K. Hair, P.C. assigned his convertible promissory note to Nimish Patel, counsel for the Company, as partial payment for legal services provided to the Company. This promissory note is convertible into 833,320 shares of the Company's restricted common stock. All such convertible promissory notes were converted into our common stock on August 25, 2004.
 
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On June 30, 2004, we acquired 50% of the outstanding shares of Starway from Eurofaith Holdings, Inc., a British Virgin Islands Corporation ("EuroFaith") by issuing to EuroFaith a convertible promissory note which may be convertible into 223,073,380 shares of our common stock. This convertible promissory note was also converted into our common stock on August 26, 2004.

On August 24, 2004, we changed our name from Rim Holdings Inc. to China Energy Savings Technology, Inc. On August 25, 2004, we effected a 20 to 1 reverse stock split of our common stock.

As described above, the Company acquired the remaining 35% of Starway as of February 1, 2005. Thus, the Company owns 100% of Starway Management Limited.

As a result, our corporate structure is illustrated as follows:
 

DESCRIPTION OF STARWAY'S BUSINESS

Starway was incorporated in the British Virgin Islands on September 15, 1998. Starway owns all of the equity interests in Shenzhen Dicken Industrial Development Limited, a company incorporated in the Republic of China on November 20, 1996 ("SDID") which in turns owns all of the equity interest in Shenzhen Dicken Technology Development Limited, a company incorporated in the Republic of China on November 9, 1999 ("SDID"). In 2003, Eurofaith, the former shareholder of SDID exchanged 100% of the common shares of SDID for 100 shares of Starway.

Starway, through its two subsidiaries SDID and SDID is a People's Republic of China based marketer, distributor and manufacturer of energy saving products for use in commercial and industrial settings. SDID is a foreign-owned enterprise 100% owned by Starway under the laws of the People's Republic of China ("PRC") and responsible for the operation and sales of its products. SDID is a wholly-owned subsidiary of SDID and is a limited company incorporated in the PRC and holds the patent on technology used by SDID to manufacture and sell its products and is responsible for the development of energy saving projects of Shenzhen Dicken Group.

 
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PRINCIPAL PRODUCTS

OVERVIEW OF ENERGY SAVER PRODUCTS

The basic technology behind the Company's energy saver products is a soft switching system (the "Switching System") comprised of microprocessors, transformers and timing circuits which are designed to work together to regulate and monitor the flow of electricity from main electricity delivery units to the device using such electricity (e.g., lighting devices, sewing devices, etc.). This regulation and monitoring is designed to lower the use of electricity by such devices, but still maintain the performance of such devices. The energy saver products are designed to be easily installed, with no wiring alterations or circuit modifications, and fully automated upon installation.

LIGHT SAVER PRODUCTS

The Company's Light Saver products include the street light saver, fluorescent light saver and the electricity saving lamp light saver and are the flagship products using the Company's Switching System. All of these products use the Switching System to reduce the amount of electricity used by lighting systems. In many street light and fluorescent lighting systems, the supply voltage is only required to allow the lights to turn on; thereafter the operating voltage can be reduced. The Company's Light Saver products automatically switch from normal to economy voltage after the start up period and the products' transformer automatically switches to the reduced voltage and monitors use of such voltage. The drop in current is dependent on the age and type of light fittings. When additional lights are turned on, the Switching System "senses" the change and switches to allow additional electricity to flow to power on such additional lights. In addition, the Switching System monitors the main voltage and automatically switch out of economy mode when the main voltage drop could induce a brownout.

The Company's Light Saver products are designed for retrofitting into existing installations. No modification is required to existing light fittings. Installations are relatively quick and simple. The Company's Light Saver products are wired into the lighting circuit, before and after the light switches and can be mounted vertically, horizontally or hung. The Company's Light Saver's products are fully automated once they are installed. Once the Company's Light Saver products are installed, they generally reduce the amount of electricity used by the lighting system, extend the life of the lights, and reduces the operating temperature of the lights. As a result, consumers of the Company's Light Saver's may save on their electricity bills and cost of purchasing replacement light tubes.

SDID warrants the original purchaser of its Light Saver products for a period of 3 years from the date of installation, to be free from defects in and arising from the design, assembly, manufacturer, material or workmanship of the products and will replace the defective products without any charge to the original purchaser.

SEWING MACHINE ELECTRICITY SAVER

SDID has also introduced the Sewing Machine Electricity Saver using the Switching System. In general, the sewing machine is used to sew in interval processes. In between the sewing intervals the sewing machine's motor runs on a constant pace, drawing electricity without actually sewing. The Company's Sewing Machine Electricity Saver product uses to the Switching System to reduce the amount of electricity used in between actual use of the sewing machine. As with the Light Saver products, once the Sewing Machine Electricity Saver products are installed, they are fully automated.

Once the Company's Sewing Machine Electricity Saver products are installed, they generally reduce the amount of electricity used by such machines, may extend the life of such machines, reduces the operating temperature and noise of the sewing machine. As a result, consumers of the Company's Sewing Machine Electricity Saver may save on their electricity bills and cost of purchasing replacement sewing machines.

ADDITIONAL ENERGY SAVER PRODUCTS

SDID has also developed and now sells other products that use the Switching System to create more energy efficient devices. Such products include: the Injection Molding Machine Saver, the Central Air Condition Electricity Saver, the Oil Bleed Set Electricity Saver and the Multi User Electricity Saver. 

SALES AND DISTRIBUTION

SDID sells and distributes its products all over China, with offices and sales agents in the cities of Beijing, Shanghai, Chendu, Xi'An and in the provinces of Wu-Han, Guangzhou, Hu-Nan and Ah-Hui. In addition, SDID offers distributorships at city levels to distributors who want to sell SDID's products. Each such distributor is required to pass qualification inspections by SDID and pay a one time upfront fee to SSDID for the right to distribute SDID's products. Currently, SDID only sells to customers in China.
 
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SDID has installed the Light Saver Products in the building, offices, supermarkets, shopping malls, restaurants, buildings, factories, oil fields and residential premises of approximately 400 customers in over 12 provinces and cities in China. The Light Saver Products have also been installed on street lamps for cities in China.

SDID sells its products by offering two types of contracts: Savings Sharing or Equipment Sale.

Under the Equipment Sale contract, the customer pays upfront for the equipment and installation cost.

Under the Savings Sharing contract, the customer is not required to pay any cost up front for the equipment and installation of SDID's products. Such customer, however, enters into a 5 to 7 year contract with SDID whereby from the date SDID's products are installed, the customer shall pay to SDID 70% of the total savings from the reduced electrical bill. SDID has entered into these Savings Sharing contracts since July of 2002. As of September 30, 2005, SDID has entered into 15 Savings Sharing contracts with:

Shenzhen Deqin Jilin Branch
Zhuzhou Municipal Street Light Bureau
Anqing Kuntai Decoration Co., Ltd
Shenzhen E-store Market Co., Ltd
Nanjing Langchi Group Co., Ltd
Shenzhen Deqin Shenyang Branch
Nanjing Giant Economic Co., Ltd
Chongqing Baifuda Technology Development Co., Ltd
Hunan Xuhua Economic trade Co., Ltd
Wuhu United Technology Co., Ltd
Kelamayi Jingying Co., Ltd
Chong Qing Environmental Protection Energy Savings Development Co., Ltd
Hangzhou Energy Savings Technology Co. Ltd
Xin Jiang Technology Co., Ltd
Shanghai Da Xiyi Electrical Appliances Co., Ltd

CONCENTRATION OF CUSTOMERS
  
SDID has approximately 600 customers. However, as of September 30, 2005, approximately $23,000,000 or approximately 48% of our sales revenue was generated from energy savings contracts from four customers: Chongqing Dicken (approximately 12%), Hangzhou Dicken (approximately 13%), Xinjiang Dicken (approximately 13%) and Shanghai Daxiyi Electronics (approximately 10%). The loss of any and/or all of these customers may have a material adverse effect on our business. All of our sales revenue was from companies or government entities located in China.
  
BACKLOG

The Company has no backlog orders.

MANUFACTURING AND SUPPLIERS

SDID designs, prototypes and manufactures the chipset component of its products at its manufacturing facilities located at Shenzhen Hi-Tech Zone Center Road, Shenzhen City, Guangdong Province, China. SDID's manufacturing facilities are ISO9001 certified. SDID contracts out the manufacturing and assembling of all other components to subcontractors. Our current annual manufacturing capacity is approximately 11,000 units. The principal components to the Company's products are computer chips, circuit boards, transformers and semiconductors. The prices for these components are subject to market forces largely beyond the Company's control, including energy costs, market demand, and freight costs. The prices for these components have varied significantly in the past and may vary significantly in the future.

Our primary suppliers of materials which are used to manufacture our products are located within an approximately 30 mile radius. There are approximately ten similar supplier companies are located in the same area as the above suppliers. Consequently, we do not believe that we would have any difficulty in locating alternative suppliers.
  
INTELLECTUAL PROPERTY   

Mr. Ian Cheng Yi Feng first explored energy savings software in 1999 for a Canadian company called Imperial Canadian Overseas Capital Corporation ("ICOC"). ICOC then sold and transferred the initial software technology it had to Shenzhen Baobo Industrial (now SDID) pursuant to a Technology Transfer Agreement dated December 2001 for consideration of RMB$2 million. This is a transfer of technology, not a patent. This agreement provided for a termination of the agreement in December, 2011. This agreement was subsequently amended on January 3, 2003 to eliminate the termination date and changed the term to be permanently effective. This agreement also provides that SDID has the right to further develop this technology to create its own intellectual properties and SDID has the right to transfer, trade, use and make it SDID's patent. ICOC further declared and agreed to undertake in this agreement that it has never applied and will never apply for any patent covering the initial software technology in any countries.

 
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With this technology, SDID put together the technicians and programmers and developed the chip set that is the heart of the intelligence control circuit board Switching System used in Starway's products. Subsequently, Mr. Cheng Ming, a former shareholder and director of SDID, applied for a patent in China covering this technology in April, 2003 and was granted preliminary approval of the patent by the Chinese intellectual property agency on September 19, 2003. All rights under such patent were then transferred to SDID by Mr. Cheng Ming on December 19, 2003.

The Company has also licensed the exclusive use of several patents from its founder for a period of ten years. The licenses expire in July 2012.

COMPETITION

There are approximately 50 companies that do business in the PRC that engage in the production and sales of energy saving products. SDID is able to compete with such competitors because the energy saving products of such competitors generally use transformer hardware to stabilize the voltage in order to reduce electricity use. SDID's products, on the other hand, uses the Soft Switching System, which consists of intelligent control circuit boards made of chipset (software), and which works with the transformer (hardware) in stabilizing the voltage.

On December 11, 2003, the China National Scientific Technology Products Committee issued a "Certificate of Approval" for SDID's products stating that SDID's products have an average energy savings range of between 28% to 34% as compared to the average energy savings range of other energy savings products which range from 8-25%. The Guangdong Research Center for Scientific and Technical Information, in its recent report on intelligent control circuit board concluded that, "there are so far no other similar device in the market that can compete."

The management of Starway is not currently aware of any competitors doing business in China that are marketing or manufacturing energy saving products using an intelligent control circuit board. However, competitors may be in the process of developing similar technology.

SDID's products have been approved by the Shenzhen Energy Saving Association and its quality certified by the China National Authority.

GOVERNMENTAL REGULATION

Our Company operates from facilities that are located in the People's Republic of China. Accordingly, we must conform to the governmental regulations and rules of China. The sale of SDID's products are generally not subject to governmental approvals or regulations. When SDID sells its products to governmental entities (e.g., for street lamps, etc.), such governmental entities' approval of the products are required for such specific use.

DOING BUSINESS IN CHINA AND GOVERNMENT REGULATIONS IN CHINA

GOVERNMENTAL REGULATION OF OUR OPERATIONS IN CHINA

Our subsidiary companies operate from facilities that are located in the People's Republic of China. Accordingly, our subsidiaries’ operations must conform to the governmental regulations and rules of China.

SINO-FOREIGN INVESTED ENTERPRISE LAWS: FIE LAWS

Our wholly owned subsidiaries exist in accordance with the People's Republic of China Wholly Foreign-Owned Enterprise Law, or WFOE Law. Article 8 of the WFOE Law provides that an enterprise with foreign capital meets the conditions for being considered a legal person under Chinese law and shall acquire the status of a Chinese legal person, in accordance with the law.

Further, the WFOE Law provides in Article 4 that the investments of a foreign investor in China, the profits it earns and its other lawful rights and interests are protected by Chinese law. Furthermore, Article 5 of the WFOE Law states that the state cannot nationalize or requisition any enterprise with foreign capital. Under special circumstances, when public interest requires, enterprises with foreign capital may be requisitioned by legal procedures and appropriate compensation shall be made.
 
 
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The first two provisions set forth above reflect the principle that the State must protect the interest of the foreign investor based upon approved Articles of Association. The third statement reflects the power of all national governments, including the United States, that are reserved to them.

Accordingly, as the above laws indicate, the only realistic method by which the Chinese Government can effect the operation of these Foreign Invested Enterprises is provided by their respective Articles of Association. Those Articles, combined with the Foreign Invested Enterprise laws, provide that the Chinese Government does not and cannot have an intrusive role in the affairs of a Foreign Invested Enterprise company. To the contrary, those laws place a continuing duty on the government to ensure that the rights of foreign investors in Foreign Invested Enterprise companies, as expressed in the approved provisions of Articles of Association, are protected and preserved.

FOREIGN COMPANIES DOING BUSINESS IN CHINA

There are three standard investment vehicles for foreigners doing business in China:

·
Equity Joint Venture;

·
Cooperative or contract Joint Venture; and

·
Wholly Foreign-Owned Enterprise.

Each of these investment vehicles is known as a Foreign Invested Enterprise. The applicable legal framework for the establishment and continuation of Foreign Invested Enterprise laws is as follows:
 
GENERAL
People's Republic of China Foreign Economic Contract Law
   
ACCOUNTING
People's Republic of China Accounting Law Laws Concerning Enterprises with Foreign Investments The General Accounting Standard for Enterprises The Specific Accounting Standards
   
EQUITY JOINT VENTURE
People's Republic of China Sino-Foreign Equity Joint Venture Law People's Republic of China Sino-Foreign Equity Joint Venture Law Implementing Regulations
   
COOPERATIVE VENTURE
People's Republic of China Sino-Foreign Cooperative Joint Venture Law Detailed Rules for the Implementation of the People's Republic of China Sino-Foreign Cooperative Joint Venture Law Regulations
   
WHOLLY FOREIGN-OWNED ENTERPRISE
People's Republic of China Wholly Foreign-Owned Enterprise Law Implementing Rules of the Wholly Foreign-Owned Enterprise Law Interpretations on Various Provisions Concerning the Implementing Rules of the Wholly Foreign-Owned Enterprise Law
 
The Foreign Invested Enterprise laws specifically referenced herein are the People's Republic of China Wholly Foreign-Owned Enterprise Law, the People's Republic of China Foreign Economic Contract Law, and the Accounting Laws.

THE CHINESE LEGAL SYSTEM

The practical effect of the People’s Republic of China legal system on our business operations in China can be viewed from two separate but intertwined considerations.

 
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First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the General Corporation Laws of the several states. Therefore, as a practical matter, a Foreign Invested Enterprise needs to retain or have ready access to a local Chinese law firm for routine compliance purposes.

Similarly, the People’s Republic of China accounting laws mandate accounting practices, which are not co-existent with U.S. Generally Accepted Accounting Principles. The China accounting laws require that an annual "statutory audit" be performed in accordance with People's Republic of China accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designate Financial and tax authorities, at the risk of business license revocation. As a practical matter, a Foreign Invested Enterprise must retain a local Chinese accounting firm that has experience with both the Chinese standards and U.S. Generally Accepted Accounting Principles. This type of accounting firm can serve the dual function of performing the annual Chinese statutory audit and preparing the Foreign Invested Enterprise’s financial statements in a form acceptable for an independent U.S. certified public accountant to issue an audit report in accordance with Generally Accepted Accounting Auditing Standards.

Second, while the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. All business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden applying Chinese substantive law. Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the "United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)." Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.

EARNINGS AND DISTRIBUTIONS OF THE FIE'S

Wholly Foreign-Owned Enterprise laws provide for and guarantee the distribution of profits to foreign investors in Chinese Foreign Invested Enterprises. Article 19 of the People’s Republic of China Wholly Foreign Owned Enterprise Law provides that a foreign investor may remit abroad profits that are earned by a Foreign Invested Enterprise, as well as other funds remaining after the enterprise is liquidated.

Because our Chinese businesses are controlled foreign corporations, for U.S. federal income tax purposes, we may be required to include in our gross income for U.S. tax purposes:

·
Those companies' "Subpart F" income, which includes certain passive income and income from certain transactions with related persons, whether or not this income is distributed to it; and

·
Increases in those companies' earnings invested in certain U.S. property.

Based on the current and expected income, assets, and operations of Chinese businesses, we believe that it will not have significant U.S. federal income tax consequences under the controlled foreign corporation rules.

POLITICAL AND TRADE RELATIONS WITH THE UNITED STATES

Political and trade relations between the United States and Chinese governments within the past five years have been volatile and may continue to be in the future. Major causes of volatility, the United States' considered revocation of China's Most Favored Nation trade status, illegal transshipments of textiles from China to the United States, issues surrounding the sovereignty of Taiwan, and the United States' bombing of the Chinese embassy in Yugoslavia, have had no direct connection to our operations; however, other on-going causes of volatility, including the protection of intellectual property rights within China and sensitive technology transfer from the United States to China have closer potential connection to our operations. There can be no assurance that the political and trade ramifications of these causes of volatility or the emergence of new causes of volatility will not cause difficulties in our operations in the China marketplace.
 
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ECONOMIC REFORM ISSUES

Although the majority of productive assets in China are owned by the Chinese government, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:

·
We will be able to capitalize on economic reforms;

·
The Chinese government will continue its pursuit of economic reform policies;

·
The economic policies, even if pursued, will be successful;

·
Economic policies will not be significantly altered from time to time; and

·
Business operations in China will not become subject to the risk of nationalization.

Negative impact upon economic reform policies or nationalization could result in a total investment loss in our common stock.

Since 1978, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.

Over the last few years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included devaluations of the Chinese currency, the Renminbi, restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limited re-centralization of the approval process for purchases of some foreign products. These austerity measures alone may not succeed in slowing down the economy’s excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets. These measures may adversely affect our manufacturing company's operations.

To date, reforms to China's economic system have not adversely impacted our manufacturing company's operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China’s economic system will continue or that we will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.

CURRENCY CONVERSION AND EXCHANGE

The currency in China is designated as the Renminbi. Although the Renminbi/United States dollar exchange rate has been relatively stable in the past five years there can be no assurance that the exchange rate will not become volatile or that the Renminbi will not be officially devalued against the United States dollar by direction of the Chinese government.

Exchange rate fluctuations may adversely affect our financial performance because of our foreign currency denominated assets and liabilities, and may reduce the value, translated or converted, as applicable into United States dollars, of our net fixed assets, our earnings and our declared dividends. We do not engage in any hedging activities in order to minimize the effect of exchange rate risks.

ENVIRONMENTAL COMPLIANCE

Our Company is subject to the People's Republic of China's National Environmental Protection Law, which was enacted on December 26, 1989, as well as a number of other national and local laws and regulations regulating air, water, and noise pollution and setting pollutant discharge standards. Violation of such laws and regulations could result in warnings, fines, orders to cease operations, and even criminal penalties, depending on the circumstances of such violation. We believe that our manufacturing and other operations are in compliance with all applicable environmental laws, including those laws relating to air, water, and noise pollution. The Company believes that the cost of compliance with the applicable environmental laws does not have a material effect on the company’s capital expenditures, earnings or the Company’s competitive position.
11


RESEARCH AND DEVELOPMENT

We believe that we will continue to refine and develop new energy savings products. For fiscal years 2005 through 2010, the Company expects to spend approximately $2,000,000 or an average of approximately $330,000 per year on research and development activities.

EMPLOYEES

As of the date of this filing, China Energy Savings, Inc. (the parent entity) has no full time employees, 11 part time employees and no long term consultants. We have 3 corporate officers, the Chief Executive Officer, Chief Financial Officer and the Corporate Secretary.

Starway has no full time employees, 4 part time employees and no long term consultants.

In addition, SDID employs approximately 230 full time employees and approximately 2,300 part-time sales consultants and 7 long-term consultants. SDID does not bear the costs of such part-time sales consultants because they are compensated by commission on sales and distribution of the Company's products.

The management of SDID is as follows:

LIU TIAN FU

Age 40 C.F.O. (CHIEF FINANCIAL OFFICER) is an economist who received his Master degree from University of Xiang Tan, Hunan Province. Prior to joining Dicken Hi-Tech Development, he worked as a financial analyst and advisor for International Financial Venture Capital Committee.

YANG AN YONG

Age 42 C.T.O. (CHIEF TECHNICAL OFFICER) is a professional engineer, graduated from Electronics Science University of Chang Du, Si-Chuang province. He has over 12 years R&D experience in high technology and in the energy saving industries. He joined Dicken Hi-Tech Development in September, 2002 as a Senior Software Engineering Manager.

HUANG ZHI

Age 47 (OFFICE MANAGER) has over 20 years experience in Public Relations and Human Resources. Graduated from University of Lao-ning Province, worked as a professional TV reporter. She has successfully worked over 6 years for HR department of Shenzhen City Government.

IGOR SIZYKH

Age 44 C.M.O. (CHIEF MARKETING OFFICER) is a highly motivated team player with 13 years experience in management and supervision for automotive, international sales and franchise industries in Europe and Canada. He has proven ability to increase profitability through contract negotiations, developing new partnerships, strategic planning, and innovative marketing strategies. Mr. Sizykh has a Bachelor of Arts Degree in Economics and Commerce.

None of our employees are under employment agreements.
 
12

AVAILABLE INFORMATION

We are subject to the informational requirements of the Securities Exchange Act of 1934. Accordingly, we file annual, quarterly and other reports and information with the Securities and Exchange Commission. You may read and copy these reports and other information we file at the Securities and Exchange Commission's public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are also available to the public from commercial document retrieval services and the Internet worldwide website maintained by the Securities and Exchange Commission at www.sec.gov. Public information (including reports we file with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act) concerning the Company is also made available through our website at: www.cesv-inc.com.

ITEM 1A.  RISK FACTORS

A DROP IN THE RETAIL PRICE OF ELECTRICAL ENERGY MAY HAVE A NEGATIVE AFFECT ON THE COMPANY'S BUSINESS.

A customer's decision to purchase the Company's products is primarily driven by the payback on the investment resulting from the increased energy savings. Although management believes that current retail energy prices support an attractive return on investment for the Company's products, there can be no assurances that future retail pricing of electrical energy will remain at such levels.

THERE CAN BE NO ASSURANCE THAT THE COMPANY CAN KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGE IN THE ENERGY SAVING PRODUCTION INDUSTRY.

Although the Company is developing and marketing its products with what it believes is state-of-the art technology, there can be no assurance that new technologies that supersede the Company's technologies will not be developed. As new technologies are developed, the Company may need to adapt and change its products and services, its method of marketing or delivery or alter its current business in ways that may adversely affect revenue and its ability to achieve its proposed business goals.

THE COMPANY MUST CONTINUALLY RESEARCH AND DEVELOP NEW TECHNOLOGIES AND PRODUCTS TO REMAIN COMPETITIVE.

To achieve its strategy and obtain market share, the Company will need to continually research, develop and refine new technologies and offer new products. Many factors may limit the Company's ability to develop and refine new products, including access to new products and technologies, as well as marketplace resistance to new products and technology.

THE COMPANY MUST ATTRACT AND RETAIN HIGHLY SKILLED AND MOTIVATED EMPLOYEES TO SUCCESSFULLY MANAGE ITS GROWTH AND COMPETE IN THE MARKETPLACE.

The Company's ability to manage its growth and operations going forward will depend on, among other things: expanding, training and managing its employee base, including attracting, retaining and motivating highly skilled personnel; developing or outsourcing its customer interface, operations, administration and maintenance systems; and controlling its expenses. The Company cannot assure that it will succeed in developing all or any of these capabilities.

THE COMPANY'S CURRENT STOCKHOLDERS EXERCISE SUBSTANTIAL CONTROL AND MAY MAKE DECISIONS THAT YOU DO NOT CONSIDER TO BE IN YOUR BEST INTERESTS.

Currently, the Company's executive officers and one shareholder beneficially own in the aggregate approximately 63% of the outstanding Common Stock. It is expected that these individuals will maintain a majority control of the Company. As a result, these stockholders, acting together, will be able to exercise control over all matters requiring approval of the stockholders of the Company.

OUR STOCK PRICE IS HIGHLY VOLATILE
 
The trading price of our common stock has fluctuated significantly. Our stock price could be subject to wide fluctuations in the future in response to many events or factors, including those discussed in the preceding risk factors relating to our operations, as well as:

·  
actual or anticipated fluctuations in operating results, actual or anticipated gross profit as a percentage of net sales, levels of inventory, our actual or anticipated rate of growth and our actual or anticipated earnings per share;
   
·  
changes in expectations as to future financial performance or changes in financial estimates or buy/sell recommendations of securities analysts;
   
·  
changes in governmental regulations or policies in China;
 
 
13

 
   
·  
our, or a competitor’s, announcement of new products, services or technological innovations;
   
·  
the operating and stock price performance of other comparable companies; and
   
·  
news and commentary emanating from the media, securities analysts or government bodies in China relating to us and to the industry in general.
 
General market conditions and domestic or international macroeconomic factors unrelated to our performance may also affect our stock price. For these reasons, investors should not rely on recent trends to predict future stock prices or financial results. In addition, following periods of volatility in a company’s securities, securities class action litigation against a company is sometimes instituted. This type of litigation could result in substantial costs and the diversion of management’s time and resources.

PAST ACTIVITIES OF THE COMPANY AND ITS AFFILIATES MAY LEAD TO FUTURE LIABILITY FOR THE COMPANY.

Prior to the acquisition of Starway, the Company engaged in businesses unrelated to its current operations. Although the major shareholders of the Company prior to the acquisition of Starway indemnified Rim Holdings against any loss, liability, claim, damage or expense arising out of or based on any breach of or inaccuracy in any of their representations and warranties made regarding such acquisition, any liabilities relating to such prior business against which the Company is not completely indemnified may have a material adverse effect on the Company.

RISKS RELATED TO DOING BUSINESS IN THE PRC

ADVERSE CHANGES IN ECONOMIC AND POLITICAL POLICIES OF THE PRC GOVERNMENT COULD HAVE A MATERIAL ADVERSE EFFECT ON THE OVERALL ECONOMIC GROWTH OF CHINA, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
 
All of our business operations are conducted in China. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Since early 2004, the PRC government has implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in China, which in turn could adversely affect our results of operations and financial condition.

FUTURE FLUCTUATION IN THE VALUE OF THE RENMINBI MAY NEGATIVELY AFFECT THE COMPANY'S ABILITY TO CONVERT ITS RETURN ON OPERATIONS TO U.S. DOLLARS IN A PROFITABLE MANNER AND ITS SALES GLOBALLY.

Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including U.S. dollars, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of the Renminbi relative to the U.S. Dollar has remained stable and has appreciated slightly against the U.S. dollar. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 2.0% appreciation of the RMB against the U.S. dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant revaluation of the RMB against the U.S. dollar. Any significant revaluation of RMB may be attributable to adjustments resulting from the translation of the Company’s financial statements, which will be recorded as part of accumulated comprehensive income in shareholders’ equity.

If any devaluation of the Renminbi were to occur in the future, the Company's returns on its operations in China, which are expected to be in the form of Renminbi, will be negatively affected upon conversion to U.S. dollars. The Company attempts to have most future payments, mainly repayments of loans and capital contributions, denominated in U.S. dollars. If any increase in the value of the Renminbi were to occur in the future, the sales of the Company's products in China and in other countries may be negatively affected.
 
14


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  DESCRIPTION OF PROPERTY

During the last quarter of fiscal year 2005, we rented office space in Hong Kong at a rate of $7,800 per month. Our lease expires in September 2006.

SDID owns an old factory that is currently leased to an unrelated third party. This was SDID's old manufacturing factory which it has outgrown. The old factory is approximately 405.27 square meters and is located at Baoan District, Shenzhen City, Guangdong Province, China. SDID also owns two residential units, one is approximately 179 square meters located at Nanshan District, Shenzhen City, Guangdong Province, China and the other one is approximately 139 square meters located at Futian District, Shenzhen City, Guangdong Province, China). These residential units are used by Mr. Cheng, SDID's President and to house certain expatriate technicians.

SDID's operates out of leased office and factory space that is approximately 2,200 square meters and is located at Block 3, 30 Shenzhen Hi-Tech Zone Centre Road, Shenzhen City, Guangdong Province, China. SDID pays approximately US$58,000 per year in rent for such space. The lease for such space is for a term of 5 years.
  
We do not anticipate investing in real estate or interests in real estate, real estate mortgages, or securities of or interests in persons primarily engaged in real estate activities. We currently have no formal investment policy, and we do not intend to undertake investments in real estate as a part of our normal operations.

ITEM 3. LEGAL PROCEEDINGS

We are not aware of any material pending legal proceedings involving us, Starway or its subsidiaries.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the last quarter of the fiscal year ended September 30, 2005.


PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Common Stock was quoted on Nasdaq National Market as of April 21, 2005. The following table sets forth the high and low bid information for the Common Stock for each quarter within the last two fiscal years.

QUARTERLY COMMON STOCK PRICE RANGES

QUARTER ENDED
HIGH
LOW
2003/2004
   
December 31, 2003
$3.60
$1.00
March 31, 2004
$5.40
$0.80
June 30, 2004
$5.80
$1.40
September 30, 2004
$20.00
$4.20
     
2004/2005
   
December 31, 2004
$ 28.28
$ 11.00
March 31, 2005
$ 17.00
$ 8.00
June 30, 2005
$ 15.70
$ 8.40
September 30, 2005
$ 10.13
$ 6.01

** Note: All prices adjusted to take into account of the 1 for 20 reverse stock split that took effect on August 25, 2004.
 
15


These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. As of December 14, 2005, there were approximately 568 stockholders of record of our Common Stock and no stockholders of record of our Preferred Stock.

DIVIDEND POLICY

We have never paid any dividends on the Common Stock. We currently anticipate that any future earnings will be retained for the development of our business and do not anticipate paying any dividends on the Common Stock in the foreseeable future.

On September 8, 2004, we established the 2004 Equity Incentive Plan ("2004 Plan") with 1,200,000 shares approved and subject to the 2004 Plan. The purpose of the Plan is to grant stock and stock options to purchase our common stock to our employees and key consultants. On September 17, 2004, we filed a registration statement on Form S-8 registering all 1,200,000 shares.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
 
Equity Compensation Plan Information

Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders
 
None
 
- - -
 
None
Equity compensation plans not approved by security holders
 
1,200,000 (1)
 
- - -
 
0 (1)
Total
 
1,200,000
 
- - -
 
0
 


(1)   
In September 2004, we established the 2004 Equity Incentive Plan ("2004 Plan") with 1,200,000 shares approved and subject to the 2004 Plan. The Board of Directors or a Committee comprised of a member or members of the Board has full authority to administer the 2004 Plan, including but not limited to, the authority to designate eligible persons, grant awards, interpret the Plan and delegate to one or more executive officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. The maximum number of shares that may be issued under the Plan is 1,200,000 shares of our common stock. On September 16, 2004, the Company issued 620,000 shares to a certain qualifying employees and 10,000 shares to non-employee consultants for services rendered under the Plan. In October and November 2004, the Company issued 470,000 shares to non-employee consultants of its common stock at $11.00 and $13.15 per share. The total shares were valued at $5,256,000, the closing price of the stock at the date the shares were issued. On April 15, 2005, the Company issued 100,000 shares to non-employee consultants and an employee of its common stock at 10.00 a share for services performed. The total shares were valued at $996,697.

SALES OF UNREGISTERED SECURITIES
 
In February 2004 we issued 2,500,000 restricted common stock shares to our legal counsel in conversion of $50,000 of accrued legal services and future legal services in connection with our acquisition of Starway. In February 2004 we also issued 4,000,000 restricted common stock shares to our Chairman in conversion of $80,000 of accrued salary. We relied upon the exemption from registration as set forth in Section 4(2) of the Securities Act of 1933 for the issuance of these shares. The investors took their shares for investment purposes without a view to distribution and had access to information concerning the Company and our business prospects, as required by the Securities Act. In addition, there was no general solicitation or advertising for the purchase of our shares. All certificates for our shares contain a restrictive legend.

On August 25, 2004, the Company issued 11,451,336 shares of common stock, in the aggregate, to EuroFaith Holdings, Inc.'s assignees and 3 individuals pursuant to a conversion of outstanding convertible notes held by EuroFaith Holdings, Inc. and the 3 individuals. We relied upon the exemption from registration as set forth in Section 4(2) of the Securities Act of 1933 for the issuance of these shares. The investors took their shares for investment purposes without a view to distribution and had access to information concerning the Company and our business prospects, as required by the Securities Act. In addition, there was no general solicitation or advertising for the purchase of our shares. All certificates for our shares contain a restrictive legend.
 
16


In November, 2004, the Company issued 4,683 shares of common stock to our legal counsel in conversion of $29,740 of accrued legal services. We relied upon the exemption from registration as set forth in Section 4(2) of the Securities Act of 1933 for the issuance of these shares. The investors took their shares for investment purposes without a view to distribution and had access to information concerning the Company and our business prospects, as required by the Securities Act. In addition, there was no general solicitation or advertising for the purchase of our shares. All certificates for our shares contain a restrictive legend.

In November, 2004, the Company issued 3,346,100 shares of common stock, in the aggregate, to EuroFaith Holdings, Inc., which represented that it is an accredited investors as part of the acquisition of a 15% interest in Starway. We relied upon the exemption from registration as set forth in Section 4(2) of the Securities Act of 1933, as amended for the issuance of these shares. The investors took their shares for investment purposes without a view to distribution and had access to information concerning the Company and our business prospects, as required by the Securities Act. In addition, there was no general solicitation or advertising for the purchase of our shares. All certificates for our shares contain a restrictive legend.

In February, 2005, the Company issued 7,807,569 shares of common stock to Sky Beyond, which represented that it is an accredited investors as part of the acquisition of the remaining 35% interest in Starway. This transaction was effected under an exemption to registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The recipients of the securities in the above-described transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificate and other instruments issued in such transaction.
 
ITEM 6. SELECTED FINANCIAL DATA

Prior to the acquisition, the Company’s subsidiaries reporting year end was December 31. However Rim Holdings, Inc.’s reporting year ended was September 30. In order to be consistent with Rim’s reporting year end, the Company’s Board of Directors approved all of their subsidiaries’ fiscal year end change from December 31 to September 30. Effective September 30, 2004, we changed our subsidiaries’ fiscal years from December 31 to September 30.

The following tables summarize data from the Company’s financial statements for the fiscal years 2002 through 2003 and reflects the transition and comparative periods and notes thereto. The Company’s complete annual financial statements and notes thereto for the current fiscal year appear in item 8 herein. See Management’s Discussion and Analysis for discussion of non-recurring items that affect the comparability of results between periods.
 
       
 
 
Year Ended December 31
     
   
Year Ended
September 30, 2005
 
Nine Month Period Ended September 30, 2004
 
2004
 
2003
 
2002
 
Nine Months Ended September 30, 2003
 
   
 Audited
 
Audited
 
Unaudited
 
Audited
 
Audited
 
Unaudited
 
Consolidated Statement of Operations Data:
                         
Total revenue
 
$
48,388,076
 
$
30,997,070
 
$
42,705,760
 
$
31,057,877
 
$
7,914,658
 
$
19,556,412
 
Gross margin
   
28,459,369
   
19,356,097
   
26,173,379
   
11,309,614
   
2,924,861
   
7,255,895
 
Income from operations
   
23,575,240
   
8,969,430
   
14,202,173
   
9,170,586
   
1,800,765
   
5,983,814
 
Income before income taxes and minority interest
   
25,674,662
   
11,196,652
   
16,774,783
   
10,787,761
   
2,188,967
   
6,817,929
 
Credit (provision) for income taxes
   
   
4,853,332
   
   
(1,879,896
)
 
(401,086
)
 
(1,200,925
)
Minority interest
   
3,258,783
   
12,025,492
   
14,745,345
   
4,453,933
   
893,940
   
2,808,502
 
Net Income
 
$
22,415,879
 
$
4,024,492
 
$
2,029,438
 
$
4,453,932
 
$
893,941
 
$
2,808,502
 
Net Income per share:
                                     
basic and diluted
 
$
1.04
 
$
0.36
 
$
0.40
 
$
0.4
 
$
0.08
 
$
0.41
 
                                       
Weighted average common shares outstanding:
                                     
basic and diluted
   
21,524,371
   
11,327,720
   
5,016,195
   
11,153,669
   
11,153,669
   
6,920,660
 
 

   
As of September 30,
 
As of December 31,
 
Consolidated Balance Sheet Data:
 
2005
 
2004
 
2004
 
2003
 
2002
 
Cash, cash equivalents and short and long-term investments
 
$
30,926,619
 
$
18,442,862
 
$
26,826,870
 
$
21,165
 
$
48,961
 
Working capital
   
42,377,400
   
28,938,792
   
35,889,769
   
(704,180
)
 
344,207
 
Total assets
   
74,705,974
   
44,262,480
   
52,039,738
   
21,106,000
   
7,820,156
 
Long term debt
   
   
7,895
   
12,975
   
17,440
   
 
Total stockholders equity
   
66,341,777
   
18,662,907
   
28,389,880
   
6,619,087
   
1,874,188
 

17

 
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion of our financial condition and results of operations of should be read in conjunction with the financial statements and related notes thereto. The following discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed herein. We undertake no obligation publicly to release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.

OVERVIEW

We are a holding company that invests in, develops, markets, distributes and manufactures energy saving products for use in commercial and industrial settings. All of our revenues are derived from our ownership interest in Starway which owns all of the equity interests in SDID which in turns owns all of the equity interest in SDID. The holding company itself does not independently generate any revenues.

Our financial statements are consolidated with those of Starway and its subsidiaries. Starway's subsidiaries, SDID and SDID develops, markets distributes and manufactures energy saving products for use in commercial and industrial settings in China.

CRITICAL ACCOUNTING POLICIES

Our management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See note 1 to the Company's consolidated financial statements, "Summary of Significant Accounting Policies." Our management bases their estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ substantially from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.

Revenue and Deferred Revenue Recognition

We recognize product sales under the following two types of contracts:

1)  
Equipment sale contract - Under the Equipment sale contract, we recognize revenue when persuasive evidence of an arrangement exists, the sales price to the buyer is fixed or determinable, collectability is reasonably assured, delivery has occurred and accepted by the buyers.

2)  
Energy savings Sharing contract - Under this contract, we grant customers extended payment terms under contracts of sale. These contracts are generally for a period of one to five years at prevailing interest rates and are collateralized by the related equipment, which if repossessed, may be less than the receivable balance outstanding. We recognize revenue under profit sharing agreements when the amounts are fixed and determinable and collectability is reasonably assured. Amounts received by us in excess of the original estimated cost savings on the contract is recorded as interest income.

NOTES RECEIVABLE

We carry our notes receivable at the net present value of the notes, net of allowance for doubtful accounts.

FISCAL YEAR END

The Company changed its fiscal year end from December 31 to September 30 effective September 30, 2004; and, therefore, the Company reported a nine-month Transition Period ended September 30, 2004. The following table describes the periods presented in the Management's Discussion and Analysis of Financial Condition and Results of Operations and in the condensed consolidated financial statements and related notes thereto:

Period
 
Referred to as:
Audited results from October 1, 2004
through September 30, 2005
 
Fiscal Year 2005
Unaudited results from October 1, 2003
Through September 30, 2004
 
Twelve month comparative period
Audited results from January 1, 2004
through September 30, 2004
 
Transition Period
Unaudited results from January 1, 2003
through September 30, 2003
 
Nine Month Comparative period
Audited results from January 1, 2003
through December 31, 2003
 
Year 2003
Audited results from January 1, 2002
through December 31, 2002
 
Year 2002


18




RESULTS OF OPERATIONS

General Results of Operations for the Twelve Months Ended September 30, 2005 and the Twelve Months Ended September 30, 2004:
 
TWELVE MONTHS ENDED SEPTEMBER 30
 
2005
 
2004
 
CHANGE
 
Revenues
   
48,388,076
   
42,498,535
   
14
%
Cost of goods sold
   
19,928,707
   
19,088,719
   
4
%
Gross profit
   
28,459,369
   
23,409,816
   
22
%
Gross profit margin
   
59
%
 
55
%
 
 
 
Operating expenses
   
4,884,129
   
11,253,614
   
(57
%)
Other income
   
2,099,422
   
3,010,282
   
(30
%)
Net income before income tax and minority interest
   
25,674,662
   
15,166,484
   
69
%
Net Income      22,415,879     5,669,922    
295
%


19

General Results of Operations of Starway for the Twelve Months Ended December 31, 2003 and Twelve Months Ended December 31, 2002:

TWELVE MONTHS ENDED DECEMBER 31
 
Audited
2003
 
Audited
2002
 
CHANGE
 
Revenues
   
31,057,877
   
7,914,658
   
292
%
Cost of goods sold
   
19,748,263
   
4,989,797
   
296
%
Gross profit
   
11,309,614
   
2,924,861
   
287
%
Gross profit margin
   
36
%
 
37
%
 
 
 
Operating expenses
   
2,139,028
   
1,124,096
   
90
%
Other income
   
1,617,175
   
388,202
   
317
%
Income before minority interest
   
8,907,865
   
1,787,881
   
398
%
Net Income
   
4,453,932
   
893,941
   
398
%

General Results of Operations for the Nine Months Ended September 30, 2004 and Nine Months Ended September 30, 2003:
 
NINE MONTHS ENDED SEPTEMBER 30
 
Audited
2004
 
Unaudited
2003
 
CHANGE
 
Revenues
   
30,997,070
   
19,556,412
   
59
%
Cost of goods sold
   
11,640,973
   
12,300,517
   
(5
%)
Gross profit
   
19,356,097
   
7,255,895
   
167
%
Gross profit margin
   
62
%
 
37
%
 
 
 
Operating expenses
   
10,386,667
   
1,272,081
   
717
%
Other income
   
2,227,222
   
834,115
   
167
%
Net income
   
4,024,492
   
2,808,502
   
43
%

NET INCOME

Our net income for the twelve months ended September 30, 2005 and twelve months ended September 30, 2004 was $22,415,879 and $5,669,922, respectively. Our net income for the twelve months ended December 31, 2003 and December 31, 2002 was $4,453,932 and $893,941 respectively. Our net income for the nine months ended September 30, 2004 and September 30, 2003 was $4,024,492 and $2,808,502, respectively. Our net income for the twelve months ended September 30, 2005 increased by approximately 295% when compared to our net income for the twelve months ended September 30, 2004. Our net income for the twelve months ended December 31, 2003 increased by approximately 398% when compared to our net income for the twelve months ended December 31, 2002. Our net income for the nine months ended September 30, 2004 increased by approximately 43% when compared to our net income for the nine months ended September 30, 2003. Such significant increases in net income were due to a significant increase in revenues and gross profit during such periods as further discussed below. The net income for the year ended September 30, 2005 in the consolidated financial statements of the Company is $22,415,879. During the quarter of December 31, 2004, 35% of the minority group was acquired while the Company was holding 65% of Starway. Since in September 30, 2005, the Company holds 100% interest in Starway, hence the total net income for the year ended September 30, 2005 should be $25,674,662, from the point of view of the group earning power as a whole inclusive the minority interest.
 
 
20

REVENUES

Our revenues are derived primarily from SDID's sales of its energy savings products and entering into energy savings sharing contracts. Revenues for the twelve months ended September 30, 2005 were $48,388,076, a net increase of approximately 14% compared with revenues of $42,498,535 for the twelve months ended September 30, 2004. During the year ended December 31, 2003, we had revenues of $31,057,877 as compared to revenues of $7,914,658 during the year ended December 31, 2002, an increase of approximately 292%. Revenues for the nine months ended September 30, 2004 were $30,997,070, a net increase of approximately 59% compared with revenues of $19,556,412 for the nine months ended September 30, 2003. The increase in revenues reflects strong sales growth in SDID's energy savings products, and was the result of increased unit sales and the Company entering into more energy savings sharing contracts. We note that SDID’s energy savings products were first introduced to the market only in July 2002. Since there were only 6 months of sales in 2002 and many of the products that were sold in 2002 were on a trial basis, revenue for 2002 was substantially lower than for 2003 and 2004. Our management expects that revenue will continue to grow in 2006 because of our continuing marketing and sales efforts, high fuel price and strong demand for our products due to electricity shortages in many parts of China. Further, our management believes that we will be able to maintain our price levels due to strong demand and a lack of strong competitive products. While our products may be used internationally, we currently have focused our sales efforts in China, targeting large businesses and local governments. Management hopes to continue to increase our market share in China.
 
GROSS PROFIT

We had a gross profit of $28,459,369 and $23,409,816 for the twelve months ended September 30, 2005 and 2004, respectively, achieving a 22% increase. Gross profit was $11,309,614 for the year ended December 31, 2003 as compared to $2,924,861 for the year ended December 31, 2002, achieving a 287% increase. We had a gross profit of $19,356,097 and $7,255,895 for the nine months ended September 30, 2004 and September 30, 2003, respectively, achieving a 167% increase.  For twelve months ended September 30, 2005 and 2004, our gross profit margin increased from approximately 55% to 59%The Company was selling their products through one time direct sales with an average gross profit of 75% last year. In 2005, it shifted its business model from direct sales to savings sharing contracts on a 5-7 yearly basis with the average gross profit down to a range of 50% - 60%. Yet in the long run, the Company has 5 to 7 years of income receivable from savings sharing contracts.
 
OPERATING EXPENSES

Below is a breakdown comparison of the operating expenses for the twelve months ended September 30, 2005 and twelve months ended September 30, 2004:


TWELVE MONTHS ENDED SEPTEMBER 30
 
Audited
2005
 
Unaudited
2004
 
CHANGE
 
Operating expenses
   
1,996,375
   
1,593,044
   
25
%
Sales and marketing expenses
   
164,219
   
602,850
   
(73
%)
General administrative expenses
   
2,723,535
 
9,057,690
   
(70
%)
Total operating expenses
   
4,884,129
   
11,253,614
   
(57
%)

There was a 57% decrease of total operating expenses from $11,253,614 to $4,884,129 for the twelve months ended September 30, 2004 and September 30, 2005, respectively. The large decrease in total operating expense for the year ended September 30, 2005 was substantially due to our adoption of our Equity Incentive Plan in the twelve months ended September 30, 2004, and our issuance of 620,000 shares of our common stock in accordance with the plan to our employees and consultants with a value of $8,001,000 ($12.70 per share) which was included in the general administrative expenses in the twelve months ended September 30, 2004 and as an increase in paid-in capital in our financial statements. Such stock was used to compensate many of our employees and consultants who have helped us in our early development stage but were not fairly compensated due to our lack of resources at the time. However, this stock issuance was a special one-time event in 2004, which did not occur in 2005, and thus there was a significant decrease in total operating expenses for 2005.


21

OTHER INCOME

We had other income of $2,099,422 for the twelve months ended September 30, 2005, as compared to $3,010,282 for the twelve months ended September 30, 2004. The decrease of approximately 30% was due to the decrease in interest income earned during the year.
 
LIQUIDITY AND CAPITAL RESOURCES
TWELVE MONTHS ENDED SEPTEMBER 30
 
Audited
2005
 
Unaudited
2004
 
CHANGE
 
Net cash provided by (used in) operating activities
   
12,975,555
   
18,311,000
   
(5,335,445
)
                     
Net cash provided by (used in) investing activities
   
(1,879,047
)
 
104,934
   
(1,983,981
)
                     
Net cash (used in) provided by financing activities
   
(8,820
)
 
(72,986
)
 
(81,806
)
 
The decrease of $5,335,445 in net cash provided by operating activities primarily reflects an increase in long-term notes receivable for the twelve months ended September 30, 2005.

The increase of $1,983,981 in net cash used in investing activities was due to the increase in long-term loan receivable during the year.

The decrease of $81,806 in net cash used in financing activities was due to less repayment for loans during the twelve months ending September 30, 2005.

We believe that we have adequate capital resources to continue our operations and will not need to raise capital in the near future. We believe that our current cash balance and the revenues that will be generated will cover anticipated operating expenses for a period of at least one year without supplementing our cash reserves.


MANAGEMENT ASSUMPTIONS

Management anticipates, based on internal forecasts and assumptions relating to our current operations that existing cash and funds generated from operations will be sufficient to meet working capital for at least the next 12 months. In the event that plans change, our assumptions change or prove inaccurate or if other capital resources and projected cash flow otherwise prove to be insufficient to fund operations (due to unanticipated expense, technical difficulties, or otherwise), we could be required to seek additional financing. There can be no assurance that we will be able to obtain additional financing on terms acceptable to it, or at all.

EFFECTS OF INFLATION

We are subject to commodity price risks arising from price fluctuations in the market prices of the various raw materials that comprise our products. Price risks are managed by each business unit through productivity improvements and cost-containment measures. For the time being, the management does not believe that inflation risk is material to our business or our consolidated financial position, results of operations or cash flows.

EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES

Our operating subsidiaries are located in China, and our Company buys all raw materials in China and sells all our products in China using Chinese Renminbi as the functional currency. Based on China government regulation, all foreign currencies under the category of current accounts are allowed to be freely exchanged with hard currencies. During the past three years of operation, there were no significant changes in exchange rates; however, unforeseen developments may cause a significant change in exchange rates.

22

INVESTMENT IN SUBSIDIARIES

As of September 30, 2005, we owned a 100% interest in Starway Management Limited ("Starway") which became a wholly owned subsidiary of CESV.

Starway holds 100% interest in Shenzhen Dicken Industrial Development Limited ("SDID"), which subsequently holds 100% interest in the energy savings project, Shenzhen Dicken Technology Development Limited ("SDID") as well as owns the intellectual property of their energy savings products in China.

FORECAST FOR THE YEAR 2006

1. The Market

We are a developer and manufacturer of energy savings products in China. We believe that the shortage of power in China and present high fuel price are expected to continue for years to come, the most immediate and effective solution is to conserve energy use. We believe that demand for our products will be strong in the next few years and we will strive to increase our capabilities to meet such demand.

2. Government Support

We have established a sales network of over 2,300 people in over 12 major provinces and cities in China. Our energy savings products are well received by the Chinese government, which is advocating the importance of energy savings to relieve the stress of power shortage

3. Customer Support

SDID's products are well accepted by our customers including business enterprises such as shopping malls, supermarkets and particularly factory owners who have been suffering from rolling blackouts. SDID's products have helped them lower their cost and increase their revenues.

4. Technology Advancement and Research and Development

We will continue to actively conduct research in the field of energy savings technology and to develop and commercialize new products.
 
5. Other Investments

CESV is seeking other energy saving investment opportunities.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table summarizes our contractual obligations (including interest expense) and commitments as of September 30, 2005:

Contractual Obligations
Total
Less than 1 Year
1-3 Years
3-5 Years
More than 5 Years
Long-Term Debt Obligations
 
  N/A   N/A   N/A   N/A   N/A
Capital Lease Obligations
 
  N/A   N/A   N/A   N/A   N/A
Operating Lease Obligations
 $301,688   $144,236   $58,436   $58,436  $40,580
Purchase Obligations
 
  N/A   N/A   N/A   N/A   N/A
Other Long-Term Liabilities Reflected on the Registrant's Balance Sheet under GAAP
  N/A   N/A   N/A   N/A   N/A


23

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK

While our reporting currency is the U.S. dollar, to date virtually all of our revenues and costs are denominated in Renminbi and a significant portion of our assets and liabilities are denominated in Renminbi. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be impacted by fluctuations in the exchange rate between U.S. Dollars and Renminbi. If the Renminbi depreciates against the U.S. Dollar, the value of our Renminbi revenues and assets as expressed in our U.S. Dollar financial statements will decline. We do not hold any derivative or other financial instruments that expose us to substantial market risk.
 
The Renminbi is currently freely convertible under the “current account”, which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account”, which includes foreign direct investment. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all. Accordingly, we may incur economic losses in the future due to foreign exchange rate fluctuations, which could have a negative impact on our financial condition and results of operations.

ITEM 8.  FINANCIAL STATEMENTS

Our financial statements appear at the end of this report beginning with the Index to Financial Statements on page F-1 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES 

None.
 
ITEM 9A. CONTROLS AND PROCEDURES

Management’s Report on Assessment of Internal Control Over Financial Reporting

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation, with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2005 because of the material weaknesses disclosed below in “Management’s Report on Internal Control over Financial Reporting.”

In light of these material weaknesses, the Company performs additional analyses and other pre and post-closing procedures to ensure that our consolidated financial statements are presented fairly in all material respects in accordance with generally accepted accounting principles in the United States. These procedures include monthly business reviews led by our Chief Executive Officer and monthly operating and financial statement reviews by various levels of our management team, including our executive officers. Accordingly, management believes that the consolidated financial statements and schedules included in this Form 10-K fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.

24

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). The Company’s internal controls over financial reporting are designed to provide reasonable assurance concerning the reliability of financial data used in the preparation of our financial statements. All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Controls considered to be operating effectively in one period may become inadequate in future periods because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2005 using the criteria described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of our assessment, Management has identified two material weaknesses, as described below, and therefore has concluded that our internal controls over financial reporting were not effective as of September 30, 2005.

A material weakness is defined within the Public Company Accounting Oversight Board’s Auditing Standard No. 2 as a control deficiency or combination of control deficiencies that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

In the process of its assessment, our management identified the following material weaknesses in our internal control over financial reporting:

1.
Accounting and Finance Personnel Weaknesses - The operation of the Chinese subsidiaries is in China, hence the presentation of their financial statements does not really comply with the USGAAP. The Company had insufficient resources to perform the accounting and financial reporting functions and such resources lacked the appropriate level of accounting knowledge, experience and training in the application of accounting principles generally accepted in the United States of America and were inadequately supervised. The lack of sufficient and adequately trained accounting and finance personnel resulted in an ineffective segregation of duties relative to key financial reporting functions.

2.
Accounting Policies and Procedures Weaknesses - The company had inadequate documentation regarding the appropriate application of accounting principles generally accepted in the United States of America, as well inadequate written documentation regarding the Company's accounting policies and procedures and application of those policies and procedures.

3.
Lack of Internal Audit System - The company lacked of internal audit department, which was ineffective in preventing and detecting control lapses and errors in the accounting of certain key areas like revenue recognition, purchase approvals, inter-company transactions, cash receipt and cash disbursement authorizations, inventory safeguard and proper accumulation for cost of products, in accordance with the appropriate costing method used by the company.

The Company has tested the internal control structure and has identified several controls, including those controls listed above as material weaknesses that require further remediation. The Company will continue the implementation of policies, processes and procedures regarding the review of complex, non-routine transactions and the hiring of additional accounting personnel.

Management believes that the controls and procedures will continue to improve as a result of the further implementation of these measures.

The Company’s management has identified the steps necessary to address the material weaknesses existing in 2005 described above, as follows:

1.
Hiring additional accounting and operations personnel and engaging outside contractors with technical accounting expertise, as needed, and reorganizing the accounting and finance department to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex, non-routine transactions are directly involved in the review and accounting evaluation of our complex, non-routine transactions;

2.
Involving both internal accounting and operations personnel and outside contractors with technical accounting expertise, as needed, early in the evaluation of a complex, non-routine transaction to obtain additional guidance as to the application of generally accepted accounting principles to such a proposed transaction;
 
25

 
3.
Documenting to standards established by senior accounting personnel and the principal accounting officer the review, analysis and related conclusions with respect to complex, non-routine transactions; and

4.
Requiring senior accounting personnel and the principal accounting officer to review complex, non-routine transactions to evaluate and approve the accounting treatment for such transactions.

5.
Interviewing prospective new Directors for our Board including a member who is appropriately credentialed as a financial expert with a goal to establish both an Audit and Compensation committee as well as sufficient independent Directors.

6.
Evaluating the internal audit function in relation to the Company’s financial resources and requirements.


The Company will begin to execute the remediation plans identified above in the first fiscal quarter of 2006.

There was no change in our internal control over financial reporting during the year ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, other than the remediation measures which are described above.

Moore Stephens Wurth Frazer and Torbet, LLP (MSFT), our independent registered public accounting firm, has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2005 as stated in their report which appears in this Annual Report on Form 10-K. Since we were unable to complete our assessment of internal control, MSFT has disclaimed an opinion on the effectiveness of our controls.

 
ITEM 9B. OTHER INFORMATION

None.


PART III

ITEM 10. OFFICERS AND DIRECTORS

The following table sets forth the names, ages, and positions of our directors and officers.


Name
Age
Position Held
Officer Since
Director Since
Sun Li
35
Chief Executive Officer, Director
2004
2004
Lawrence Yuen-Ming Lok
45
Chief Financial Officer, Director
2005
2005
Lai Fun Sim
37
Corporate Secretary, Director
2004
2004
Paul Risberg
43
Director
N/A
2004
Pang Jing-Wen
43
Director
N/A
2005
Wing Sze Yau
31
Director
N/A
2004
Shao Guang Tan
44
Director
N/A
2004

The directors named above will serve until the next annual meeting of our stockholders or until their successors are duly elected and have qualified. Directors will be elected for one-year terms at the annual stockholders meeting. Officers will hold their positions at the pleasure of the board of directors, absent any employment agreement. There is no arrangement or understanding between any of our directors or officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current board of directors. There are also no arrangements, agreements or understandings between non-management stockholders that may directly or indirectly participate in or influence the management of our affairs.
 
26

There are no family relationships among the foregoing directors and executive officers. None of the directors or executive officers has, during the past five years: (a) Had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (b) Been convicted in a criminal proceeding or subject to a pending criminal proceeding; (c) been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities, futures, commodities or banking activities; and (d) been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

BIOGRAPHICAL INFORMATION

SUN LI, age 35, is the Chairman of the Board and the Chief Executive Officer. Mr. Sun has been engaged in retail business, motors, real property, internet development, sales and marketing in Beijing, Xing Tai (in Hebei Province), Shanghai and Shenzhen for years. In addition, he has 10 years of experience in China marketing and financial investment in the stock markets of Hong Kong and China. Mr. Sun is the investing shareholder of Shenzhen Dicken Industrial Development Limited. He is recently elected Chairman of the Board and appointed as the Chief Executive Officer ("CEO") of the Company. Since 1999, Mr. Sun has served as the shareholder and Chief Executive Officer of Beijing Heng Fu Plaza Development, Inc. ("Heng Fu"), which is devoted to the construction of a 100,000 m2 multi-purpose commercial plaza in Chao Yang District, Beijing.

LAWRENCE YUEN-MING LOK, age 45, is the Chief Financial Officer of China Energy Savings Technology, Inc. Mr. Lok received his Master’s Degree in Economics (major in Professional Accounting) from Macquarie University, Sydney NSW Australia in 1989. Mr. Lok is an Australian chartered accountant and has over 20 years experience in professional accounting and finance. He has served as a director in Australia and Hong Kong publicly listed companies. Since 2000, Mr. Lok has been the Chief Executive Officer and an Executive Director of CSI Investment Management Limited, a Hong Kong Securities and Futures Commission registered investment advisor.

LAI-FUN SIM, age 37, is the Executive Director and Corporate Secretary. Ms. Sim has completed the Higher Diploma in Translation and Interpretation at the City University. She has over 13 years experience in administration. She has obtained the qualification of Stock Broker and Stock Broker Representative in Hong Kong. She worked for China Convergent Corporation Limited listed on the Nasdaq Stock Market, the Australian Stock Exchange and Frankfurt Stock Exchange, and its subsidiary listed on the Stock Exchange of Hong Kong as Assistant to Chairman for from 1999 through 2001. From 2002 through 2003, she joined China Cable and Communications, Inc. listed on the Nasdaq OTCBB as Assistant to Chairman.

PAUL RISBERG, age 43, is the Non-executive Director. He has over 10 years experience in investment banking and securities market expertise. He currently provides consulting service to numerous small to medium size companies in regards to growth strategies and capital expansion opportunities. From 1998 until 2002, Mr. Risberg served as Divisional Vice President of Fahnestock & Co. (now known as Oppenheimer & Co.), one of oldest New York Stock Exchange firms. Mr. Risberg supervised operations at Fahnestock's Atlanta, Minneapolis, Richmond and Cincinnati offices including compliance, trading, investment banking, new equity issue distribution, branch manager supervision and reporting. Prior to that, Mr. Risberg served as Senior Vice President and Branch Manager of Josephthal & Co., and was instrumental in establishing the firm's Atlanta office in 1995. Since 1995, Mr. Risberg has also conducted extensive research on alternative energy processes including energy audit, photovoltaic array design and construction, wind and hydro energy services.

JING-WEN PANG, age 41, is an Assistant Certified Public Accountant in China. She earned her bachelors degree from the Renmin University of China, majoring in Statistics. She has over 10 years experience in financial management. For the past three years she has been working with Win’s Technology Development Limited (“Win’s) as its Treasurer in Beijing. Prior to joining Win’s, Ms. Pang worked with the Beijing office of Asia Trading Ltd. of Japan as an accounting manager from 1999 to 2002.

WING SZE YAU, age 31, earned her bachelors degree from the Lingnan University majoring in Asia Pacific Studies of Social Science. She has been working as corporate secretary in various companies with over 7 years of experience in business administration. For the past five years she has worked with various Chinese non-profit educational organizations.

SHAO-GUANG TAN, age 44, is a qualified accountant in China. He holds a bachelors degree in foreign trade and economic management. Currently he is the deputy general manager and chief financial officer of Jia Sheng International Consultant (HK) Co., Limited. Prior to this position, and since 1999, he was the general manager and financial controller of Xinhui Auction Limited in Jiangmen City, Guangdong Province. Mr. Tan has over 20 years experience in banking and financial management and has worked with the Guangdong Development Bank.

27

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires our directors and executive officers, and persons who beneficially own more than ten percent of a registered class of our equity securities, to file with the Securities and Exchange Commission (the "Commission") initial reports of beneficial ownership and reports of changes in beneficial ownership of our Common Stock. The rules promulgated by the Commission under Section 16(a) of the Exchange Act require those persons to furnish us with copies of all reports filed with the Commission pursuant to Section 16(a). The information in this section is based solely upon a review of Forms 3, Forms 4, and Forms 5 received by us. Our Chief Executive Officer Sun Li was not able to timely file his Form 5. In addition, the following persons were not able to file their Form 3 within 10 days after he/she was elected an officer or director of the Company or became a more than 10% shareholder of the Company:

NAME
POSITION/SHAREHOLDER
FORM 3 FILED
Sun Li
Chief Executive Officer / Director
November 22, 2005
Lawrence Yuen-Ming Lok
Chief Financial Officer Director
October 13, 2005
Lai Fun Sim
Corporate Secretary, Director
November 14, 2005
Paul Risberg
Director
November 14, 2005
Jing-Wen Pang
Director
October 13, 2005
Shao Guang Tan
Director
November 14, 2005
Wing Sze Yau
Director
October 13, 2005
New Solomon Consultants Ltd.
10% Shareholder
October 20, 2004

CODE OF ETHICS

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Such code of ethics will be provided to any person without charge, upon request. You may request a copy of this code of ethics to be sent as a pdf file to an e-mail address; if you do not have an e-mail address you may request a copy by sending such request to us at our principal office.

AUDIT COMMITTEE FINANCIAL EXPERT

Mr. Shao Guang Tan is the Audit Committee Financial Expert that serves on the Company's audit committee. Mr. Tan is independent, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

AUDIT COMMITTEE

Our Audit Committee is composed of directors Shao Guang Tan, Wing Sze Yau and Jing-Wen Pang.

PROCEDURES FOR NOMINATING DIRECTORS

The Board has created a Nominating Committee and adopted a Nominating Committee Charter. Such charter was filed as an exhibit to our previously filed Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004.


28

ITEM 11. EXECUTIVE COMPENSATION

The following executive compensation disclosure reflects all compensation awarded to, earned by or paid to the executive officers below, for the fiscal years ended September 30, 2005, 2004, and 2003. None of our executive officers received compensation in excess of $100,000 for the fiscal year ended September 30, 2005, and no officer received compensation in excess of $100,000 for the fiscal years 2005, 2004 or 2003, respectively. The following table summarizes all compensation received by our Chief Executive Officer, Chief Financial Officer (former) and Corporate Secretary in fiscal years 2005, 2004 and 2003.


       
Annual Compensation
 
Long-Term Compensation
     
                   
Awards
 
Payouts
 
Name and Principal Position
 
Fiscal
Year
 
Salary
($)
 
Bonus
($)
 
Other Annual Compensation
($)
 
Stock
Award(s)
($)
 
Underlying Options/SARs
($)
 
LTIP
Payouts
($)
 
All Other
Compensation
($)
 
Sun Li (1)
 
2005
 
*
 
--
 
--
 
--
 
--
 
--
 
--
 
Chief Executive
 
2004
 
**
 
--
 
--
 
--
 
--
 
--
 
--
 
Officer
 
2003
 
--
 
--
 
--
 
--
 
--
 
--
 
--
 
                                   
Lawrence Lok (2)
 
2005
 
*
 
--
 
--
 
--
 
--
 
--
 
--
 
Chief Financial
 
2004
 
--
 
--
 
--
 
--
 
--
 
--
 
--
 
Officer
 
2003
 
--
 
--
 
--
 
--
 
--
 
--
 
--
 
                                   
Stella Lai Fun Sim (3)
 
2005
 
*
 
--
 
--
 
--
 
--
 
--
 
--
 
Secretary
 
2004
 
**
 
--
 
--
 
--
 
--
 
--
 
--
 
 
 
2003
 
--
 
--
 
--
 
--
 
--
 
--
 
--
 

---------------------------------------
*None paid as of September 30, 2005.
** None paid as of September 30, 2004.
 
OPTIONS/SAR GRANTS IN FISCAL YEAR ENDED SEPTEMBER 30, 2005
 
We have not granted any options/stock appreciation rights during the fiscal year ended September 30, 2005.

LONG-TERM INCENTIVE PLAN ("LTIP") AWARDS TABLE

We do not currently have a long term incentive plan.

COMPENSATION OF DIRECTORS

We issued 3,000 shares to Mr. Risberg as compensation for serving on our Board. All other board members were not paid any compensation for serving on our Board. We may, at our discretion, reimburse Board members for expenses.

EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

We currently have no employment agreements with any of our executive officers, nor any compensatory plans or arrangements resulting from the resignation, retirement or any other termination of any of our executive officers, from a change-in-control, or from a change in any executive officer's responsibilities following a change-in-control.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Our directors Mr. Shao Guang Tan and Ms. Wing-Sze Yau acted as our compensation committee during our 2005 fiscal year. We have seven Directors, Sun Li, Lawrence Yuen-Ming Lok, Lai Fun Sim, Paul Risberg, Jing-Wen Pang, Shao Guang Tan and Wing Sze Yau. Our directors Sun Li, Lawrence Yuen-Ming Lok and Lai Fun Sim are also Company officers. During the 2005 fiscal year, our compensation committee took no actions regarding the compensation of our Company officers. The Company has no executive or officer incentive compensation programs in either cash, stock, or equity derivatives.

29

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Equity Compensation Plan Information

Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders
None
- - -
None
Equity compensation plans not approved by security holders
1,200,000(1)
- - -
0(1)
Total
1,200,000
- - -
0

(1)
In September 2004, we established the 2004 Equity Incentive Plan ("2004 Plan") with 1,200,000 shares approved and subject to the 2004 Plan. The Board of Directors or a Committee comprised of a member or members of the Board has full authority to administer the 2004 Plan, including but not limited to, the authority to designate eligible persons, grant awards, interpret the Plan and delegate to one or more executive officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. The maximum number of shares that may be issued under the Plan is 1,200,000 shares of our common stock. On September 16, 2004, the Company issued 620,000 shares to a certain qualifying employees and 10,000 shares to non-employee consultants for services rendered under the Plan. In October and November 2004, the Company issued 470,000 shares to non-employee consultants of its common stock at $11.00 and $13.15 per share. The total shares were valued at $5,256,000, the closing price of the stock at the date the shares were issued. On April 15, 2005, the Company issued 100,000 shares to non-employee consultants and an employee of its common stock at 10.00 a share for services performed. The total shares were valued at $996,697.


The following table sets forth certain information regarding beneficial ownership of our common stock as of December 14, 2005, determined in accordance with Rule 13d-3 and 13d-5 of the Exchange Act by (i) each person who is known by us to own beneficially more than five percent (5%) of the outstanding shares of our voting securities, (ii) each of our directors and officers, and (iii) all of our directors and executive officers as a group. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investing power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable community property laws.

Title of Class
 
Name and address
of beneficial owner (1)
 
Amount and nature
of beneficial ownership
 
Percent of class
Common
 
Sun Li
 
16,005,134
 
62.96
%
 
 
CEO and Director
         
Common
 
Lawrence Yuen-Ming Lok
 
0
 
0
%
 
 
CFO
         
Common
 
Lai Fun Sim
 
10,000
 
*
%
 
 
Corporate Secretary and
         
 
 
Director
         
Common
 
Jing-Wen Pang
 
0
 
0
%
 
 
Director
         
Common
 
Paul Risberg
 
3,000
 
*
%
 
 
Director
         
Common
 
Wing Sze Yau
 
0
 
0
%
 
 
Director
         
Common
 
Shao Guang Tan
 
0
 
0
%
 
 
Director
         
Common
 
New Solomon Consultants Ltd.
 
16,005,134
 
62.96
%
All officers and directors as a group
 
16,018,134
 
63.02
%
________________________
* less than 1%.

30

 
(1)
The address for all officers and directors is Central Plaza, 18 Harbour Road, Suite 3203A, 32nd Floor, Hong Kong, China, unless otherwise indicated.

(2)
Sun Li indirectly owns 16,005,134 shares through sole ownership of Able Stars Enterprises Ltd., which owns 55% of New Solomon Consultants Limited, which owns 16,005,134 shares.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


As of September 30, 2005, the due from related a party amounted to US$123,602. A majority of this amount was generated from making cash advances to the shareholders for ordinary business expenses. In addition, certain shareholders had collected the payments on receivables on the Company's behalf from the customers and those payments had not been repaid to the Company by September 30, 2005 timely. Those amounts are unsecured, interest free and have no fixed terms of repayment.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

The aggregate fees billed for each of Fiscal Year 2004 and Fiscal Year 2005 for professional services rendered by our principal accountants for the audit of our annual financial statements, review of financial statements included in our Form 10-QSBs and other services provided by the accountant in connection with statutory and regulatory filings are as follows:

Fiscal Year 2004: $150,000;
Fiscal Year 2005: $138,000


AUDIT RELATED FEES

The aggregate fees billed for each of Fiscal Year 2003 and Fiscal Year 2004 for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financials statements are as follows:

Fiscal Year 2004: $0;
Fiscal Year 2005: $32,862

31

TAX FEES

The aggregate fees billed for each of Fiscal Year 2003 and Fiscal Year 2004 for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning are as follows:

Fiscal Year 2004: $0; $7,000
Fiscal Year 2005: $0; $7,000

ALL OTHER ACCOUNTANT FEES

The aggregate fees billed for each of Fiscal Year 2003 and Fiscal Year 2004 for other professional services rendered by our principal accountants are as follows:

Fiscal Year 2004: $0;
Fiscal Year 2005: $0.


PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES

The following documents are filed as part of this report:
 
(1)  Financial Statements - See Index to Consolidated Financial Statements on page 34 of this report.

(2)  Exhibits - See Index to Exhibits.

Index of Exhibits

Exhibit
Number
 
 
Description
 
 
 
3.1
 
Certificate of Incorporation (2)
3.2
 
Bylaws (2)
10.1
 
Agreement and Plan of Share Exchange dated November 16, 2004 by and between Eurofaith Holdings, Inc. and China Energy Savings Technology, Inc. (1)
10.2
 
Agreement and Plan of Share Exchange dated February 1, 2005 by and between Sky Beyond Investments Limited and China Energy Savings Technology, Inc. (3)
10.3
 
China Energy Savings Technology, Inc. 2004 Equity Incentive Plan (4)
14
 
Code of Business Ethics (5)
21
 
Subsidiaries of Registrant (5)
23.1
 
Consent of Moore Stephens LLP(6)
31.1
 
Certification of Chief Executive Officer Pursuant to 302 of the Sarbanes-Oxley Act of 2002 (6)
31.2
 
Certification of Chief Financial Officer Pursuant to 302 of the Sarbanes-Oxley Act of 2002 (6)
32.1
 
Certification of Chief Executive Officer Pursuant to 906 of the Sarbanes-Oxley Act of 2002 (6)
32.2
 
Certification of Chief Financial Officer Pursuant to 906 of the Sarbanes-Oxley Act of 2002 (6)
___________

(1)
Previously filed with the Securities and Exchange Commission as Exhibit 10.1 to the Company's Current Report on Form 8K filed on November 18, 2004 and incorporated herein by reference.
(2)
Previously filed with the Securities and Exchange Commission as an exhibit to the Registration Statement on Form 10 filed on July 11, 2000 and incorporated herein by reference.
(3)
Previously filed with the Securities and Exchange Commission as Exhibit 10.1 to the Company's Current Report on Form 8K filed on February 4, 2005 and incorporated herein by reference.
(4)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form S-8 filed with the U.S. Securities and Exchange Commission on September 17, 2004.
(5)
Previously filed with the Securities and Exchange Commission as an exhibit to the Form 10-KSB filed with the U.S. Securities and Exchange Commission on January 13, 2005.
(6)
Filed herewith.

[SIGNATURES PAGE FOLLOWS]

32

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
CHINA ENERGY SAVINGS TECHNOLOGY, INC.
(Registrant)
  
  
  
Date:  December 20, 2005
By:  
/s/ Sun Li
 
Sun Li
Chief Executive Officer
 
 
 
 
  
  
  
Date:  December 20, 2005
By:  
/s/ Lawrence Lok Yuen-Ming
 
Lawrence Lok Yuen-Ming
Chief Financial Officer

In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
Name
 
 
Title
Date
/s/ Sun Li      
Sun Li
 
Chief Executive Officer / Director
December 20, 2005
       
/s/ Lawrence Yuen-Ming Lok      
Lawrence Yuen-Ming Lok
 
Chief Financial Officer / Director
December 20, 2005
       
/s/ Lai Fun Sim      
Lai Fun Sim
 
Corporate Secretary / Director
December 20, 2005
       
/s/ Jing-Wen Pang
     
Jing-Wen Pang
 
Director
December 20, 2005
       
/s/ Shao Guang Tan      
Shao Guang Tan
 
Director
December 20, 2005
       
/s/ Wing Sze Yau      
Wing Sze Yau
 
Director
December 20, 2005
 

33




INDEX TO FINANCIAL STATEMENTS

         

   
PAGE
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
F-2
 
 
CONSOLIDATED BALANCE SHEETS
 
   
AS OF SEPTEMBER 30, 2005 AND 2004 AND DECEMBER 31, 2003
 
F-6
 
       
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 
   
(LOSS) FOR THE YEAR ENDED SEPTEMBER 30, 2005 AND NINE MONTHS ENDED
 
   
SEPTEMBER 30, 2004 AND THE YEARS ENDED DECEMBER 31, 2003 AND 2002
 
F-7
 
 
 
   
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED
 
   
SEPTEMBER 30, 2005 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND
 
   
THE YEARS ENDED DECEMBER 31,2003 AND 2002
 
F-8
 
 
 
   
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30,
 
   
2005 AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND THE YEARS ENDED
 
   
DECEMBER 31, 2003 AND 2002
 
F-9
 
 
 
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
F-10
 






F-1


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of China Energy Savings Technology, Inc

We have audited the accompanying consolidated balance sheets of China Energy Saving Technology, Inc. and Subsidiaries (the Company) as of September 30, 2005 and 2004, and the related consolidated statements of income and other comprehensive income (loss), shareholders’ equity and cash flows for the year ended September 30, 2005 and the nine months ended September 30, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The financial statements of Starway Management Limited as of December 31, 2003 and 2002, the acquirer of China Energy Savings Technology, Inc., as explained in note 1 in the accompanying financial statements were audited by other auditors whose report dated January 29, 2004 expressed an unqualified opinion on those statements.

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 audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Energy Saving Technology, Inc. and subsidiaries as of September 30, 2005 and 2004, and the results of their operations and cash flows for the year ended September 30, 2005 and the nine months ended September 30, 2004 in conformity with accounting principles generally accepted in the United States of America.

We were engaged to audit, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of September 30, 2005, and our report dated December 14, 2005 disclaimed an opinion on both management's assessment of the effectiveness of the Company's internal control over financial reporting and on the effectiveness of the Company's internal control over financial reporting because of the effects of a scope limitation.
 
 
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
Walnut, California
December 14, 2005

 
F-2

 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 
To the Board of Directors of
China Energy Savings Technology, Inc

We were engaged to audit management's assessment regarding the effectiveness of internal control over financial reporting of China Energy Savings Technology, Inc. and Subsidiaries (the Company) as of September 30, 2005, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company's management is responsible for maintaining effective internal control over financial reporting and assessing the effectiveness of internal control over financial reporting.

Management of the Company was unable to complete their assessment of internal control over financial reporting as of September 30, 2005 and due to that scope limitation we were unable to perform any procedures required in an audit of internal control over financial reporting or an audit of management's assessment of the effectiveness of internal control over financial reporting.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
F-3



A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses in internal control have been identified by management and are discussed in Management's Report on Internal Control over Financial Reporting.

-  
Accounting and Finance Personnel Weaknesses - The Company had insufficient resources to perform the accounting and financial reporting functions and such resources lacked the appropriate level of accounting knowledge, experience and training in the application of accounting principles generally accepted in the United States of America and were inadequately supervised. The lack of sufficient and adequately trained accounting and finance personnel resulted in an ineffective segregation of duties relative to key financial reporting functions.

-  
Accounting Policies and Procedures Weaknesses - The company had inadequate documentation regarding the appropriate application of accounting principles generally accepted in the United States of America, as well inadequate written documentation regarding the Company's accounting policies and procedures and application of those policies and procedures.

-  
Lack of Internal Audit System - The company lacked of internal audit department, which was ineffective in preventing and detecting control lapses and errors in the accounting of certain key areas like revenue recognition, purchase approvals, inter-company transactions, cash receipt and cash disbursement authorizations, inventory safeguard and proper accumulation for cost of products, in accordance with the appropriate costing method used by the company.

Since management was unable to complete their assessment of internal control over financial reporting, we are unable to express, and we do not express, an opinion either on management's assessment or on the effectiveness of the Company's internal control over financial reporting.

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of September 30, 2005 and 2004, and the related consolidated statements of income and comprehensive income (loss), changes in shareholders' equity and cash flows for the year ended September 30, 2005 and the nine months ended September 30, 2004 and our report dated December 14, 2005 expressed an unqualified opinion on those statements. The fact that management was unable to complete their assessment of internal control over financial reporting was considered in determining the nature, timing and extent of audit tests applied in our audit of the consolidated financial statements, and this report does not affect our report on those financial statements.

 

/s/ Moore Stephens Wurth Frazer and Torbet, LLP
Walnut, California
December 14, 2005

 
F-4

 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors of:
China Energy Savings Technology, Inc.


We have audited the accompanying consolidated balance sheet of Starway Management Limited and subsidiaries as of December 31, 2003 and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for the two years ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the 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 financial statements are free of material misstatement. As audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of Starway Management Limited and subsidiaries as of December 31, 2003 and the results of its operations and its cash flows for the two years ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America.




/s/ WEBB & COMPANY, P.A.

Boynton Beach, Florida
January 29, 2004

 
F-5

 

CHINA ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS RIM HOLDINGS, INC.)
               
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 AND 2004 AND DECEMBER 31, 2003
               
A S S E T S
             
   
September 30
 
December 31
 
   
2005
 
2004
 
2003
 
   
Audited
 
Audited
 
Audited
 
CURRENT ASSETS:
             
Cash
 
$
30,926,619
 
$
18,442,862
 
$
21,165
 
Accounts receivable, trade, net of allowance for doubtful
   
6,471,689
   
6,580,525
   
4,304,134
 
accounts of $768,151 and $768,151 as of September 30, 2005 and  
                   
2004, respecitvely, and $766,710 as of December 31, 2003 
                   
Current maturities of notes receivable, net
   
9,744,786
   
3,727,540
   
2,201,523
 
Inventories
   
1,584,213
   
4,329,552
   
533,453
 
Prepaid expenses
   
1,890,688
   
1,529,955
   
71,582
 
Due from related party
   
123,602
   
1,257,130
   
 
Total current assets 
   
50,741,597
   
35,867,564
   
7,131,857
 
                     
PLANT AND EQUIPMENT, net
   
443,600
   
528,344
   
750,266
 
 
                   
OTHER ASSETS:
                   
Long-term loan receivable
   
1,857,000
   
   
 
Long-term notes receivable, net
   
21,166,175
   
7,087,692
   
12,743,550
 
Other receivables
   
419,859
   
778,880
   
252,700
 
Intangible asset, net
   
   
   
227,627
 
Other assets
   
77,743
   
   
 
Total other assets 
   
23,520,777
   
7,866,572
   
13,223,877
 
 
                   
 Total assets
 
$
74,705,974
 
$
44,262,480
 
$
21,106,000
 
                     
L I A B I L I T I E S    A N D    S H A R E H O L D E R S'    E Q U I T Y
                   
                     
CURRENT LIABILITIES:
                   
Accounts payable and accrued expenses
 
$
1,442,931
 
$
2,719,554
 
$
2,789,735
 
Current portion note payable
   
11,874
   
12,799
   
12,536
 
Other payables
   
201,391
   
551,528
   
 
Loans payable - related parties
   
   
   
95,578
 
Customer deposits
   
1,858,452
   
1,752,216
   
83,967
 
Taxes payable
   
4,849,550
   
1,892,676
   
4,854,221
 
Total current liabilities 
   
8,364,198
   
6,928,773
   
7,836,037
 
                     
LONG-TERM LIABILITIES:
                   
Note payable, net
   
   
7,895
   
17,440
 
                     
Total liabilities 
   
8,364,198
   
6,936,668
   
7,853,477
 
                     
MINORITY INTEREST
   
   
18,662,906
   
6,633,436
 
                   
SHAREHOLDERS' EQUITY:
                 
Common stock, $0.001 par value, 50,000,000 shares authorized,
                   
24,699,753 (2005), 12,968,401(2004) and 12,338,401(2003) shares issued and outstanding 
   
24,700
   
12,968
   
12,338
 
Additional paid-in capital
   
36,889,732
   
8,655,339
   
654,339
 
Statutory reserves
   
324,583
   
324,583
   
324,583
 
Retained earnings
   
32,082,555
   
9,666,676
   
5,642,184
 
Deferred compensation
   
(4,379,203
)
 
   
 
Accumulated other comprehensive income (loss)
   
1,399,409
   
3,340
   
(14,357
)
Total shareholders' equity 
   
66,341,776
   
18,662,906
   
6,619,087
 
 Total liabilities and shareholders' equity
 
$
74,705,974
 
$
44,262,480
 
$
21,106,000
 
 
 
The accompanying notes are integral part of this statement.
F-6

 
CHINA ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS RIM HOLDINGS, INC.)
                   
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED SEPTEMBER 30, 2005, NINE MONTHS ENDED SEPTEMBER 30, 2004
AND THE YEARS ENDED DECEMBER 31, 2003 AND 2002
                   
   
Year ended
 
Nine months ended
 
Year ended December 31
 
   
9/30/2005
 
9/30/2004
 
2003
 
2002
 
   
Audited
 
Audited
 
Audited
 
Audited
 
       
Restated
 
Restated
 
Restated
 
REVENUES
 
$
48,388,076
 
$
30,997,070
 
$
31,057,877
 
$
7,914,658
 
                           
COST OF GOOD SOLD
   
19,928,707
   
11,640,973
   
19,748,263
   
4,989,797
 
                           
GROSS PROFIT
   
28,459,369
   
19,356,097
   
11,309,614
   
2,924,861
 
                           
OPERATING EXPENSES
                         
Operating expense 
   
1,996,375
   
1,538,220
   
155,780
   
225,589
 
Selling, general and administrative expenses 
   
2,887,754
   
8,848,447
   
1,983,248
   
898,507
 
 Total Operating Expenses
   
4,884,129
   
10,386,667
   
2,139,028
   
1,124,096
 
                           
INCOME FROM OPERATIONS
   
23,575,240
   
8,969,430
   
9,170,586
   
1,800,765
 
                           
OTHER INCOME (EXPENSE)
                         
Interest income 
   
1,839,409
   
2,202,122
   
1,607,373
   
389,253
 
Interest expense 
   
(6,496
)
 
(3,086
)
 
(573
)
 
(118
)
Other income (expense) 
   
6,320
   
25,506
   
   
(933
)
Other income 
   
260,189
   
2,680
   
10,375
   
 
 Total Other Income
   
2,099,422
   
2,227,222
   
1,617,175
   
388,202
 
                           
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
   
25,674,662
   
11,196,652
   
10,787,761
   
2,188,967
 
                           
CREDIT (PROVISION) FOR INCOME TAXES
   
   
4,853,332
   
(1,879,896
)
 
(401,086
)
                           
INCOME BEFORE MINORITY INTEREST
   
25,674,662
   
16,049,984
   
8,907,865
   
1,787,881
 
                           
MINORITY INTEREST
   
3,258,783
   
12,025,492
   
4,453,933
   
893,940
 
                           
NET INCOME
   
22,415,879
   
4,024,492
   
4,453,932
   
893,941
 
                           
OTHER COMPREHENSIVE INCOME (LOSS):
                         
Foreign currency translation adjustment 
   
1,396,069
   
17,697
   
(12,074
)
 
1,544
 
COMPREHENSIVE INCOME
 
$
23,811,948
 
$
4,042,189
 
$
4,441,858
 
$
895,485
 
                           
Net income per share - basic and diluted
 
$
1.04
 
$
0.36
 
$
0.40
 
$
0.08
 
                           
Weighted average number of shares outstanding - basic and diluted
   
21,524,371
   
11,327,720
   
11,153,669
   
11,153,669
 
 
The accompanying notes are integral part of this statement.
F-7

 
CHINA ENERGY SAVINGS TECHNOLOGY, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS RIM HOLDINGS, INC.)
                                       
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30,2005, NINE MONTHS ENDED SEPTEMBER 30, 2004 AND
AND THE YEAR ENDED DECEMBER 31, 2003
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
other
 
 
 
 
 
 
 
 
 
Number
 
Common
 
Paid-in
 
Retained
 
Statutory
 
comprehensive
 
Subscription
 
Deferred
 
 
 
 
 
of shares
 
stock
 
capital
 
Earnings
 
Reserves
 
income (loss)
 
Receivable
 
Compensation
 
Totals
 
BALANCE, December 31, 2002
   
12,338,401
 
$
12,338
 
$
654,328
 
$
1,183,347
 
$
329,488
 
$
(2,283
)
$
(303,030
)
$
-
 
$
1,874,188
 
Cash received from subscription receivable
                                       
303,030
         
303,030
 
Contributed capital by stockholders
               
11
                                 
11
 
Foreign currency translation adjustments
                                 
(12,074
)
             
(12,074
)
Net income
                     
4,453,932
                           
4,453,932
 
Statutory reserves
                     
4,905
   
(4,905
)
                   
-
 
BALANCE, December 31, 2003
   
12,338,401
   
12,338
   
654,339
   
5,642,184
   
324,583
   
(14,357
)
 
-
         
6,619,087
 
Foreign currency translation adjustments
                                 
17,697
               
17,697
 
Issued S-8 stock of 630,000 shares
   
630,000
   
630
   
8,001,000
                                 
8,001,630
 
Net income
                     
4,024,492