-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FWzX6djpdfX1Exng2zWB6De4JlK4GMFs4QAtwW+JIaEpN0doM13HNwtwHEDxfJBF 6czW4M8HDxPwuQN3vbns8A== 0001144204-05-017538.txt : 20050611 0001144204-05-017538.hdr.sgml : 20050611 20050527171907 ACCESSION NUMBER: 0001144204-05-017538 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 20050527 DATE AS OF CHANGE: 20050527 FILER: COMPANY DATA: COMPANY CONFORMED NAME: China International Enterprises Corp. CENTRAL INDEX KEY: 0001315756 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 202188353 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-123031 FILM NUMBER: 05864919 BUSINESS ADDRESS: STREET 1: NO. 5 FLOOR 6, BLOCK A, SKYWORTH BLDG. STREET 2: HI-TECH INDUSTRIAL PARK, NANSHAN DISTRIC CITY: SHENZHEN STATE: F4 ZIP: 518057 BUSINESS PHONE: 212-232-0120 MAIL ADDRESS: STREET 1: 100 WALL STREET, 15TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10005 SB-2/A 1 v017947_sb2a.txt Registration No. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 China International Enterprises Corp. (Name of small business issuer in its charter)
Delaware 5045 20-2188353 (State or Jurisdiction of (Primary Standard Industrial (IRS Employer Identification Incorporation or Organization) Classification Code Number) Number)
100 Wall Street, 15th Floor New York, New York 10005 (212) 232-0120 (Address and telephone number of principal executive offices) No.5 Floor 6, Block A, Skyworth Building Hi-tech Industrial Park, Nanshan District, Shenzhen, 518057, P.R. China (Address of principal place of business or intended principal place of business) Norman Fuchs 100 Wall Street, 15th Floor New York, New York 10005 (212) 232-0120 (Name, address and telephone number of agent for service) Copies of communications to: Darren Ofsink, Esq. Guzov Ofsink, LLC 600 Madison Avenue, 14th Floor New York, New York 10022 (212) 371-8008 Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the offering. |_| If this Form is post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_| Calculation of Registration Fee - -------------------------------------------------------------------------------- Title of each class of Amount to Proposed maximum Proposed maximum Amount of securities to be be offering price aggregate registration registered registered per unit offering price fee - -------------------------------------------------------------------------------- $.001 par value 3,600,000 $.10 (2) $360,000 (2) $127.12 (3) per share common stock (1) (1) Relates to the resale by the Selling Stockholders identified herein of up to 3,600,000 shares of our Common Stock issued in private placement transactions. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. As of the date hereof, there is no established public market for the common stock being registered. We and the Selling Stockholders have agreed that the selling stockholders will sell at a fixed price of $.10 per share for the duration of the offering. In the event that, following conclusion of the offering, our Common Stock is quoted on the OTC Bulletin Board or other interdealer or quotation system, or listed for trading on a stock exchange, then, at such time, the Selling Stockholders may sell any shares not sold in the offering at prevailing market prices pursuant to Rule 144 or another available exemption from registration. (3) The registration fee was paid when the preliminary registration statement was filed on February 28, 2005. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. (iii) China International Enterprises Corp. 3,600,000 Shares Common Stock ------------------- This Prospectus relates to the resale of 3,600,000 shares of our common stock, par value $.001 per share, ("Common Stock") by the selling stockholders listed on page 15 of this prospectus (referred to herein as the "Selling Stockholders"). The Selling Stockholders, by themselves or through brokers and dealers, are offering the shares at the fixed price of $.10 a share. We will not receive any proceeds from the Selling Stockholders' resale of the shares of Common Stock. The Selling Stockholders will receive all proceeds from such sales. The Selling Stockholders reserve the right to accept or reject, in whole or in part, any proposed purchase of shares. Accordingly, the Selling Stockholders will determine the amount of any applicable underwriting discounts and commissions and the net proceeds at the time of any sale. The Selling Stockholders will pay any underwriting discounts and commissions. The Selling Stockholders and the brokers through whom sales of the securities are made will be "underwriters" within the meaning of Section 2(11) of the Securities Act of 1933, as amended, referred to herein as the "Securities Act". Our Common Stock is not publicly traded. An application has been filed with the National Association of Securities Dealers, Inc. for the quotation of our Common Stock on the OTC Bulletin Board, but there is no assurance that the our Common Stock will be quoted on the OTC Bulletin Board or other interdealer or other quotation system or listed on any stock exchange. Investing in our Common Stock involves a high degree of risk. See "Risk Factors" beginning on page 5. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information from that contained in this prospectus. The Selling Stockholders are offering to sell and seeking offers to buy shares of our Common Stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our Common Stock. (i) The date of this prospectus is ___________ No person is authorized in connection with this prospectus to give any information or to make any representations about us, the Selling Stockholders, the securities or any matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us or any selling stockholder. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy the securities in any circumstances under which the offer or solicitation is unlawful. Neither the delivery of this prospectus nor any distribution of securities in accordance with this prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this prospectus. TABLE OF CONTENTS Page No. -------- Prospectus Summary 1 Risk Factors 6 Cautionary Note Regarding Predictive Statements 14 Use of Proceeds 14 Determination of Offering Price 14 Selling Stockholders 15 Business 16 Decription Of Property 37 Selected Financial Data 38 Management's Discussion andAnalysis of Financial Condition and Results Of Operations 39 Security Ownership of Certain Beneficial Owners and Management 44 Directors and Executive Officers, Promoters and Control Persons 45 Executive Compensation 48 Certain Relationships and Related Party Transactions 48 Plan of Distribution 49 Description Of Securities 50 Market Price of and Dividends on our Common Equity and Related Stockholder Matters 52 Legal Proceedings 53 Changes in and Disagreements with Accountants 54 Indemnification of Directors and Officers 54 Legal Matters 55 Experts 55 Financial Statements 55 Where You Can Find More Information 56 (ii) PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus, including "Risk Factors" and the consolidated financial statements and the related notes before making an investment decision. OUR COMPANY On January 31, 2005, China International Enterprises Corp. ("we," "us" or the "Company") entered into a Capital Stock Exchange Agreement pursuant to which we acquired 100% of the outstanding stock of Heng Xing Technology Group Development Limited, a British Virgin Islands corporation which we refer to as "XHT." XHT's only asset is 100% of the stock of Shenzhen Hengtaifeng Technology Co., Ltd., a People's Republic of China ("PRC") corporation we refer to as "HTF." HTF is classified as a wholly-owned foreign enterprise under PRC law by virtue of its ownership by XHT. As a wholly-owned foreign enterprise, HTF can engage in the same business activities as any PRC corporation, without restriction. The result of the above transactions, as set forth in the following diagram, is that XHT is now our direct wholly-owned subsidiary, and HTF remains a wholly-owned subsidiary of XHT. China International Enterprises Corp. | 100% Heng Xing Technology Group Development Limited | 100% Shenzhen Hengtaifeng Technology Co., Ltd. Neither we nor XHT have any operations or plan to have any operations in the future other than acting as a holding company and management company for HTF and raising capital for its operations. 1 Our business is conducted entirely through our operating subsidiary, HTF. HTF is a Chinese software producer which currently markets its products and services exclusively within the PRC. HTF's products are highly specialized applications software which are designed for use in targeted industries and are developed to meet the specified needs of certain of HTF's customers. Once developed, we may seek to market our products to other customers in the same or similar industries. To date, HTF has developed and sold four types of applications software: housing accumulation fund software, credit guarantee software, family planning software and property management software. HTF provides its customers with related systems integration and training services in support of our proprietary products at no additional charge. In addition, we also market certain other companies' software products as a value-added reseller; in such cases, we provide and charge for installation and related systems integration services. Housing Accumulation Fund software provides information management and sharing capabilities to a variety of groups of participants in China's Housing Accumulation Fund program, a social welfare program funded by contributions from workers and their employers which provides employees with savings accounts intended to enable them to purchase housing. The program was instituted in 1991 by the PRC Ministry of Construction and is administered by regional Housing Accumulation Fund Centers, which in turn are under the supervision of local governments, the Ministry of Construction and the Ministry of Finance. HTF's Housing Accumulation Fund software is available in four versions, which are tailored for use by different levels of participants in the program; a "User" version, which enables the contributing employers and employees to submit and retrieve information regarding the accounts; a "Center" version for use by the local and regional branches which administer the program and manage the contributed funds; a "Bank" version, for use by the commercial banks where the funds are deposited and held; and a Supervisor's version, designed for use by the government agencies which supervise the regional Centers. Sales of Housing Accumulation Fund software accounted for approximately 64% of HTF's revenues in 2004. HTF's Credit Guarantee software is designed to provide an information management and record-keeping system for organizations which provide credit guarantees to enterprises seeking to borrow money. China's Credit Guarantee System was established by the National Economic and Trading Commission in 1999 in order to facilitate the financing of small and medium-sized enterprises ("SMEs"), which have difficulty obtaining bank loans. The government-sponsored Credit Guarantee System supplements the existing commercial credit guaranty industry, which is composed of various for-profit commercial enterprises. Under the Credit Guarantee System, government-funded local and regional agencies and non-profit organizations provide guarantees to enable SMEs to obtain loans. HTF's software, which was developed at the request of one such local agency, provides a means of collecting and organizing data from SMEs and performs risk management functions, such as financial analysis, credit evaluation and risk estimation. The software is marketed for use both by participants in the government sponsored system and by private, commercial credit guarantors. Sales of Credit Guaranty software accounted for 9% of HTF's revenues in 2004. 2 HTF's property management software was developed as "custom" products designed specifically for use by certain of HTF's Housing Fund Accumulation software customers and related parties. To date, it has been sold only on an occasional basis and has not generated significant amounts of revenues. Customers currently using HTF's property management software include four government property management bureaus, one commercial real estate developer and one real estate agent. The primary function of HTF's property management software is to provide users with access to official government property ownership and use rights registries and enable them to search the databases for records on file. We hope to be able to market our property management software to real estate exchange centers, commercial property management companies, government property management bureaus, real estate developers and real estate agents in the future. No property management software was sold by HTF in 2004; accordingly; there were no revenues generated by this product line in 2004. Family planning software is HTF's newest line of products. HTF began developing this product in 2003 for use by government family planning management departments, public education organizations and nonprofit family planning associations, and recently completed its first sales of the software. HTF's family planning software is designed for use in connection with the national network for disseminating family planning information which has been established pursuant to a mandate by the PRC government. The product creates a large-scale, networked database that can be accessed by users. Its functional capabilities include data collection and processing, statistical reporting, search engine features, an "early warning" system for monitoring rapid population increases and system maintenance. Sales of family planning software accounted for 4% of revenues in 2004. In addition to our four lines of proprietary software products, we also offer software products made by other manufacturers as a value-added reseller. In such cases, we provide installation, configuration and related systems integration services. We currently market products made by two other companies: Lenovo, which is the largest information technology company in China, and Microsoft(R) sales of such products and services accounted for 23% of revenues in 2004. THE OFFERING This prospectus relates to the resale by the Selling Stockholders named on page 15 of up to an aggregate of 3,600,000 shares of our Common Stock. 1,800,000 of the shares were acquired by three Selling Stockholders under a Capital Stock Exchange Agreement, dated as of January 31, 2005, pursuant to which we acquired all of the issued and outstanding stock XHT (referred to as the "Share Exchange Agreement"). 650,000 shares were issued to American Union Securities, Inc. as partial payment for financial and strategic consulting services provided to us pursuant to an engagement letter dated November 24, 2004. The engagement letter contemplates the provision by American Union Securities, Inc. of financial and strategic consulting and investment banking services related to the Share 3 Exchange Agreement and to this offering, including advice regarding our capitalization, mergers, acquisitions and similar transactions and assistance in procuring financing. 610,000 shares were issued to Warner Technology and Investment Corp. as partial payment for certain services provided to us, including assistance in preparing our business plan, introductions to our U.S. accountants and counsel and assistance with our application for listing our Common Stock on the OTC Bulletin Board. The 1,800,000 shares of our Common Stock which were issued pursuant to the Share Exchange Agreement were issued in reliance upon an exemption from Registration provided by Regulation S under the Securities Act for shares issued to non-U.S. persons. We issued the remaining 1,800,000 shares in reliance upon an exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act for private transactions. MARKET FOR OUR SECURITIES There is no public market for our Common Stock and a public market may never develop. While we intend to seek a market maker to apply for quotation of our Common Stock on the OTC Bulletin Board, we may not be successful in our efforts, and owners of our Common Stock may not have a market in which to sell our shares. Even if our Common Stock is quoted or listed for trading in a market, there may never be substantial activity in such market and, if there is substantial activity, such activity may not be maintained and no prediction can be made as to what prices may prevail in such market. SALES BY SELLING STOCKHOLDERS The Selling Stockholders may offer our Common Stock pursuant to this prospectus in varying amounts and transactions so long as we have not withdrawn this prospectus and it is current under the rules of the Securities and Exchange Commission (the "Commission"). The offering of Common Stock may be through the facilities of the OTC Bulletin Board (if a market maker successfully applies for quotation of our Common Stock) or another reporting system or stock exchange where our Common Stock may be quoted or traded. Brokerage commissions may be paid or discounts allowed in connection with such sales; however, it is anticipated that the discounts allowed or commissions paid will be no more than the ordinary brokerage commissions paid on sales through brokers or dealers. To our knowledge, as of the date hereof, no one has made any arrangements with a broker or dealer concerning the offer or sale of the Common Stock. See "Plan of Distribution." Our Common Stock is not quoted or listed for trading on any quotation system or securities exchange and there presently is no public market for our Common Stock. OUTSTANDING SECURITIES As of January 31, 2005, there were 10,800,000 shares of our Common Stock issued and outstanding. 4 An investment in our Common Stock is subject to the risk factors set forth below under the heading "Risk Factors" among others. You should carefully review these Risk Factors before making an investment in our Common Stock. SUMMARY FINANCIAL DATA The following table presents summary consolidated financial data of XHT and HTF for the fiscal year ended December 31, 2004 and summary financial data of HTF for the fiscal years ended December 31, 2003 and December 31, 2002. We derived the summary financial data as of December 31, 2004 and for the year then ended from the consolidated financial statements of XHT as of December 31, 2004 and for the year then ended that are included elsewhere in this prospectus. We derived the summary financial data as of December 31, 2003 and for the year then ended from the financial statements of HTF as of December 31, 2003 and for the year then ended that are included elsewhere in this prospectus. We derived the summary financial data as of December 31, 2002 and for the year ended from the audited financial statements of HTF as of December 31, 2002 and for the year then ended, which are not included in this prospectus. We have not included any summary financial data for the Company, as it was not formed until January 31, 2005. You should read the following summary financial data in conjunction with the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. Fiscal Year Ended ----------------- December 31, ------------ 2004 2003 2002 ----------- ----------- ----------- Net revenues $ 1,373,079 $ 2,206,757 $ 480,295 Income (loss) from operations (131,711) 603,101 (185,224) Net income 45,783 707,653 (247,036) Total assets 1,963,600(1) 2,820,574(2) 1,453,214(3) Total liabilities 296,628(1) 1,201,779(2) 542,756(3) - ---------- (1) As at December 31, 2004 (2) As at December 31, 2003 (3) As at December 31, 2002 Our reporting currency is the U.S. dollar. We use the local currency in the PRC, the Renminbi ("RMB"), as our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the end of period exchange rates. As of February 24, 2005, U.S. $1 = RMB 8.2765. 5 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks described below in conjunction with other information and our consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision. You should pay particular attention to the fact that we conduct our operations in the People's Republic of China and are governed by a legal and regulatory environment that in some respects differs significantly from the environment that may prevail in other countries that you may be familiar with. Our business, financial condition or results of operations could be affected materially and adversely by any or all of these risks. Risks Related to Our Business - ----------------------------- We Face Competition In Our Industry. We face increasing competition in our industry of developing and marketing software and providing systems integration and related services. A large number of new software competitors enter the Chinese software market each year. Competition is based primarily on price and quality. While we intend to maintain or improve our competitive position through constant improvements in our products, services and operational efficiencies, we cannot assure you that we will be able to do so. Our Limited Operating History May Not Serve As An Adequate Basis To Judge Our Future Prospects and Results of Operations, Making Our Business Prospects More Difficult to Evaluate. We began operations in 1995. Our limited operating history may not provide a meaningful basis on which to evaluate our business. This means that our historical results may serve as a poor indicator of our future prospects, and investors may find it more difficult to evaluate our prospects. Our Inability to Fund Our Capital Expenditure Requirements May Adversely Affect Our Growth and Profitability. Our continued growth is dependent upon our ability to raise capital from outside sources. We believe that in order to successfully execute our business plan, we will need at least $5 million of additional capital in the 12-18 months following the date of this prospectus. $1.5 million of this amount will be used to develop our existing business, including the purchase of fixed assets, research and development, software upgrading and testing, marketing and promotion and the hiring of additional employees. The balance would be used as consideration for acquisitions of complementary businesses. We intend to raise the needed financing through sales of our securities. We cannot assure that we will be able to obtain the necessary financing on a timely basis and on acceptable terms, and our failure to do so may adversely affect our financial position, competitive position, growth and profitability. Our ability to obtain acceptable financing at any time may depend on a number of factors, including: 6 o our financial condition and results of operations, o the condition of the PRC economy and the computer software industry in the PRC, and o conditions in relevant financial markets in the U.S., the PRC and elsewhere in the world. The Company will not receive any of the proceeds from sales of our Common Stock pursuant to this Prospectus. We May Not Be Able to Effectively Control and Manage Our Growth. If our business and markets grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. In addition, we may face challenges in managing expanding product and service offerings and in integrating acquired businesses with our own. Such eventualities will increase demands on our existing management, workforce and facilities. Failure to satisfy such increased demands could interrupt or adversely affect our operations and cause production backlogs, longer product development time frames and administrative inefficiencies. We Do Not Presently Maintain Fire, Theft, Liability or Any Other Insurance, Which Leaves Us With Exposure in The Event of Loss or Damage to Our Properties or Claims Filed Against Us. We do not maintain fire, theft, liability or other insurance of any kind. We bear the economic risk with respect to loss of or damage or destruction to our property and to the interruption of our business as well as liability to third parties for damage or destruction to them or their property that may be caused by our personnel or products. Such liability could be substantial and the occurrence of such loss or liability may have a material adverse effect on our business, financial condition and prospects. While product liability lawsuits in the PRC are rare and HTF has never experienced significant failures of its software, there can be no assurance that HTF would not face liability in the event of the failure of any of its products. We Depend on Large Contracts and a Concentration of Customers; Loss of Any One of These Could Substantially Decrease Our Revenues. Our revenue is dependent, in large part, on significant contracts from a limited number of customers. During the fiscal year ended December 31, 2004 approximately 47% of sales were to our 10 largest customers, approximately 30% of our sales were made to our 5 largest customers and approximately 7% of sales were made to our largest customer. For the fiscal year ended December 31, 2003, approximately 59% of our sales were to our 10 largest customers, approximately 45% of our sales were made to our 5 largest customers and approximately 24% of sales were made to our largest customer. We believe that revenue derived from current and future large customers will continue to represent a significant portion of our total revenue. Our inability to continue to secure and maintain a sufficient number of large contracts would cause a significant decrease in our revenues, which would negatively affect our operating results. 7 We Are Dependent Upon Certain Key Personnel, the Loss of Which Could Leave Us Without Adequate Human Resources. We depend, to a large extent, on the expertise and efforts of a small number of individuals with experience in the software industry, ties to international capital markets and existing relationships with Chinese government agencies. Due to the specialized nature of their backgrounds, we may not be able to find suitable replacements were we to lose the services of any of such individuals. This could adversely affect certain of our existing customer relationships or our ability to build new relationships with certain government agencies. We do not carry key man life insurance for any key personnel. Our Operating Expenses Will Increase As We Expand and Could Limit Our Profitabilty. We anticipate that as we expand our business our overhead for facilities, marketing and advertising costs, administrative costs and other operating expenses will increase. If such increases are not offset by corresponding increases in our revenues, our profitability could be limited or we could incur operating losses. We May Prove Unable To Successfully Implement Our Business Plan and Strategies. We are still at a relatively early stage in our development and most of our strategies for achieving growth remain largely unimplemented or in the planning and development stage. Furthermore, we will in all likelihood require funding from outside sources to be able to implement our business plan. Since we may not succeed at obtaining the required funding or have access to other necessary resources (including human resources), we cannot ensure that we will, in fact, be able to fully implement all, or any, of our identified strategies, or that, if implemented, such strategies will prove successful. Risks Related to Operating Our Business in China - ------------------------------------------------ We Face the Risk that Changes in the Policies of the PRC Government Could Have Significant Impacts Upon the Business We Are Able to Conduct in China and on the Profitability of Such Business. The economy of China is undergoing a transition from a planned economy to a market-oriented economy. This transition is subject to five-year and annual plans adopted by the PRC Government that set down national economic development goals. Policies of the PRC Government have historically had a substantial effect on economic conditions in China. The Chinese government has confirmed that economic development will follow a model of "market economy under socialism". Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in China will follow market forces. While we believe that this trend will continue, there can be no assurance that such will be the case. A change in policies by the Chinese government could adversely affect our interests by resulting in, among other things: changes in laws, regulations or the 8 interpretation thereof; confiscatory taxation; restrictions on currency conversion, imports or sources of supplies; or the expropriation or nationalization of private enterprises. Although the Chinese government has been pursuing economic reform policies for approximately two decades, there is no assurance that the government will continue to pursue such policies or that such policies will not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting China's political, economic and social life. The Markets for Our Products Could Diminish or Disappear if the Chinese Government Were to Terminate, Scale Back or Overhaul its Programs. We currently develop and market applications software for industry sectors, which are under the direct guidance of Chinese national policy. In some cases, such as Housing Accumulation Funds and Family Planning software, our products are designed either to implement, or specifically for use in connection with, government sponsored and controlled programs. A change or adjustment of PRC national policy would likely have a profound impact on both the programs and the industry sectors associated with them. Were the PRC government to terminate, scale back or make substantial alterations to any such program, it could render our software products associated with the program useless or of limited utility and severely diminish or eliminate market demand for them. In such event, our operating results would suffer severely and we would be forced to either alter our existing products or design and develop new products to replace them. We Face the Risk of Piracy of Our Intellectual Property; the Enforcement of Laws to Protect Intellectual Property Rights in the PRC May Not be Sufficient to Protect Against Such Risks. For a long period of time, piracy has negatively affected Chinese and foreign software companies doing business in China. Although the PRC government has strengthened its copyright laws and increased its efforts to enforce such laws, we believe that copyright laws and their enforcement in the PRC are still in need of improvement. According to William Lash, U.S. Assistant Secretary of Commerce, "the total amount of fines [for piracy] in the country in 2003 equaled, by my calculation, 1/20th of 1% of the amount of damage caused by piracy." In order to deter piracy, we use certain security measures to protect our products, such as imbedding special check codes in our software. We also deter piracy by frequently upgrading our software products so as to make pirated versions soon obsolete. Finally, we believe that, by operating in specialized application software markets with fewer potential customers and competitors than the general software market, we also lessen the risk of piracy to a certain extent. We believe that such markets, because of their smaller size and sophisticated business and government consumers, are less attractive to potential pirates. Furthermore, the requirements for specialized technical knowledge may also make the software more difficult to obtain and replicate. 9 The PRC Laws and Legal System Governing Our Current Business Operations and Contractual Arrangements Are Uncertain, and if We Are Found To Be in Violation, We Could Be Subject To Sanctions. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death or the commencement of bankruptcy or criminal proceedings. We and our subsidiaries are considered "foreign persons" or "foreign funded enterprises" under PRC laws and, as a result, we are required to comply with PRC laws and regulations. These laws and regulations are relatively new and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. PRC has not developed a fully integrated legal system and the array of new laws and regulations may not be sufficient to cover all aspects of economic activities in the PRC. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, published government policies and internal rules may have retroactive effects and, in some cases, the policies and rules are not published at all. As a result, we may be unaware of our violation of these policies and rules until some time later. Our contractual arrangements with our affiliated entities are governed by the laws of the PRC. The enforcement of these contracts and the interpretation of the laws governing these relationships is subject to uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, the PRC authorities retain broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business licenses and requiring actions necessary for compliance. In particular, licenses, permits and beneficial treatments issued or granted to us by relevant governmental bodies may be revoked at a later time under contrary findings of higher regulatory bodies. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. We may be subject to sanctions, including fines, and could be required to restructure our operations. As a result of these substantial uncertainties, we cannot assure you that we will not be found in violation of PRC laws or regulations. A Slowdown or Other Adverse Developments in the PRC Economy May Adversely Affect Our Customers, Demand for Our Services and Our Business. All of our operations are conducted in the PRC and all of our revenues are generated from sales in the PRC to businesses operating in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue. The computer software industry in the PRC is relatively new and rapidly growing, but we do not know how sensitive we are to a slowdown in economic growth or other adverse changes in the PRC economy which may affect demand for computer software. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may substantially reduce the demand for our products and significantly reduce our revenues and profits. 10 Inflation in China Could Negatively Affect Our Profitability and Growth. While the Chinese economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in our costs, it may have an adverse effect on profitability. In order to control inflation in the past, the Chinese government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. Such an austerity policy can lead to a slowing of economic growth. In October 2004, the People's Bank of China, China's central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. Repeated rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase our costs and also reduce demand for our products. Governmental Control of Currency Conversion Will Affect the Value of Your Investment. The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in Renminbi, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also, at its discretion, restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due. The Fluctuation of the Renminbi May Reduce the Value of Your Investment. The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC's political and economic conditions. As we rely entirely on revenues earned in the PRC, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into 11 Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar could significantly reduce the value to us of the amounts we receive and increase our capital requirements to continue our business or force us to scale back our operations. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes and the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be reduced. To date, however, we have not engaged in transactions of either type. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets. Since 1994, the PRC has pegged the value of the Renminbi to the U.S. dollar. We do not believe that this policy has had a material effect on our business. However, there have been indications that the PRC government may be reconsidering its monetary policy in light of the overall devaluation of the U.S. dollar against the Euro and other currencies during the last two years. If the pegging of the Renminbi to the U.S. dollar is loosened we anticipate that the value of the Renminbi would likely appreciate against the dollar with the consequences discussed above. Because Our Principal Assets are Located Outside of the United States and All of Our Directors and Officers Reside Outside of the United States, it May be Difficult For You to Enforce Your Rights Based on U.S. Federal Securities Laws Against Us and Our Officers and Directors in the U.S. or to Enforce U.S. Court Judgments Against Us or Them in the PRC. Three of our four directors and officers reside outside of the United States. In addition, HTF, our operating subsidiary, is located in China and substantially all of its assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the U.S. Federal securities laws or otherwise. Risks Related to Our Common Stock - --------------------------------- Our Officers, Directors and Affiliates Control Us Through Their Positions and Stock Ownership and Their Interests May Differ from Those of Other Stockholders. Our officers, directors and affiliates beneficially own approximately 83% of our Common Stock. Li Yuan Qing the Chairman of our Board of Directors and our Chief Executive Officer, beneficially owns approximately 58% of our Common Stock (including shares held by his wife) and is a Selling Stockholder herein. Mr. Li can effectively control us and his interests may differ from other stockholders. 12 We Are Not Likely to Pay Cash Dividends in the Foreseeable Future. We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. There is No Trading Market for Our Common Stock. Our Common Stock is not listed on any stock exchange nor quoted over-the-counter. There is currently no trading market for our Common Stock and we do not know if any trading market will ever develop. You may be unable to sell your shares due to the absence of a trading market. Our Stock is Subject to the "Penny-Stock" Rules, Which May Further Limit the Liquidity of Your Investment. In addition, broker-dealers who recommend our common stock to people who are not established customers or qualifying investors must follow special sales procedures, including getting the purchaser's written consent prior to the sale. Our Common Stock is also subject to the "penny stock" rules, which require delivery of a schedule explaining the penny stock market and the associated risks before any sale. See "MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS." These requirements may further limit your ability to sell your shares. Our Common Stock is Subject to Price Volatility Unrelated to Our Operations. The market price of our Common Stock could fluctuate substantially due to a variety of factors, including the market's perception of our ability to achieve our planned growth, quarterly operating results of other software companies, trading volume in our Common Stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our Common Stock. In particular, news of international political developments affecting China could affect the market prices of our securities more severely than those of other companies. We Intend Effect Future Sales of Our Securities, Which Would Dilute the Holdings of Our Current Stockholders. We intend to raise $5 million in additional funding to finance our operations over the next 12 to 18 months by effecting sales of our securities, either in a public offering or in a private placement. If we were to sell additional shares of Common Stock, or securities convertible into or exercisable or exchangeable for Common Stock, the holders of the currently outstanding shares of Common Stock would experience dilution and a decrease in the value of their holdings. 13 CAUTIONARY NOTE REGARDING PREDICTIVE STATEMENTS Our disclosure and analysis in this prospectus contain statements that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar expressions. Although we believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flow, research and development costs, working capital, capital expenditures and other projections, they are subject to several risks and uncertainties, and therefore, we can give no assurance that such projections will be achieved. Investors are cautioned that our statements are not guarantees of future performance and the actual results or developments may differ materially from the expectations expressed. As for the statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and projections and may be better or worse than projected. Given these uncertainties, you should not place any reliance on these statements. These statements also represent our estimates and assumptions only as of the date that they were made and we expressly disclaim any duty to provide updates to them or the estimates and assumptions associated with them after the date of this filing to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events. We undertake no obligation to publicly update any predictive statement in this prospectus, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in our Form 10-KSB, Form 10-QSB and Form 8-K reports to the SEC after we begin to file such reports. Also note that we provide a cautionary discussion of risks and uncertainties under the caption "Risk Factors" in this prospectus. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could also adversely affect us. USE OF PROCEEDS We will not receive any of the proceeds from any Selling Stockholder's sale of the shares offered under this prospectus; all of such proceeds will be paid directly to the Selling Stockholders. DETERMINATION OF OFFERING PRICE All of the shares being offered for sale by this Prospectus are offered by the Selling Stockholders. Since there is no established public market for our Common Stock or the shares being registered, the Selling Stockholders have agreed to sell their shares at a fixed price of $.10 per share for the duration of this offering. 14 The offering price was arbitrarily determined by the joint agreement of the Company and the Selling Stockholders. The offering price does not bear any relationship to our assets, book value, earnings or net worth and is not an indication of the actual value of the shares being offered hereby. Investors should not judge the real or potential future market value, if any, of our Common Stock by comparison to the offering price. SELLING STOCKHOLDERS This prospectus relates to the resale of up to an aggregate of 3,600,000 shares of our Common Stock by the Selling Stockholders identified below. There is currently no public market for our Common Stock; accordingly, the Selling Stockholders have agreed to sell their shares at a fixed price of $.10 per share for the duration of this offering. In the event that, following the conclusion of this offering, our Common Stock is listed for quotation on an inter-dealer quotation system such as the OTC Bulletin Board or listed for trading on a stock exchange, then the Selling Stockholders may sell any shares not sold in this offering at prevailing market prices pursuant to Rule 144 or another exemption from registration. We will not receive any proceeds from sales of the shares of Common Stock being offered by the Selling Stockholders through this prospectus. The following table sets forth certain information regarding the beneficial ownership of our securities as of the date of this prospectus by the Selling Stockholders.
- -------------------------------------------------------------------------------- Name and Securities Percentage Securities Amount of Percentage of Relationship to Us Beneficially Ownership to be Securities Securities Owned Before Offered to be Held to be Held Offering for Selling After After (1) Stockholder's Offering (2) Offering (2) Account - -------------------------------------------------------------------------------- Li Yuan Qing 5,400,000 50.0% 1,080,000 4,320,000 40% - -------------------------------------------------------------------------------- Qiu Zhen Liang 2,700,000 25.05% 540,000 2,160,000 20% - -------------------------------------------------------------------------------- Chen Ling 900,000 8.3% 180,000 720,000 6.7% - -------------------------------------------------------------------------------- Warner Technology 610,000 5.6% 610,000 0 0 and Investment Corp. - -------------------------------------------------------------------------------- American Union 650,000 6.0% 650,000 0 0 Securities, Inc. - -------------------------------------------------------------------------------- Huakang Zhou 540,000 5.0% 540,000 0 0 - --------------------------------------------------------------------------------
- ---------- (1) Based on 10,800,000 shares outstanding as of January 31, 2005. (2) Assumes the sale of all shares offered by the Selling Stockholders. American Union Securities, Inc. is a registered Broker-Dealer and a member of the National Association of Securities Dealers, Inc. American Union Securities is controlled by Mr. John Leo, who owns over 75% of the outstanding equity. Warner Technology and Investment Corp. is controlled by Mr. Huakang Zhou. Mr. Zhou owns approximately 1% of the outstanding equity of American Union Securities, Inc. In addition, Mr. Zhou's son, Peter Zhou, owns approximately 20% of the outstanding equity of American Union Securities, Inc. 15 At the time when the shares offered hereby were purchased, none of the Selling Stockholders had an agreement or understanding, directly or indirectly, with any purchasers to distribute the shares. BUSINESS The Company is a holding Company for XHT, which is a holding company for, and owns 100% of HTF. HTF is a provider of applications software and system integration services in China. Specifically, HTF develops and produces Housing Accumulation Fund Software, credit guarantee management software, family planning software and property management software. HTF also provides related systems integration services to customers purchasing its proprietary products at no additional charges. In addition, HTF markets software products produced by other companies as a value-added reseller; in such cases, HTF provides installation and related systems integration services at an additional cost to the customer. Our U.S. executive offices are located at 100 Wall Street, 15th Floor, New York, New York 10005 and our telephone number is 212-232-0120. HTF's principal offices are located at No.5 Floor 6, Block A, Skyworth Building, Hi-tech Industrial Park, Nanshan District, Shenzhen, 518057, P.R.China. Shenzhen is a southern Chinese city which is located near Hong Kong. We were incorporated in Delaware on January 13, 2005. On January 31, 2005, we entered into the Share Exchange Agreement, pursuant to which we acquired 100% of the outstanding stock of XHT from its three shareholders. XHT's only asset is 100% of the stock of HTF, a PRC corporation that is classified as a wholly-owned foreign enterprise under PRC law by virtue of its ownership by XHT. Our core product is Housing Accumulation Fund software, which accounted for 64% of our revenues in 2004. HTF entered this market in 1996 and has more than 110 customers in over 20 provinces throughout China. We have also developed and are marketing credit guarantee management software. Since its development in 2003, this product has experienced rapid sales growth. We believe our product is the first credit guarantee software available in China, and as of the date of this prospectus, we are not aware of any other professional software company that is marketing a competing product. We have also developed and recently commenced marketing family planning software, which accounted for accounted for 4% of our revenues in 2004. We have also developed property management software at the request of certain of our Housing Accumulation Fund software and related customers. So far, sales of property management software have been sporadic and have not generated significant revenues. We did not sell any property management software in 2004. 16 We do not charge customers purchasing our proprietary software products separately for related systems integration services; however we also provide and charge for such services as a value-added reseller of other companies' products. Sales of value--added systems integration services accounted for approximately 23% of our revenues in 2004. Products and Services - --------------------- Housing Accumulation Funds Software ----------------------------------- The system of a public accumulation fund for housing construction in China was introduced in 1991 by the PRC Ministry of Construction. "Housing Accumulation Funds" are long-term housing reserve accounts which are maintained for the benefit of employees and are funded with mandatory contributions by both the employees and their employers. The contributions are deposited in accounts at designated commercial banks ("Bank") and managed by regional Housing Accumulation Fund Management Centers ("Centers"), which in turn are supervised by local governments, the PRC Ministry of Construction and the PRC Ministry of Finance (collectively referred to as "Supervisors"). Although employees own their respective shares of the Housing Accumulation Funds, they do not have any control over the investment of the funds. An employee can withdraw his or her respective share of the funds in any of the following situations: to purchase, build or renovate a home; to retire; if unable to work; if the employee is relocating outside of China; if the employee is repaying debt secured by a mortgage; or if the employee's rent exceeds a designated percentage of his salary. The Housing Accumulation Fund program was established by the PRC Government as a social welfare system in an attempt to address the problems of low employee salaries and insufficient savings for purchasing housing. It was designed as a stable, long-term reserve fund for improving housing conditions. The PRC Central Government State Council issued "Administrative Regulations for Housing Accumulation Funds" on March 24, 2002 to promote and more effectively manage the system. By the end of 2002, the regulations had been adopted in nearly 2,000 counties across China and the total amount by the PRC Government deposited in the system had reached approximately RMB 500 billion (approximately U.S. $62.5 billion). 17 HTF developed its first version of Housing Accumulation Fund software in 1996. By the end of 2003, HTF had sold a total of over $6 million of such software. HTF currently holds registered PRC copyrights on this product series and sells to over 110 customers in over 20 provinces in China. HTF had $1,016,000 in revenues for this product series in the fiscal year ended December 31, 2003, and $885,700 in the fiscal year ended December 31, 2004. Approximately 67.9% of sales of Housing Accumulation Fund software were made to the ten largest purchasers and 46.2% to the five largest purchasers of this product. Our Housing Accumulation Fund software provides a complete, computerized information management solution for the national Housing Accumulation Fund Management system. The Housing Accumulation Fund system involves four types of users: Housing Accumulation Fund Management Centers, which are local government agencies that manage and administer the system; Supervisors, as described above; designated commercial banks where the contributed funds are deposited and held; and the participating employees and employers, which include a large number of government offices, state-owned and private companies, for-profit and non-profit organizations that contribute to the funds (collectively "Units"). HTF offers four versions of its Housing Accumulation Fund software --- a "Center version", a "Supervisor version", a "Bank version" and a "Unit version". Each of these versions was developed to serve the specific needs of the various groups of participants, allowing them to create, manage and analyze a database of information relating to Housing Accumulation Funds, including employee information, deposits and withdrawals, individual loans, housing subsidies, housing purchases and sales, property records and other information. HTF believes it was the first company to bring Housing Accumulation Fund software to market, and, to our knowledge, it is still the only company in the industry that offers multiple, user-specific "versions" of this type of software. The four versions of software are compatible with each other and with products sold by other companies, allowing data to be migrated and reconciled from one user's system to another. Thus, the original data recorded by each Unit (including personal and account information for each employee participating in the system) is automatically submitted via telephone modem or through an internet network to its regional Center, which records the information in the designated employee account and automatically produces relevant documentation for each account. The documentation is then forwarded to the designated bank for the fund, which performs clearing and settlement using the Bank version software. Supervisors can use their version of the software to retrieve relevant data from the Centers and the Banks and receive detailed information concerning deposits, withdrawals and loans through the statistical reporting and analytical functions. 18 At the end of each month, users can run checks through a special "module" to reconcile their information with that of the other users in the system, thereby ensuring the accuracy of data at each point in the system. Centers can also use the software to produce statistical reports and perform analysis for decision-making. Our software replaces the previous system of manual input and handling of information, which often produced errors, especially with the dramatic increase in the number of employees participating in the system, and which we believe was inefficient. We believe that by automating many of the recordkeeping functions which were formerly performed by hand, our software system provides more scientific, robust, and efficient management for the national Housing Accumulation Fund system and standardizes the flow of information among the various different types of users in the system. The design and operation of any applications software must be based on certain operating systems and database platforms. The software structure design must also meet the needs of clients' current and future businesses. We believe that HTF's Housing Accumulation Fund software series meets these criteria. Our products are compatible with most international operating systems and database platforms, and are designed to meet the complicated needs of different customers, as described below. Certain characteristics of HTF's Housing Accumulation Fund software are set forth below: o Operating system: supports Microsoft Windows and UNIX operating systems o Development platform: Sybase Powerbuilder o Database: simultaneously supports multiple databases such as Microsoft SQL Server, Informix, Oracle and Sybase. o Software system structure: combines B/S (internet browser server maintained by the internet service provider) and C/S (the local area network server maintained by customer) HTF's software products are designed with various different functions packaged in discrete modules; this modular design allows users to select individual functions according to their specific needs when purchasing our software. We believe that this ability to customize the functionality of our products to meet the specific needs of our customers will enable us to effectively address their changing requirements. Credit Guarantee Software ------------------------- In 2002, at the request of the Shenzhen City Small-to-Medium-Sized Enterprises Credit Guarantee Center, HTF began to develop its credit guarantee software. The project was funded by a $36,000 (RMB 300,000) grant from the Shenzhen Science & Technology Bureau, which we received in 2003. In September 2003, HTF released its first version of the software, "Credit Guarantee Management Information System," which was then successfully implemented in Shenzhen City Small-To-Medium-Sized Enterprises Credit Guarantee Center. The product generated approximately $35,000 (RMB 290,000) of revenue in 2003 and approximately $120,000 (RMB 995,000) in revenue in 2004. Sales of the product accounted for 9% of revenues in 2004. 19 China's Credit Guarantee System was established by the National Economic and Trading Commission in 1999 in order to facilitate the financing of small and medium-sized enterprises ("SMEs"), which have difficulty obtaining bank loans. The government-sponsored Credit Guarantee System supplements the existing commercial credit guaranty industry, which is composed of various for-profit commercial enterprises. Under the Credit Guarantee System, government-funded local and regional agencies and nonprofit organizations provide guarantees to enable SMEs to obtain loans. HTF's software provides a means of collecting and organizing data from SMEs and performs risk management functions, such as financial analysis, credit evaluation and risk estimation. The software is marketed for use both by participants in the government-sponsored system and by private, commercial credit guarantors. At present, HTF's credit guarantee software is sold to 12 credit guarantee organizations in Shanxi, Jiangshu, Ningxia, Guangdong, Neimeng, Shandong and other provinces. In 2004, approximately 73.9% of sales were to the five largest customers for this product. As of the date of this prospectus, we are not aware of any other credit guarantee software available in China. Furthermore, we believe that our existing relationships with municipal credit guarantee organizations which purchase our software will enable us to retain a large market share for this product even if competitors enter the field. Based upon statements by the President of China Economics Technology Investment Guarantee Co., Ltd., we estimate that in several years there will be approximately 5,220 credit guarantee entities in China. Assuming an average price of approximately $12,100, (RMB 100,000) per system, we estimate that the potential market for this product may be up to $63 million (RMB 521,419,500). HTF's credit guarantee management software is based on the Microsoft(R) Visual Studio.net software development platform and database technology. Some basic specifications of the software are as follows: o Operating system: supports Microsoft Windows(R) operating system but can also be operated on IBM and HP UNIX operating systems. o Development platform: Microsoft Visual Studio.net o Database: capable of supporting various different databases such as Microsoft SQL Server, Oracle and Sybase. As with our Housing Accumulation Fund software, HTF's credit guarantee software is packaged in modules, allowing users to "customize" their systems by selecting and purchasing particular functions to meet their needs. Presently available functions for this software include business flow control, risk management, data analysis, and decision-making features. It also has two general application modules: a document management module and an office management module, which provide assistance to customers in their daily operations. 20 Property Management Software ---------------------------- HTF has developed property management software and real estate exchange and information management systems pursuant to the request of several of its Housing Accumulation Fund software customers and related parties. The software was originally developed as "custom" products and, to date, has been sold only on an occasional basis. Customers currently using our property management software include four government property management bureaus, one commercial real estate developer and one real estate agent. We did not sell any property management software in 2004. In China all records related to rights to use real property are filed at local and regional "Real Estate Exchange Centers," which maintain official databases of such information, Real Estate Exchange Centers are subject to supervision by property management bureaus regulated by the PRC Ministry of Construction. The primary function of our property management software is to enable users to access official government property ownership and use rights registries. Users can search for official documents on file and process and analyze information relating to property ownership. Although there were no sales of this product in 2004, we have continued to update the software and believe that it could potentially be marketed to the general real estate industry in China. This would include Real Estate Exchange Centers, property management bureaus, commercial property management companies and a large number of real estate agents. t 6 0 We estimate that in China there are over 3,000 Real Estate Exchange Centers, about 300 property management bureaus, over 1,000 commercial property management companies and a large number of real estate agents. Based on the foregoing, we estimate that the total potential market for property management software and related systems integration services, which includes various applications software, system software platforms, systems integration and software upgrade services, is approximately $145 million (RMB 1.2 billion). Family Planning Software ------------------------ Family planning software is HTF's newest line of products. HTF began developing this product in 2003 for use by government family planning management departments, public education organizations and nonprofit family planning associations, and recently completed its first sales of the software. In 2004, all sales of family planning software in 2004 were made to fewer than five customers. Family planning is a basic national policy which was officially instituted by the PRC government during the 1970's and 1980's. The PRC government has committed to building a national network for disseminating population and family planning information by 2006. This plan calls for 80% of China's 3,000 counties to have access to a central information system for child-bearing age women by the end of 2005. HTF's family planning software is designed for use in connection with such central information system. It creates a large-scale, networked database that can be accessed by users without connecting to the internet and automatically switches between the "online" and "offline" status. The system combines the "internet browser server and client local server" structure. 21 HTF's population and family planning management software provides such functions as data collection, processing, statistical reporting, search engine capabilities, an "early warning" system for monitoring rapid population increase and system maintenance. The system is used by different levels of government family planning management departments, public education organizations and family planning associations. The system is intended to automate the input, processing and analysis of information, thereby enabling faster information exchange than is currently possible under the existing manual input system. In addition, by creating a central database which can be accessed by various organizations throughout China, our system will allow for increased sharing of information and data resources, which we believe will improve the quality and consistency of services offered by the organizations participating in the network and allow such organizations to operate more efficiently. Based upon recent population and demographic statistics, we estimate that the number of potential users of the software is over 400,000. Sales of family planning management software accounted for 4% of revenues in 2004. Systems Integration Services ---------------------------- In addition to our four proprietary lines of software products, HTF also markets software products produced by other companies as a value-added reseller. In such cases, HTF provides value-added services, such as installation, configuration and similar systems integration services, for an additional charge over the "base" price of the software. HTF currently has agreements with Lenovo, Inc. (the largest information technology company in China) and Microsoft(R) Corporation pursuant to which we sell value-added systems integration services. Sales of such services accounted for approximately 23% of revenues in 2004. Approximately 74.5% of sales of systems integration services were made to our 10 largest purchasers and 55.3% of sales were made to the 5 largest purchasers of the services. The Overall Computer Software Market in China - --------------------------------------------- The overall market for computer software in China has experienced rapid growth in recent years. Considered to be a "strategic industry" by the PRC government, the software industry has received strong support from the PRC government in the form of grants and other funding to individual companies, rewards, preferential tax treatment, patronage by government organizations seeking to establish computerized information and record-keeping systems and encouragement of software exports. According to the PRC Ministry of Information Industry, China's software market grew an average of 36% per year from 2000 to 2003. 22 HTF has received $36,000 (RMB 300,000) from the Shenzhen Science & Technology Bureau and $60,459 (RMB 500,000) from the National Development and Reform Committee for research and development of our credit guarantee software, and a rent subsidy of $1,545 (RMB 12,780) per month from Shenzhen Software Enterprise Zone Management Center, the branch of Shenzhen Municipal Hi-Technology Office, for locating our facilities in the Shenzhen Software Enterprises Zone. In addition, as a producer of its own software, from June 2000 through December 2010, HTF is eligible for 14% of the 17% Value Added Tax it pays to be returned to it. If the returned funds are used for operations, the payments are exempt from income tax. Modernization efforts prevalent throughout China have created strong demand by national, provincial and local governments for computerized data reporting and information management and exchange capabilities. In addition, China's recent entry into the World Trade Organization and the concomitant reformation and restructuring of many of China's traditional industries to be more competitive has greatly increased the demand by private industry for various operations-related software applications. Given China's status as a "developing nation," we believe that this growth in demand will continue well into the future. To date, much of the Chinese software industry's product offerings have consisted of highly specialized or "customized" products which are targeted towards specific industries or geographic markets and have limited uses for larger, more general audiences. According to China Computer World Research, a Chinese marketing and research consulting firm, industry-specific products accounted for roughly 61% of all domestic software sales, while PRC Computer Journal reported that exports accounted for roughly 11.27% of total software sales in 2002. Because design of these products requires specialized knowledge of the Chinese government and government programs and industries specific to China, we believe that barriers to market entry for foreign competitors are high. In addition, the Chinese software market is highly fragmented, with a large number of small companies. We believe that this creates an opportunity for us to achieve growth and improve our profitability through consolidating acquisitions, which will enable us to realize economies of scale in our operations. According to the statistics of the PRC Ministry of Information Industry, China's software industry, including software and systems integration, had total sales of $19.7 billion (RMB 163.3 billion) in 2003, an increase of 48.5% from $13.3 billion (RMB 110 billion) in 2002, and averaged 36% annual growth in revenues from 2000 to 2003. According to the February 2, 2004 issue of PRC Computer Journal, software exports by Chinese companies also increased from approximately $400 million (RMB 3.31 billion) in 2000 to approximately $720 million (RMB 5.96 billion) in 2001 and $1.5 billion (RMB 12.41 billion) in 2002, with an annual growth rate of 93.6%. Under the Software Products Registration Administrative Regulations promulgated by the PRC Ministry of Information Industry (the "Ministry") in 2001, no software products are permitted to be sold in the PRC unless they are registered with the local authority designated by the Ministry. All of our products are registered with the State Economic Development Bureau and Shenzhen Information Offices. 23 In addition, HTF was designated a "National Certified Software Company" in 2002. Under the regulations promulgated by the Ministry, "National Certified Software Company" status is accorded only to software companies which own the intellectual property rights to their products and have at least 50% of their employees engaged in research and development. The Company recently hired additional employees, bringing our total number of employees to 68;we intend to hire additional Research and Development employees and thereby regain compliance with the requirement. While such status is not required to produce or sell software in the PRC, it entitled us to certain privileges and benefits. Because HTF is a National Certified Software Company, we have received research and development grants of $36,000 (RMB 300,000) from the Shenzhen Science and Technology Bureau and $60,459 (RMB 500,000) from the National Development and Reform Committee to develop our credit guarantee software. According to the PRC Ministry of Information Industry, by the end of 2002 China had 6,282 National Certified Software Companies, 10,900 registered software products and 11 national software bases. (A software base is a special zone where companies may receive benefits, such as lower rent and access to comprehensive software testing facilities and training centers.) At present there are 500,000 people employed in the software industry in China, 250,000 of whom are professionals dedicated to software research and development. There are also another 400,000 people who work in other industries in China, but who are engaged in software applications research and education. The PRC software market includes three segments: software products, systems integration and software services, which constitute 51%, 33% and 16% respectively. 24 [logo China software market growth] [logo Composition of China's software industry] [logo China's software market] The PRC Ministry of Information-Industry estimated that total sales of software and information system products in China in 2004 were approximately $25.4 billion (RMB 210 billion), an increase of 29% over 2003. Sales of software products in 2005 are expected to be $30.27 billion (RMB 250 billion), a 19% increase from 2004. Software products include system software and applications software. System software markets are mostly dominated by foreign software manufacturers, while most Chinese software companies are dedicated to the applications software market. 25 China Computer World Research, a marketing research and consulting firm in China, divides applications software products into three categories: industry-specialized software, general enterprise software, and generally-used software. Industry-Specialized Software is software that is designed for use in a particular industry such as telecommunications finance or taxation. All of HTF's products - Housing Accumulation Fund software, credit guarantee software, property management software, and family planning software, are Industry-Specialized Software products. General Enterprise Software is software that is designed to perform a specific, particular function (such as accounting) but can be used in a number of different industries. Generally-Used Software is software that is designed to perform a basic computing function (such as internet web browsing, word processing or anti-virus protection) and is widely used by government, commercial enterprises and individuals both in business and for personal or recreational purposes. [logo Composition of China's application software sector] According to the Software Industry Annual Report 2003-2004 published by China Computer World Research, in 2003, the Chinese applications software sector had total sales revenue of approximately $3.04 billion (RMB 25.17 billion). Of this amount, Industry-Specialized Software accounted for 61%, with $1.85 billion (RMB 15.33 billion) in total revenue, a 21.4% increase over the previous year. General Enterprise Software accounted for 29% of total sales and Generally-Used Software accounted for 10% of total sales. Housing Accumulation Fund Software Market. China has 31 provinces and 4 municipalities directly under the PRC central government, in which are located in 332 cities and 2,860 counties. According to the "Administrative Regulations for Housing Accumulation Funds," every city must have one Center and every county must have branch Centers. We estimate that every Center will have at least two banks to work with, that every Center will have about 1,500 Units (employers that deposit funds), and every branch Center will have 350 Units. Therefore, we estimate that there will be approximately 332 Centers, 2,860 branch Centers, more than 6,000 Banks (branches of the five national commercial Banks), and more than 1.5 million Units which can be potential users of our Housing Accumulation Fund software. 26 The cost of our Housing Accumulation Fund software to different types of users can vary significantly depending upon which function modules are selected and purchased. The four versions available incorporate different sets of functions and therefore vary substantially in price. For example, the price of the Unit version software is much less than that of the Center version software because it includes fewer function modules. In addition, the Center version software, which incorporates multiple modules, can vary in price depending upon the number and type of modules selected by the customer. Based upon the foregoing, we estimate the potential total size of China's Housing Accumulation Fund software market at over $5 billion (RMB 42.3 billion). Within such market, the total market for applications software is approximately $430 million (RMB 3.53 billion), the total market for related systems integration services approximately $4.4 billion (RMB 36.02 billion), and the market for other related software services is approximately $170 million. Aside from large demand for software and systems integration services from Centers, Banks and employers, we believe that there may also be increasing demand for software and system upgrade services. While a recent reorganization of the Housing Accumulation Fund Center system has temporarily decreased the demand for our Housing Accumulation Fund software, we believe that, once the reorganization is completed, there will be an increase in demand for software updates and upgrades. Our goal is to maintain our market position and expand. Credit Guarantee Software Market Historically, China's SMEs have had difficulty gaining access to financing, particularly bank loans. This has hindered the development or even the survival of many SMEs. The PRC government's establishment of a national SME Credit Guarantee System was intended to provide a solution for SME financing. On January 1, 2003, the "Small-to-Medium-Sized Enterprises Promotion Act" was released. The law ensures legal protection for various credit guaranty organizations that provide credit guarantees to SMEs. The Act stipulates that county level and higher government organizations establish and promote a government-funded SME credit guarantee system, to supplement the commercial credit guaranty industry and create an environment conducive to SME financing. The system is composed of three levels of credit guarantee organizations: government credit guarantee entities, commercial credit guarantee entities, and inter-enterprise financing guarantee entities. The number of credit guarantee entities has increased from 203 in 2000 to 582 in 2001, 848 in 2002, and over 1,000 by year-end 2003. These entities are spread over all of China's 31 provinces except Tibet, with annual growth of 125%, according to the Small-to-Medium Sized Enterprises Net website. These entities have guaranteed a total of approximately $14.3 billion (RMB 117.9 billion) of loans for 48,318 enterprises. We believe that this high growth rate reflects strong government backing and pressing demands from SMEs for credit guarantees. 27 Currently, only a small number of the more than 1,000 existing credit guarantee organizations have computerized systems for their operations flow and service management. According to the President of China Economic Technology Investment Guarantee Co., Ltd., the total market for credit guarantee software and systems integration could be as large as $68 million (RMB 558 million). We believe that the credit guarantee software business will be HTF's fastest growing segment for the foreseeable future. The annual sales of this product were $38,000 (RMB 314,507) in 2003 and $120,200 (RMB 993,180) in 2004. As of the date of this prospectus, we are not aware of any other applications software companies that have developed a software system that targets the credit guarantee industry. Property Management Software Market As previously discussed, sales of our property management software to date have been sporadic, as our products have been designed to the particular specifications of a handful of customers; however, we believe our products will prove suitable for use by the general property management industry. We estimate that in China there are over 3,000 Real Estate Exchange Centers, about 300 property management bureaus, over 1,000 commercial property management companies and a large number of real estate agents. Based on the foregoing, we estimate that the total potential market for property management software and related systems integration services, which includes various applications software, system software platforms, systems integration and software upgrade services, is approximately $145 million (RMB 1.2 billion). Family Planning Software Market The family planning software market is composed of various levels of government family planning management departments, public education organizations and family planning organizations. Currently, there are approximately 2860 counties in China, each of which has at least 130 branch offices dealing with population and family planning. We estimate the total number of potential users for family planning software at over 400,000. Shortfalls in local and regional government budgets, combined with additional government funding requirements due to the recent outbreak of SARS (Severe Acute Respiratory Syndrome) in China, have resulted in cutbacks in funding for implementation of China's national family planning policies. As a result, the market in many provinces for family planning software has been weak over the past two years. Accordingly, we have concentrated our marketing efforts on certain provinces such as Guangdong Province, where strong economic development has generated higher tax revenues for local governments. 28 Competition The market for software products is highly competitive, with a large number of new companies entering the Chinese market each year. Although competition is largely on the basis of technological innovation, functional design and price, conditions vary according to the type of software involved. Foreign companies currently have a clear advantage over Chinese companies in system software; however, in the field of applications software, where there is a great need for specialization, we believe that local Chinese software enterprises have unique advantages. The first such advantage comes from product localization; the design of applications software requires an in-depth understanding of local business customs, management systems, culture and traditions. A second advantage enjoyed by local Chinese companies comes from service localization; because of the logistical barriers involved, it is more difficult for foreign companies to establish a national service network to support their products within China in a short time period. HTF develops industry-specialized applications software and principally serves domestic Chinese customers. Our software products are, to a large extent, based on Chinese platforms and interfaces; we believe that it is more difficult for foreign businesses to develop and sell specialized applications software in China because they do not have the depth of understanding of local business customs. At present, the domestic Chinese applications software market is very fragmented. There are many identified subsectors, such as accounting software, translation software, commercial software and Chinese system-based management software. We do not directly compete with companies producing products in other subsectors. In addition, many of our competitors and potential competitors are small companies with limited resources and undiversified product lines. Competition in the Housing Accumulation Fund Software Market Because Housing Accumulation Fund software is a very specialized market, there are only a small number of companies that compete in this market. Our three major competitors in this market are: - - Beijing Jintianpeng Software Technology Co Ltd. -- This company entered the Housing Accumulation Fund software market in 1999 through its relationship with clients in the oil industry. The Housing Accumulation Fund software is that company's only product. - - Beijing Zhongfangyuan Housing Reformation and Information Network Co Ltd. This company is a subsidiary of China Urban Housing System Reform Committee and entered the market in 1996. It has a strong industry background and, as a state-owned company, has access to government funding and resources; however, its business is limited to providing software services to the several municipalities directly under the control of the PRC central government. 29 - - Xi'an Gildsoft Technology Development Co Ltd. -- This company was founded in 1998. Its key employees were formerly top-ranking personnel of Xi'an Province Housing Accumulation Fund Management Center. Therefore, this company has expertise in dealing with local governments and established relationships with many government agencies. The following graph shows the respective market shares of HTF and our competitors as of year-end, 2001: [logo Major players and their market shares in the housing accimulation fund software market (year 2001)] Competition in the Credit Guarantee Software Market We are not aware of any other commercial software company that offers a product in direct competition with our credit guarantee software in China. Some credit guarantee centers have begun to use software platforms similar to ours; however, we believe that such platforms do not have the technical function, work-flow definition and product flexibility offered by our product. Competition in the Family Planning Software Market Our closest competition in the family planning software market is Shenzhen WanGuo Software, which developed the "Pregnant-age Women Pregnancy Planning Information Management System" in 1998 for customers such as Shenzhen Municipal Population Planning Commission which is part of Shenzhen Municipal Government and its subsidiaries. Due to the lack of post-sale service, however, Shenzhen Municipal Government has stated that it will change to a new system. 30 Another major competitor of ours is Shenzhen MaiKeLong: This company has a special relationship with the National Population Planning Commission. Their products are currently in use throughout Guangdong province as well as part of Beijing Municipality and Fujian Province. We believe that Shenzhen MaiKeLong is our most powerful competitor. There are also a number of companies whose products are marketed only on a local or regional basis. These include: Luzhou HongSheng Technology, whose software products are only promoted in the 52 counties of Luzhou Municipality; Guizhou XinTian PC, which is located in Zunyi Municipality and its 13 counties; Zhengzhou YueTai Software, which is a local company whose products are sold in Henan Province; and Hunan JinQiao Software, which is a subsidiary of the Hunan Province Population Planning Commission. Competition in the Property Management Software Market Currently, there are three types of entities in China which are engaged in the development of property management software. The first category includes professional software companies, such as Huangzhou Aowei, HTF and Chuanda Software. The second category of entities currently involved in developing property management software is non-professional computer companies. Although such companies can develop systems for their customers, they lack the ability to maintain and update the software and focus on marketing hardware rather than software. The third category of property management software developers consists of government Housing Departments, which sometimes employ their own professionals to design and develop the software they use. In many cases, Housing Departments rely upon a single professional for software development and system maintenance, and therefore are limited by a lack of resources. Research and Development Activities Most of our products were originally developed according to specifications supplied by a particular customer, who also typically provides funding for the projects. If we judge that certain products have long-term market promotion value, we may invest additional time and our own resources in order to improve and commercialize them. In 2003, we invested an aggregate of $125,657 (RMB1,040,000) in research and development activities, 65% of which was used for improving our Housing Accumulation Fund and Property Management software and 35% of which was used to develop our credit guarantee and family-planning software. In addition, we received $525,998 (RMB 4.35 million) from our clients for research and development. In 2004, we invested an aggregate of $179,339 (RMB 1,484,300) in research and development activities, 58% of which was used for the improvement of our credit guarantee software and 42% of which was used for the improvement of our Housing Accumulation Fund Management Software. We also received $108,827 (RMB900,000) from our clients for research and development. As of December 31, 2004, we employed 33 people who were engaged in research and development activities. 31 Intellectual Property All of our products are protected under the PRC Copyright Law, which was enacted by the General Committee of the PRC National People's Representative Committee in 1991, and the PRC Computer Software Protection Regulations ("Software Regulations") promulgated by the PRC State Counsel in 2001. Under the PRC Copyright Law, a copyright protects both the design of a software product and the name of the product. Copyrights are granted for a term of 50 years from the date of first publication or, if there is no publication, from the date of development. Publication is not necessary to obtain copyright protection in the PRC. Under the PRC Copyright Law, a copyright entitles its owners to obtain various injunctions against infringers. These include an injunction against further infringement, an injunction to preserve evidence of infringement and an injunction freezing the infringer's bank accounts. In addition, an aggrieved copyright owner can also seek monetary damages, either by means of a lawsuit or through arbitration. As previously discussed, there are many uncertainties in China's legal system, and enforcement of intellectual property rights has been difficult. In the event that we are unable to enforce our copyrights, we might not be able to obtain one or more of the foregoing forms of relief. We have registered the following products with the National Copyrights Bureau of the PRC. Registered Names Registered No. Date of Issuance and Term - -------------------------------------- ---------------- ---------------- 1. HOUSING property exchange and Registered No. 01/15/2001;50 information management system V2.0 2001SR0147 years from Soft. No.0007080 08/01/2000 2. HOUSING accumulation fund Registered No. 01/15/2001;50 management software (Office version) V 2001SR0145 years from 1.0 Soft. No.0007078 09/01/2000 3. HOUSING accumulation fund Registered No. 01/31/2001;50 management center software (C/S 2001SR0222 years from version) V3.0 Soft. No.0007155 04/13/1998 4. HOUSING Estate Property Management Registered No. 01/15/2001;50 Software V2.0 2001SR0146 years from Soft. No.0007079 08/01/2000 5. HOUSING(R) House Property Application Registered No. 06/10/2002;50 Information Management (IC card) 2001SR0138 years from System (C/S Version) V1.0 Soft. No.000138 11/10/2001 6. HOUSING(R) accumulation fund personal Registered No. 07/12/2002;50 loan management system V1.0 2001SR1184 years from Soft. No.001184 10/08/2001 7. HOUSING(R) Record Management V1.0 Registered No. 07/15/2001;50 2001SR1205 years from Soft. No.001205 09/10/2001 8. HTF OA system V1.0 Registered No. 01/20/2003;50 2001SR0464 years from Soft. No.005555 06/06/2002 9. HTF Population& Family-planning Registered No. 12/09/2003; 50 Management Software V2.0 2003SR12654 years from Soft. No.017745 05/01/2003 10. CGC Credit Guarantee Management Registered No. 12/02/2003; 50 Information System (GMIS) V1.0 2001SR12275 years from Soft. No.017366 08/01/2003 11. HOUSING(R) Subsidy Management System Registered No. 09/01/2003; 50 V3.3 2001SR9331 years from Soft. No.014422 01/27/2002 32 We are the sole owner of all of the above copyrights except our CGC Credit Guarantee Management Information System, which we own jointly with the Shenzhen Small-to-Medium-Sized Enterprises Credit Guarantee Center. Under the PRC Copyright Law, ownership rights to software vest in the party which develops the software unless otherwise agreed to. In the event that the two or more parties collaborate in developing software, then ownership rights to various portions of the software will vest in the respective party responsible for developing such portions or, if the portions are not severable, then jointly in all of the parties. In cases of joint ownership, rights and licensing fees are apportioned either pro rata or as otherwise agreed by the parties. The following software products of HFT are registered with Shenzhen Software Industry Association, which is an organization approved by the PRC Ministry of Information. Registration with the Shenzhen Software Industry Association is recognized all over China. Software Registered Names Registration No. - ---------------------------------------------------- ----------------- HOUSING accumulation fund management center software SZ DGY-2001-0056 (C/S Version) V3.0 HOUSING property exchange and information management SZ DGY-2001-0058 SoftwareV4.0 HOUSING Accumulation Fund management software (Unit SZ DGY-2001-0057 version) V 1.0 HOUSING Property Management Software V2.0 SZ DGY-2001-0059 HOUSING accumulation fund management software (Unit SZ DGY-2003-0156 Version) HOUSING accumulation fund management center software V SZ DGY-2003-0157 3.60 HTF Population and Family-planning Management Software SZ DGY-2003-0523 V2.0 HTF Credit Guarantee Management Software V1.0 SZ DGY-2003-0582 33 Vendors and Suppliers We make advances to certain of our suppliers for our purchases of materials in order to receive bulk discounts and reserve the unit cost of our supplies at a lower price. Our relationship with our vendors and suppliers is good, and we are not aware of any circumstance which would cause any of our vendors or suppliers to discontinue doing business with us. Our products consist largely of intangible technology and data, accordingly, our supply needs, which consist mostly of data storage media and packaging materials, are minimal and can be easily be satisfied by many different vendors. Employees As of January 31, 2005, we had 68 full-time employees, including 8 management employees, 33 employees engaged in technology research and development, 19 employees engaged in sales and marketing and 8 administrative employees. All of our employees have signed confidentiality and non-competition agreements and employment agreements with HTF. We believe that our relationships with our employees are good. Development and Operating Strategies Our development strategy will be to: o Continue to develop specialized applications software products in partnership with our clients. o Maintain our positions in the Housing Accumulation Fund software market and the credit guarantee software market, and continue to increase our market share for these products. o Achieve product diversification and economies of scale by acquiring other software companies and consolidating their operations with our own. Our business plan contains the following specific operating strategies: Marketing Strategy Our products and services are currently marketed and sold directly to our customers primarily through our employee sales force. Our sales representatives identify and contact potential customers by telephone, brochure mailings, and personal meetings. Potential customers are also invited to visit our facilities. In addition, we participate in various activities organized by the administrative bureaus to explore new business opportunities. The specifics of our marketing strategy are as follows: 34 o Monitor changes in market demand to be able to timely establish and adjust our marketing system and sales network. o Continue to target government and other large, "strategic" clients through joint design and development efforts. o Develop strategic partnerships with other well-known, reputable information technology manufacturers. o Promote our products through media, our company website and industry exhibitions. Sales Strategy Since our applications software is industry specialized, our basic sales model principally focuses on the "direct sale" method, complemented by agent sales. Our main sales technique is to provide individual clients with targeted, integrated solution plans for achieving their computerization objectives. Pricing Strategy We currently employ three different pricing strategies: Pricing policy: for products with the same technology content as competitors, we will generally set our price at the same level as or slightly higher than that of the highest-priced competitor. It is our policy not to engage in, or precipitate, any price wars with other companies; however, we may occasionally offer lower prices in order to gain customers who we feel would have an important influence on our long-term development strategy. Pricing by the size of customers: Usually the larger the customer, the higher the expense for software installation, testing, training and maintenance; accordingly, we set different levels of prices based on the size of our customers. In the case of Housing Accumulation Fund software, the size of the user is directly related to the number of employees participating in the fund; the larger the number of employees, the higher the price we charge for our software. Pricing by the software module: Each module of our software has a separately quoted price. Customers can choose to purchase different modules according to their needs. We do not charge separately for systems integration or training services related to sales of our products. We do charge for such services when they are provided in connection with sales of other companies' products; such charges are recognized as part of the overall price charged for the products. Product Strategy Our business plan includes the following strategies for product development: o Continuously invest in product research and development: and develop new generations of software systems that fit future business models. o Pursue development of a number of different products. o Study competitors and their products and promote innovation and originality in our product concept and technology. o Develop different versions of our software specifically designed for various different groups of users. 35 Strategic Alliances In 2004, approximately 23% of our revenues were from sales of value-added services pursuant to our strategic alliances with other information technology companies. In addition, our strategic alliances have provided us with funding to develop new products, such as our credit guarantee software. By developing strategic partnerships with other software companies, we believe that we can broaden and expand the potential markets for our products and enhance their competitive position in the marketplace. We currently have the following strategic alliances: We are a licensed "Microsoft(R) OEM System Builder", which allows us to make bundled sales of Microsoft(R) Windows and SQL Server together with our own products. As an authorized member of the "Microsoft(R) dealer coalition," we can also sell other Microsoft(R) software products on a stand-alone basis. Our Housing Accumulation Fund software received a Windows(R) Server 2003 product certification, which grants us the right to use the "Windows(R)2003" logo in conjunction with sales of our own products. We believe that this significantly increases the value of our products. On August 30, 2003, we signed a PartnerWorld Agreement with IBM, pursuant to which we pair the IBM P-server in conjunction with our Housing Accumulation Fund software to create the "IBM-HTF Housing Accumulation Fund System Solution." Lenovo Group is China's largest information technology manufacturer. On March 24, 2003, HTF entered a Cooperative Agreement with Lenovo and became a value-added service provider of Lenovo's server storage products. Together with Lenovo, we provide data storage solutions for clients in such market sectors as government, education, enterprises, finance, telecommunications, etc. Under the terms of the agreement, we are entitled to sell Lenovo's products with Lenovo's brand as an independent sales agent and bundled products which incorporate Lenovo's products. We purchase Lenovo's products at up to a 15% discount, depending on the quantity purchased and other factors. We also provide our own maintenance services to purchasers of such products. We believe the partnership has helped us to grow our systems integration revenue, which reached $631,000 (RMB 5.2 million) in 2003. Our systems integration revenue decreased to $325,800 in 2004, primarily as a result of Lenovo's decision to subdivide HTF's territory into three districts. On November 12, 2002, HTF and Shenzhen Small-to-Medium-Sized Enterprises Credit Guarantee Center signed a Cooperative Development Agreement for the purpose of developing a Credit Guarantee Information System for SMEs. Under the agreement, both parties jointly own the copyright of the cooperative product and share the post-tax profits from sales of the product at the rate of 20% for the Center and 80% for HTF until the expiration of the copyright. The term of the contract is from August 1, 2003 to December 31, 2052. 36 We intend to continue to pursue strategic partnerships with other domestic and international information technology companies. Strategic Acquisitions We intend to supplement our internal growth strategies by pursuing acquisitions of other software companies. We believe that such acquisitions will provide the following benefits: o Enable us to quickly enter new markets by providing us with existing marketing and distribution systems; o Help us to expand and diversify our product lines while reducing the risks and uncertainties associated with the development of new software products; o Enable us to achieve economies of scale by consolidating technologies, facilities and human resources; and o Help us to build brand recognition by expanding our customer base and market presence. We believe that the fragmented nature of the software market in China will provide attractive opportunities for consolidation due to the large number of small, specialized companies currently in existence. In evaluating potential acquisition targets, we will seek out companies with strong management teams and innovative, well-designed products. We anticipate looking to venture capital firms, which may be interested in selling their holdings in start-up software companies, and managers of office parks where many software companies are located, as well as other parties, as potential sources for finding acquisition candidates. DESCRIPTION OF PROPERTY We lease approximately 640 square meters of space for HTF's executive offices and operations in Shenzhen, China from Shenzhen Chuangwei-RGB Electronic Co., Ltd. The lease is for a term of three years beginning on February 25, 2003 and ending on February 24, 2006. The monthly rent under the lease (including property management and air conditioning maintenance fees), is approximately $4,398 (RMB 36,400) and is subject to adjustment by the landlord. The lease is renewable for an indefinite period of time upon one month's prior notice. We receive a government rent subsidy of approximately $1,544 (RMB 12,780) per month until February, 2005 under the 2003 Agreement for the Entrance of Software Enterprises into Shenzhen Software Enterprise Zone. On December 15, 2003 HTF entered into a purchase agreement for approximately 600 square meters of space which was to be used as our executive offices and for operations at Shenzhen Municipal Tian'an Digital Chuang Ye Garden Suite A, Room 802. The property was purchased for $513,577 (RMB 4,250,724). In connection with the purchase, Mr. Li Yuan Qing obtained a loan from China Xing Ye Bank, Shenzhen Xiang Mi Hu Branch in the amount of $359,129 (RMB 2,970,000) for HTF and HTF granted a mortgage on the property to secure repayment of the loan. The Company sold the property on April 20, 2005 for $540,050 (RMB4,463,230). The mortgage on the property was released prior to the time of the sale. 37 HTF leases a sales office of approximately 160 square meters in Beijing, China from Zhong Qing Property Management Co., Ltd. on a year-to-year basis. The current term is from January 1, 2005 to December 31, 2005 at a monthly rent of $1,560 (RMB 12,900) (including management and air-conditioning maintenance fees). HTF also owns approximately 170 square meters of office space at Room 202 and 702 of Xu Yuan #27, Unit 4 of Sunny Garden, Dian Chi Rd, Kunming, China. The property is used as a sales office. HTF purchased the property for $25,227 (RMB 209,027.73) on January 15, 2001. On November 5, 2003 HTF paid another $3,560 (RMB29,461) for the property to fill the shortfall between the commercial property price and governmental subsidized property price as local real property policy requires. SELECTED FINANCIAL DATA The following table presents our selected financial data at December 31, 2004 and December 31, 2003 and for the fiscal years then ended. We derived the selected financial data set forth below as of December 31, 2004 from our consolidated financial statements as of December 31, 2004 and for the fiscal year then ended that are included elsewhere in this prospectus. We derived the selected financial data set forth below as of December 31, 2003 and for the year then ended from the financial statements of HTF as of December 31, 2003 and for the year then ended that are included elsewhere in this prospectus. We derived the selected financial data for the year ended December 31, 2002 from audited financial statements of HTF which are not included in this prospectus. You should read the following summary financial data in conjunction with the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. Fiscal Year Ended ----------------- December 31, ------------ 2004 2003 2002 Net revenues $1,373,079 $2,206,757 $480,295 Income (loss) from operations (131,711) 603,101 (185,224) Net income 45,783 707,653 (247,036) Total assets 1,963,600 (1) 2,820,574 (2) 1,453,214(3) Total liabilities 296,628 (1) 1,201,779 (2) 542,756(3) (1) As at December 31, 2004 (2) As at December 31, 2003 (3) As at December 31, 2002 38 Our reporting currency is the U.S. Dollar. We use the local currency in the PRC, the Renminbi, as our functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the end of period exchange rates. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains predictive statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these predictive statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this prospectus. Overview The Company was incorporated in the State of Delaware on January 13, 2005 and it is a holding company for, and owns 100% of, XHT. XHT is a holding company for, and owns 100% of, HTF. HTF was founded in the PRC on July 5, 1995, under the name of "Shenzhen Guangba Trade Development Co., Ltd" and changed its name to "Shenzhen Hengtaifeng Technology Co., Ltd." on May 12, 2000. HTF is a provider of special-use applications software and systems integration services in China. We developed and produce our Housing Accumulation Fund software and credit guarantee management software products. We also developed family planning and property management software and sell value-added systems integration services pursuant to our strategic alliances with other software companies. HTF is headquartered in Shenzhen, China and has established a sales network in northern and southern China through its Beijing and Kunming branch offices. On January 31, 2005, the Company acquired 100% of XHT pursuant to the Share Exchange Agreement in exchange for 9,000,000 shares of the Company's common stock. As a result of that transaction, HTF became a wholly-owned subsidiary of the Company. 39 Results of Operations Fiscal Years Ended December 31, 2004 and December 31, 2003 Sales and Gross Profit Net sales for the fiscal year ended December 31, 2004 were approximately $1,373,079 compared to approximately $2,206,757 for the fiscal year ended December 31, 2003, a decrease of $833,678 or approximately 37.8%. The primary reasons for the decrease in net sales in 2004 were the absence of sales of our property management software, which generated $525,000 in revenues in 2003, and a $305,200 decrease in systems integration revenue and a decrease of $130,300 in sales of our Housing Accumulation Fund software. The decrease in systems integration revenue in 2004 primarily resulted from the decision by our strategic partner, Lenovo, to subdivide the district in which HTF is located into three districts, thereby reducing the amount of systems integration work assigned to us. The decrease in sales of Housing Accumulation Fund software was primarily due to a reorganization of the Centers by the PRC State Counsel in 2004, which temporarily diverted the Centers' efforts towards effecting the transition. Under the reorganization, certain Centers at the county level were consolidated with Centers at the municipal level.Sales of our credit guarantee software in 2004 increased by $85,000, or 243% from $35,000 in 2003. The increase was primarily due to completion of the initial development of the product, which commenced sales in the third quarter of 2003, and an increase in the number of sales agents devoted to the product. In addition, sales of our family planning software, which was developed in 2003 and commenced sales in 2004, increased to $54,600 from $0 in 2003. Sales of value-added systems integration services bundled with other companies' products decreased from $630,000 in 2003 to $325,800 in 2004, primarily as the result of Lenovo's decision to subdivide our territory, hereby reducing the amount of systems integration services business assigned to us. Sales of property management software decreased from $36,000 in 2003 to $0 in 2004. Sales of property management software have been sporadic, and we have not focused our efforts on this product. Gross profit for the fiscal year ended December 31, 2004 was approximately $995,403, compared to $1,314,819 for the fiscal year ended December 31, 2003, a decrease of $319,416 or approximately 24.3% from the year ended December 31, 2003. The decrease in gross profit was primarily due to the decrease in sales and revenues as mentioned above. For the fiscal year ended December 31, 2004, approximately 47% of sales were made to our 10 largest customers, approximately 30% of our sales were made to our 5 largest customers and approximately 7% of sales were made to our largest customer. For the fiscal year ended December 31, 2003, approximately 59% of our sales were made to our 10 largest customers, approximately 45% of our sales were made to our 5 largest customers and approximately 24% of sales were made to our largest customer. 40 Approximately 74.5% of sales of Systems Integration Services were made to our 10 largest purchasers and 55.3% of sales were made to the 5 largest purchasers of the services. Approximately 67.9% of sales of Housing Accumulation Fund software were made to the ten largest purchasers and 46.2% to the five largest purchasers of this product. All sales of Credit Guarantee software were made to ten customers, and approximately 73.9% of sales were to the five largest customers for this product. All sales of family planning software in 2004 were made to fewer than five customers. Cost of sales Cost of sales decreased to approximately $377,676 in the fiscal year ended December 31, 2004, or approximately 57.7% from approximately $891,938 in the prior year, primarily due to the decrease in systems integration revenue. The changes in cost of revenues are attributable to changes in sales levels for each category of products: the cost of revenue of housing accumulation funds software in 2004 decreased to $131,561 from $304,562 in 2003 because the demand for that software decreased from 2003 to 2004; the cost of revenue for credit guaranty software increased to $13,167 in 2004 from $4,953 in 2003 as a result of a rapid increase in sales for credit guaranty software from 2003 to 2004. There was no revenue, and therefore no cost of revenue, for family planning software in 2003. The cost of revenue for the family planning software was $1,855 in 2004. The cost of revenue for property management software was $72,772 in 2003 and $0 in 2004, since there were no sales of the product in 2004. The cost of revenues for IT products and systems integration services was $503,604 and $223,355, respectively. The decrease was a result of the decrease in sales. Selling, General and Administrative Expenses Selling, general and administrative expenses were approximately $947,513, in the fiscal year ended December 31, 2004, or approximately 69% of net sales, compared to approximately $586,452, or approximately 26.6% of net sales, for the fiscal year ended December 31, 2003. The increase in selling, general and administrative expenses primarily resulted from the increase in bad debt expense as a result of increasing the Company's Allowance for Accounts Receivable from $11,860 in 2003 to $209,740 in 2004, professional expenses of $96,800 incurred in 2004 (as compared to no such expenses in 2003) as a result of the Company's decision to restructure and become a reporting company in the United States and an increase in employee traveling expenses from $17,989 in 2003 to $79,337 in 2004. 41 Income Taxes According to the Provisional Regulations of the People's Republic of China on Income Tax, the Document of Reductions and Exemptions of Income Tax for the Company has been approved by the Shenzhen local tax bureau and we were exempted from all income tax during the fiscal years ended December 31, 2003 and 2004. We will pay one-half of the regular tax rate of 15% during the fiscal years ending December 31, 2005 through December 31, 2007 and the regular tax rate for fiscal years occurring after December 31, 2007. Liquidity and Capital Resources As of December 31, 2004, we had a short term loan payable in the amount of $121,000 to a non-related party. The loan is unsecured, non-interest bearing and due on demand. We currently finance our operations and capital expenditures through cash flows from operations and short term loans. Net cash provided by operating activities for the fiscal year ended December 31, 2004 was $213,556 as compared to $188,694 for the fiscal year ended December 31, 2003. The increase in net cash provided by operating activities in 2004 was primarily a result of a reduction in accounts receivable, an increase in deposits and decreases in payables during 2004, which more than offset a reduction in net income in 2004. Net cash used in financing activities for 2004 was $554,334 as compared to $674,709 for 2003. The increase in net cash used in financing activities in 2004 was primarily a result of our making an aggregate of $910,573 in payments in 2004 on a note, compared to $5,424 of payments made in 2003, and a decrease in 2004 in proceeds received from loans by non-related parties of $524,548, offset by our receipt of proceeds from loans from officers and shareholders of $199,620 in 2004, an increase of $125,226 over the $74,394 received in 2003. As discussed elsewhere in this Prospectus under the heading, "Risk Factors," we anticipate that we will need to raise approximately $5 million to finance our operations over the next 12 to 18 months; although we intend to obtain the financing through sales of our securities, we cannot ensure that we will be able to do so. Accounts Receivable The decrease in accounts receivable from $475,299 for the fiscal year ended December 31, 2003 to $255,290 for the fiscal year ended December 31, 2004 is primarily attributable to the decrease in net sales from 2003 to 2004 and an increase in the allowance for doubtful accounts. The allowance for doubtful accounts was increased upon re-evaluation of our accounts receivable at December 31, 2004, based upon circumstances as they existed, including dealings with the customers, age of the receivables and financial status of the customers. 42 The increase in other receivables from December 31, 2004 to December 31, 2003 from $68,708 to $236,352 was primarily due to the sale of property as described in Note 5 of the audited consolidated financial statements. Inventory Total inventory remained constant between the fiscal year ended at December 31, 2004 ($312,046) and 2004($329,561). However, raw and packing materials decreased from $217,604 in 2003 to $130,940 as a result of the decrease in total revenues from $2,206,757 in 2003 to $ 1,373,079 in 2004. The finished goods increased from $9,562 in 2003 to $85,985 in 2004, mostly due to an increase in unsold Housing Accumulation Funds software, which remains in stock. Accounts Payable Accounts payable and accrued expenses decreased from $84,470 as of December 31, 2003 to $17,650 as of December 31, 2004, primarily as a result of a decrease in our purchases of materials. Critical Accounting Policies 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 our consolidated financial statements, "Summary of Significant Accounting Policies." Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations. Revenue recognition The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers or services has been rendered when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. 43 License Revenue. The Company recognizes revenue from license contracts when a non-cancelable, non-contingent license agreement has been signed, the software product has been delivered, no uncertainties exist surrounding product acceptance, fees from the agreement are fixed and determinable and collection is probable. Any revenues from software arrangements with multiple elements are allocated to each element of the arrangement based on the relative fair values using specific objective evidence as defined in the SOPs. If no such objective evidence exists, revenues from the arrangements are not recognized until the entire arrangement is completed and accepted by the customer. Once the amount of the revenue for each element is determined, the Company recognizes revenues as each element is completed and accepted by the customer. For arrangements that require significant production, modification or customization of software, the entire arrangement is accounted for by the percentage of completion method, in conformity with Accounting Research Bulletin ("ARB") No. 45 and SOP 81-1. Services Revenue. Revenue from consulting services is recognized as the services are performed for time-and-materials contracts and contract accounting is utilized for fixed-price contracts. Revenue from training and development services is recognized as the services are performed. Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most instances is one year. Payment for software maintenance received in advance is recorded on the balance sheet as deferred revenue. The maintenance revenue was insignificant during 2004 and 2003. Accounting for long-lived assets Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business. "We periodically evaluate the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on our review, we believe that, as of December 31, 2004 and 2003, there were no significant impairments of our long-lived assets. Bad debts Our business operations are conducted in the PRC. During the normal course of business, we extend credit to our customers based upon our assessment of their credit worthiness and generally do not require collateral. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of January 31, 2005, certain information with respect to the beneficial ownership of our voting securities by (i) any person or group owning more than 5% of our securities, (ii) each director, (iii) each executive officer and (iv) all executive officers and directors as a group. 44 Amount and Name and Nature of Address of Title of Beneficial Percent of Beneficial Owner Class Ownership Class (1) ---------------- ----- Li Yuan Qing Suite 2911-2912, 29th Floor Two International Finance Centre No. 8 Finance Street Common Central, Hong Kong Stock 6,300,000 (2) 58.3% Qiu Zhen Liang Building 86-306 Yuanling Xincun Futian District Common Shenzhen, PRC Stock 2,700,000 25.0% Chen Ling 5-402 Chiwei Building South Huaquiang Road Common Shenzhen, PRC Stock 900,000 8.3% Warner Technology and Investment Corp. 701 East Linden Avenue Common Linden, New Jersey 07036 Stock 610,000 5.6% American Union Securities, Inc. 100 Wall Street, 15th Floor Common New York, New York 10005 Stock 650,000 6.0% Huakang Zhou 701 East Linden Avenue Common Linden, New Jersey 07036 Stock 40,000 5.0% All Directors and Officers of Common the Company Stock 9,000,000 (2) 83.3% as a group (3 persons) (1) Computed based upon a total of 10,800,000 shares of Common Stock outstanding as of January 31, 2005. (2) Includes 900,000 shares owned by Chen Ling, Mr. Li's wife DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS The following are our executive officers and directors as of January 31, 2005. Except for Norman Fuchs, each of our executive current officers and Directors is a resident of China. As a result, it may be difficult for investors to effect service of process within the United States upon them or to enforce court judgments obtained against them in the United States courts. 45 Name Position(s) Age - ---- ----------- --- Li Yuan Qing Chairman, 36 President and Director Executive Director of XHT Chairman of HTF Shen Ding Hong Director and 36 Chief Financial Officer, Chief Accounting Officer Director and Financial Manager HTF Wu Jian Ping Director 33 Executive Officer of HTF Chen Ling Director - XHT 38 Norman Fuchs Director 51 Yu Qing Biao Secretary 37 Qiu Zhen Liang Director and 44 Member of XHT Yue Xin Director of HTF 41 Chen Ning Xiang Director of HTF 37 Ma Ping Director of HTF 39 Li Yuan Qing has been the Chairman and President of our company since January 2005, the Executive Director of XHT since 2004 and the Chairman of HTF since 2003. He has been a director of HTF for more than five years and was the CEO of HTF from 2000 to 2004. Mr. Li has also served as the Director of Jiangsu Qi Hang Digital Control Engine Bed Co., Ltd. and Jiangsu Zhenjiang Xinzhou Mechanics Factory, and as the Executive Director of Hengtaifeng International Holdings Co., Ltd. He graduated from Shenzhen University in 1989 and earned an Executive MBA degree from Zhongshan University in 2003. Shen Ding Hong has been a Director and CFO of our company since January 2005. She has been Financial Manager of HTF since 2003. From 1999 to 2002 she served as the Manager of He Zhong Heng Software Co., Ltd. Wu Jian Ping has been a Director of our company since January 2005. She has also served as the CEO of HTF since January 1, 2005. Ms. Wu has served as the Manager of Credit Guarantee Department of HTF and the Vice President of HTF from 2003 to 2004. She was the Vice President of Shenzhen Municipal Pu Da Technology Co., Ltd., an enterprise engaged in the development and sale of office management software and client source management software, from 2001 to 2003, a member of the Project Research Staff of Shenzhen Saibo Technology Co., Ltd., an applications software company specializing in networking software, from 2000 to 2001 and the Sales Manager and Manager of the Market Department of Shenzhen Shu Ju Tong Computer Network System Co., Ltd. from 1999 to 2000. 46 Yu Qing Biao has been the secretary of the Company since January 2005. During the past five years, he has worked for HTF serving as Assistant Manager of the Technology Department from June 1, 2001 to December 31, 2001, Administrative Manager on Human Resource Administration from January 1, 2002 to December 31, 2002, vice president of HTF and manager of the HTF IT resource department from January 1, 2003 to December 31, 2003; executive vice president of HTF and manager of the HTF IT resource department from January 1, 2004 to December 31, 2004 and vice president of HTF since January 1, 2005. Prior his joining to HTF, he had worked for Jing Zhong Daily as Editor and Director for the Computer Center for over 11 years. Qiu Zhen Liang is a Director of XHT since its incorporation on May 28, 2004. He has served as both the CEO of Shenzhen Municipal Hope Realization Network Technology Co, Ltd. and the Chairman of Shenzhen Qi Xin Credit Guarantee Co., Ltd. since 2002. He has also served as the CEO of Shenzhen Shengdaxian Development Group Co., Ltd., a provider which has 30% equity of HTF and doing credit guarantee, networks and international trading, from 1994 to date. Chen Ling has been a Director of XHT since its incorporation on May 28, 2004 and a Director of HTF since 2003. She served as a Monitor of Shenzhen Hengtaifeng Industrial Company, the HTF's predecessor company, from 1999 to 2002, and as a Monitor of HTF from 2002 to 2003. Chen Ning Xiang has been a Director of HTF Shenzhen Shengdaxian Development Group Company since 2003. Prior to that, he served as the Manager for the Comprehensive Management Department and the Legal Consultant of Shenzhen Municipal Sheng Long Industrial Co., Ltd. from 1993 to 2003. Ma Ping has been a Director of HTF and the Manager of the Audit Department of Shenzhen Shengdaxian Development Group Company ("Shengdaxian") since 2003. During the past five years, she has also served as the Financial Manager of Shengdaxian from 2000 to 2005. Norman Fuchs has been a Director of our company since January 2005. He is also the Director of Corporate Finance and Investment Banking of American Union Securities, Inc., a broker-dealer located in New York, New York and a Selling Stockholder, since April 2004. From January 2000 to April 2004, he was a senior research analyst with ATH Ventures, Inc., a firm specializing in venture capital fund development and management, technology transfer, corporate finance and investment banking services for high technology companies. 47 Family Relationships There are no family relationships between or among any executive officers or Directors of the Company or our subsidiaries except that Li Yuan Qing, our Chairman and President, is the husband of Chen Ling, who is a Director of our subsidiary, XHT. Audit Committee Financial Expert Our full Board of Directors currently serves as our audit committee. Our Board of Directors does not currently have an audit committee "financial expert" as defined under Rule 401(e) of Regulation S-B because we only recently consummated our transaction with XHT and our Board of Directors is in the process of searching for a suitable candidate for this position. EXECUTIVE COMPENSATION Neither the Company nor XHT currently pays any compensation to our executive officers or Directors. The following is a summary of the compensation paid by HTF to its CEO for the three years ended December 31, 2004. No executive officer of HTF received compensation in excess of $100,000 for any of the three years ended December 31, 2004, 2003 or 2002.
ANNUAL COMPENSATION LONG TERM COMPENSATION Awards Payouts Other Restricted Securities Annual Stock Underlying All Year Compen- Awards Options/ LTIP Other Name Position Ended Salary($) Bonus($) sation($) $ SARS Payouts Compensation ---- --------- ----- --------- -------- --------- ------ ---- ------- ------------ Li Yuan Qing CEO 12/31/2004 13,526 1,156 349 0 0 0 0 755 CEO 12/31/2003 10,077 0 0 0 0 0 CEO 12/31/2002 7,137 309 0 0 0 0 0
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS In 2003 HTF loaned $199,620 to Mr. Li Yuan Qing, our Chairman, who was the Chief Executive Officer of HTF at the time the loan was made. The loan was unsecured, non-interest bearing and due upon demand. It was repaid in full by Mr. Li Yuan Qing in 2004. In 2003 Mr. Li Yuan Qing personally borrowed $359,129 from China Xing Ye Bank. The loan was secured by a mortgage on the Company's property located at Shenzhen Municipal Tian'an Digital Chuang Ye Garden. The proceeds of the loan were used to purchase the property on the Company's behalf as a means of paying off indebtedness to the Company which was previously incurred by Mr. Li Yuan Qing.We sold the property on April 20, 2005 for $540,050 (RMB4,463,230). The morgage on the property was released prior to the sale. On October 18, 2003, we entered into an agreement with Warner Technology and Investment Corp. ("Warner"), a Selling Stockholder listed in this prospectus. Pursuant to the agreement, Warner assisted us in preparing our business plan, introduced us to our U.S. accountants and counsel, selected a U.S. corporation for the share exchange and assisted with our due diligence efforts. In addition, Warner agreed to assist us with our listing application for the OTC Bulletin Board and with public relations in the U.S., among other things. 48 In exchange for such services, Warner received a $50,000 retainer, which is refundable in the event that Warner fails to procure our listing on the OTC Bulletin Board in a timely fashion, $10,000 upon completion of our business plan, $5,000 upon completion of the Share Exchange and 610,000 shares of Common Stock. We also agreed to indemnify Warner against all liabilities incurred by it in performing its obligations under the agreement. On November 24, 2004, we entered into an agreement with American Union Securities, Inc., a Selling Stockholder listed in this prospectus ("AUS"). Pursuant to the agreement, AUS agreed to provide us with financial consulting and investment banking services, including advice regarding our corporate structure and capitalization, mergers, acquisitions and similar transactions and assistance in procuring financing. In exchange for such services, AUS has received $100,000 and $250,000 has been placed in an escrow account, $100,000 of which will be released to AUS when the registration statement relating to this prospectus is declared effective by the Commission and the remaining $150,000 of which will be released when our Common Stock is approved for listing on the OTC Bulleting Board. AUS also received 650,000 shares of Common Stock. In addition, we agreed to pay additional fees to AUS in the event that a merger, acquisition or capital raising transaction results from AUS's efforts or occurs during the term of the agreement, as follows: for transactions with up to $500,000 consideration, $25,000; for transactions with over $500,000 to $5,000,000 consideration, 5% of the total consideration; and for transactions with over $5,000,000 consideration, $250,000 plus 2 1/2% of consideration in excess of $5,000,000. In the event that we enter into a joint venture with another company, AUS will receive 3% of the venture's sales for the first two years of operation. If we conduct a private offering of securities, AUS will receive 10% of the gross amount received as commissions, a 3% non-accountable expense allowance and 10% of the securities placed. We also agreed to indemnify AUS for all liabilities incurred by it in performing its obligations under the agreement. Except for the foregoing, during the fiscal years ended December 31, 2004 and December 31, 2003, HTF did not enter into any transactions in which any Director, executive officer or affiliate of the Company or any of its subsidiaries, or any member of the immediate family of any of the foregoing, had a direct or indirect material interest. PLAN OF DISTRIBUTION The Selling Stockholders may sell the shares of Common Stock offered hereby directly or through brokers, dealers or underwriters who may act solely as agents or may acquire Common Stock as principals. The Selling Stockholders may distribute the Common Stock using one or more of the following methods: 49 o ordinary brokers transactions, which may include sales through the facilities of the OTC Bulletin Board, if a market maker successfully applies for inclusion of our Common Stock in such market or such other market where the Common Stock may be quoted or listed for trading; o in other ways not involving market makers or established trading markets, including direct sales to purchasers or sales made through agents; o any combination of the above, or by any other legally available means. The Selling Stockholders and/or the purchasers of Common Stock may compensate brokers, dealers, underwriters or agents with discounts, concessions or commissions (compensation may be in excess of customary commissions). We do not know of any arrangements between any Selling Stockholder and any broker, dealer, underwriter or agent relating to the sale or distribution of the Common Stock offered hereby. We and the Selling Stockholders and any other persons participating in a distribution of our Common Stock will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M, which may restrict certain activities of, and limit the timing of purchases and sales of securities by, these parties and other persons participating in a distribution of securities. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions subject to specified exceptions or exemptions. We cannot assure you that the Selling Stockholders will sell any of their shares of Common Stock. In order to comply with the securities laws of certain states, if applicable, the Selling Stockholders will sell shares of Common Stock in such jurisdictions only through registered or licensed brokers or dealers. In addition, in certain states, the Selling Stockholders may not sell or offer the Common Stock unless the sale is registered with the applicable state commission, or the applicable state qualifies the Common Stock for sale in that state, or the applicable state exempts the Common Stock from the registration or qualification requirement. DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 60,000,000 shares of Common Stock, par value $.001 per share, of which there are 10,800,000 shares issued and outstanding, and 1,000,000 shares of preferred stock, par value $.001 per share, of which no shares have been designated or issued. 50 Common Stock Holders of shares of Common Stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of Common Stock do not have cumulative voting rights. Holders of Common Stock are entitled to share ratably in dividends, if any, as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefore. In the event of a liquidation, dissolution or winding up of the Company, the holders of our Common Stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. Holders of our Common Stock have no preemptive rights. There are no conversion or redemption rights or sinking fund provisions with respect to our Common Stock. Preferred Stock Our Board of Directors is authorized to provide for the issuance of shares of preferred stock in series and, by filing a certificate of designations, preferences and rights pursuant to Delaware law, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof without any further vote or action by our stockholders. Any shares of preferred stock so issued are likely to have priority over our Common Stock with respect to dividend or liquidation rights. Any future issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by our stockholders and may adversely affect the voting and other rights of the holders of Common Stock. At present, we have no plans to either issue any preferred stock or adopt any series, preferences or other classification of preferred stock. The issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could be used to discourage an unsolicited acquisition proposal. For instance, the issuance of a series of preferred stock might impede a business combination by including class voting rights that would enable the holders to block such a transaction, or facilitate a business combination by including voting rights that would provide a required percentage vote of the stockholders. In addition, under certain circumstances, the issuance of preferred stock could adversely affect the voting power of the holders of the Common Stock. Although our Board of Directors is required to make any determination to issue such stock based on its judgment as to the best interests of our stockholders, the Board of Directors could act in a manner that would discourage an acquisition attempt or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which they might receive a premium for their stock over the then market price of such stock. The Board of Directors does not at present intend to seek stockholder approval prior to any issuance of currently authorized preferred stock, unless otherwise required by law. 51 MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of the date of this prospectus, there is no trading market for our securities. An application has been filed with the National Association of Securities Dealers for the public trading of our Common Stock on the OTC Bulletin Board, but there is no assurance that our Common Stock will be quoted on the OTC Bulletin Board or any other quotation service or traded on any stock exchange. We are not offering, and do not propose to publicly offer, any of our Common Stock on behalf of the Company. As of the date of this prospectus, there are six holders of our Common Stock and none of such holders are eligible to sell any of their shares of Common Stock pursuant to Rule 144. Dividends The payment of dividends, if any, is within the discretion of our Board of Directors. We presently intend to retain all earnings, if any, for use in our business operations and, accordingly, the Board of Directors does not anticipate declaring any dividends in the near future. Dividends, if any, will be contingent upon our revenues and earnings, capital requirements, financial conditions and the ability of HTF to obtain approval to get monies out of the PRC. The PRC's national currency, the Yuan, is not a freely convertible currency. Effective January 1, 1994, the PRC foreign exchange system underwent fundamental changes. This reform was stated to be in line with the PRC's commitment to establish a socialist market economy and to lay the foundation for making the Yuan convertible in the future. The currency reform is designed to turn the dual exchange rate system into a unified and managed floating exchange rate system. A China Foreign Exchange Trading Centre was formed in April, 1994 to provide an interbank foreign exchange trading market whose main function is to facilitate the matching of long and short term foreign exchange positions of the state-designated banks, and to provide clearing and settlement services. The People's Bank of China publishes the state managed exchange rate daily based on the daily average rate from the previous day's inter-bank trading market, after considering fluctuations in the international foreign exchange markets. Based on these floating exchange rates, the state-designated banks list their own exchange rates within permitted margins, and purchase or sell foreign exchange with their customers. The State Administration of Foreign Exchange of the PRC ("SAFE") administers foreign exchange dealings and requires that they be transacted through designated financial institutions. All Foreign Investment Enterprises ("FIEs") may buy and sell foreign currency from designated financial institutions in connection with current account transactions, including, but not limited to, profit repatriation. With respect to foreign exchange needed for capital account transactions, such as equity investments, all enterprises in the PRC (including FIEs) are required to seek approval of the SAFE to exchange Yuan into foreign currency. When applying for approval, such enterprises will be subject to review by the SAFE as to the source and nature of the Yuan funds. 52 There can be no assurance that the Yuan relative to other currencies will not be volatile or that there will be no devaluation of the Yuan against other foreign currencies, including the U.S. dollar. Equity Compensation Plan Information As of the date of this Report, we do not have any equity compensation plans. Transfer Agent We currently act as our own transfer agent, but plan to engage a transfer agent when, and if, a trading market for our Common Stock develops. Penny Stock Regulations The SEC has adopted regulations which generally define "penny stock" to be an equity security that has a market price of less than $5.00 per share. The Company's Common Stock, will fall within the definition of penny stock and be subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the "penny stock" rules may restrict the ability of broker-dealers to sell our Common Stock and may affect the ability of investors to sell our Common Stock in the secondary market. LEGAL PROCEEDINGS Neither the Company, nor XHT nor HTF is currently a party to any pending legal proceeding. 53 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS During the fiscal years ended December 31, 2003 and December 31, 2002, and for the nine months ended September 30, 2004, Rosenberg Rich Baker Berman & Company ("Rosenberg Rich") was the principal independent accountant of our subsidiaries, HTF. Rosenberg declined an engagement to audit the consolidated financial statements of XHT and HTF as of December 31, 2004 because it decided to limit its involvements with companies whose securities are publicly traded. Rosenberg's report on the financial statements of HTF for the past two fiscal years did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles. During HTF's two most recent fiscal years and the subsequent interim periods, there were no disagreements with Rosenberg on any matter of accounting principles or practices, financial statement disclosure, auditing scope, or procedure, which disagreements, if not resolved to the satisfaction of Rosenberg, would have caused it to make reference to the subject matter of the disagreement in connection with its reports. On January 7, 2005, we retained Kabani & Company as our new independent accountant. Kabani & Company is located at 17011 Beach Boulevard, Suite 1230, Huntington Beach, California 92647. The decision to retain Kabani & Company was approved by our Board of Directors. Kabani & Company was not consulted regarding: (i) the application of accounting principals to a specific transaction, (ii) the type of audit opinion that might be rendered on our financial statements, (iii) the provision of any written or oral advice regarding any accounting, auditing or financial reporting issue, or (iv) any matter that is the subject of a disagreement or reportable event as defined by Item 304 of Regulation S-B under the Securities Act. INDEMNIFICATION OF DIRECTORS AND OFFICERS We had agreed to indemnify the Selling Stockholders whose shares we are registering from all liability and losses resulting from any misrepresentations we make in connection with this registration statement; however, the Selling Stockholders subsequently waived such indemnification and we have not so indemnified any of them. We had separately agreed to indemnify Warner and AUS in connection with the performance of their obligations under their respective agreements with us as described elsewhere in this prospectus under the heading, "Certain Relationships and Related Party Transactions." Pursuant to Article V, Section 1 of our By-Laws, we may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he or she is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceedings, had no reasonable cause to believe his or her conduct was unlawful. 54 Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our Directors, officers and controlling persons, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a Director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such Director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. LEGAL MATTERS Our counsel, Guzov Ofsink, LLC, located in New York, New York, is passing upon the validity of the issuance of the Common Stock that we are offering under this prospectus. EXPERTS Kabani & Company, independent certified public accountants, located at 17011 Beach Boulevard, Huntington Beach, California 92647, have audited the financial statements of the Company and the consolidated financial statements of XHT included in this registration statement to the extent, and for the periods set forth in their report. Rosenberg Rich Baker Berman & Company, independent certified public accountants, located at 380 Foothill Road, Bridgewater, New Jersey 08807-0483, have audited the financial statements of HTF included in this registration statement to the extent, and for the periods, set forth in their report. We have relied upon such reports, given upon the authority of such firms as experts in accounting and auditing. FINANCIAL STATEMENTS The Company's consolidated financial statements, including the notes thereto, together with the report of independent certified public accountants thereon, are presented beginning at page F-1. 55 WHERE YOU CAN FIND MORE INFORMATION We have filed with the U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, a registration statement on Form SB-2, as amended, under the Securities Act for the Common Stock offered by this prospectus. We have not included in this prospectus all the information contained in the registration statement and you should refer to the registration statement and its exhibits for further information. The registration statement and other information may be read and copied at the Commission's Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC maintains a web site (HTTP://WWW.SEC.GOV.) that contains the registration statements, reports, proxy and information statements and other information regarding registrants that file electronically with the SEC such as us. You may also read and copy any reports, statements or other information that we have filed with the SEC at the addresses indicated above and you may also access them electronically at the web site set forth above. These SEC filings are also available to the public from commercial document retrieval services. 56 INDEX TO FINANCIAL STATEMENTS Page No. Heng Xing Technology Group Development Limited and Subsidiary Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheet as of December 31, 2004 F-2 Consolidated Statement of Income for the year ended December 31, 2004 F-3 Consolidated Statement of Stockholders' Equity for the year ended December 31, 2004 F-4 Consolidated Statements of Cash Flow for the year Ended December 31, 2004 F-5 Notes to Consolidated Financial Statements F-6 Shenzhen Hengtaifeng Technology Co., Ltd. Independent Auditors' Report F-16 Balance Sheet as of December 31, 2003 F-17 Statement of Operations for the year ended December 31, 2003 F-18 Statement of Changes in Stockholders' Equity for the year Ended December 31, 2003 F-19 Statement of Cash Flows for the year ended December 31, 2003 F-20 Notes to Financial Statements F-21 China International Enterprises Corp. Report of Independent Registered Public Accounting Firm F-28 Balance Sheet as of January 30, 2005 F-29 Statement of Operations for the Period January 13, 2005 (inception) to January 30, 2005 F-30 Statement of Stockholders Deficit for the Period January 13, 2005 (inception) to January 30, 2005 F-31 Statement of Cash Flows for the Period January 13, 2005 (inception) to January 30, 2005 F-32 Notes to Financial Statements F-33 You should rely on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. The information in this document may only be accurate on the date of this document. This document may be used only where it is legal to sell these securities. 1 Until __________, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - ---------------- TABLE OF CONTENTS Prospectus Summary 1 Risk Factors 6 Cautionary Note Regarding Predictive Statements 14 Use of Proceeds 14 Determination of Offering Price 14 Selling Stockholders 15 Business 16 Decription Of Property 37 Selected Financial Data 38 Management's Discussion andAnalysis of Financial Condition and Results Of Operations 39 Security Ownership of Certain Beneficial Owners and Management 44 Directors and Executive Officers, Promoters and Control Persons 45 Executive Compensation 48 Certain Relationships and Related Party Transactions 48 Plan of Distribution 49 Description Of Securities 50 Market Price of and Dividends on our Common Equity and Related Stockholder Matters 52 Legal Proceedings 53 Changes in and Disagreements with Accountants 54 Indemnification of Directors and Officers 54 Legal Matters 55 Experts 55 Financial Statements 55 Where You Can Find More Information 56 2 INDEX TO FINANCIAL STATEMENTS
Page No. -------- Heng Xing Technology Group Development Limited and Subsidiary Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheet as of December 31, 2004 F-2 Consolidated Statements of Income for the years ended December 31, 2004 and 2003 F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2004 and 2003 F-4 Consolidated Statements of Cash Flow for the years Ended December 31, 2004 and 2003 F-5 Notes to Consolidated Financial Statements F-6 Shenzhen Hengtaifeng Technology Co., Ltd. Independent Auditors' Report F-16 Balance Sheet as of December 31, 2003 F-17 Statement of Operations for the year ended December 31, 2003 F-18 Statement of Changes in Stockholders' Equity for the year Ended December 31, 2003 F-19 Statement of Cash Flows for the year ended December 31, 2003 F-20 Notes to Financial Statements F-21 China International Enterprises Corp. Report of Independent Registered Public Accounting Firm F-28 Balance Sheet as of January 30, 2005 F-29 Statement of Operations for the Period January 13, 2005 (inception) to January 30, 2005 F-30 Statement of Stockholders" Deficit for the Period January 13, 2005 (inception) to January 30, 2005 F-31 Statement of Cash Flows for the Period January 13, 2005 (inception) to January 30, 2005 F-32 Notes to Financial Statements F-33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Heng Xing Technology Group Development Limited We have audited the accompanying consolidated balance sheet of Heng Xing Technology Group Development Limited (a British Virgin Islands Corporation) and subsidiary as of December 31, 2004 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 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 audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Heng Xing Technology Group Development Limited and subsidiary as of December 31, 2004, and the results of its consolidated operations and its cash flows for the year ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In December 2003, the president of the Company obtained a Loan from a bank by mortgaging a property owned by the company. The company's by-law did not permit such an act by an officer of the company (Note 15). The loan was outstanding throughout the year ended December 31, 2004. /s/ Kabani & Company, Inc. KABANI & COMPANY, INC. CERTIFIED PUBLIC ACCOUNTANTS Huntington Beach, California January 31, 2005, except for Note 15, as to which the date is May 25, 2005. F-1 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED CONSOLIDATED BALANCE SHEET DECEMBER 31, 2004 ASSETS CURRENT ASSETS: Cash & cash equivalents $ 191,165 Accounts receivable, net 255,290 Inventory 312,046 Other receivable 236,352 Advances to Suppliers 303,446 Prepaid expense 1,635 ----------- Total current assets 1,299,934 PROPERTY AND EQUIPMENT, net 654,350 DEPOSITS 9,316 ----------- $ 1,963,600 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable & accrued expense $ 17,650 Payroll payable 21,580 Welfare payable 10,728 Taxes payable 77,288 Short term loan 121,000 Customer deposits 48,382 ----------- Total current liabilities 296,628 STOCKHOLDERS' EQUITY Common stock, $1 per share; authorized shares 50,000; issued and outstanding 100 shares 100 Additional paid in capital 1,199,900 Statutory reserve 6,867 Accumulated other comprehensive income 10,821 Retained earnings 449,284 ----------- Total stockholders' equity 1,666,972 ----------- $ 1,963,600 =========== The accompanying notes are an integral part of these financial statements F-2 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2004 2004 ----------- Net revenue $ 1,373,079 Cost of revenue 377,676 ----------- Gross profit 995,403 Operating expenses Selling expenses 313,192 General and administrative expenses 634,321 Research & development 179,601 ----------- Total operating expenses 1,127,114 ----------- Income from operations (131,711) Non-operating Income (expense): Interest income 1,207 Interest expense (26,192) Gain on sale of property 7,289 Technology subsidy 60,500 Value added tax refund 92,065 Other income 49,941 Other expense (7,316) ----------- Total non-operating income (expense) 177,494 ----------- Net income $ 45,783 =========== Basic and diluted weighted average shares outstanding 100 =========== Basic and diluted net earning per share $ 457.83 =========== The accompanying notes are an integral part of these financial statements F-3 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2004
Common Stock -------------------------- Additional Number of paid in Statutory shares Amount capital reserve ----------- ----------- ----------- ----------- Balance, December 31, 2003 10,000,000 1,200,000 0 -- Recapitalization on reverse acquisition (9,999,900) (1,199,900) 1,199,900 -- Net income for the year ended December 31, 2004 -- -- -- -- Allocation to statutory reserve -- -- -- 6,867 Foreign currency translation adjustment -- -- -- -- ----------- ----------- ----------- ----------- Balance, December 31, 2004 100 $ 100 $ 1,199,900 $ 6,867 =========== =========== =========== =========== Accumulated other Retained Total comprehensive earnings stockholders' income (deficit) equity ----------- ----------- ----------- Balance, December 31, 2003 8,427 410,368 1,618,795 Recapitalization on reverse acquisition -- -- -- Net income for the year ended December 31, 2004 -- 45,783 45,783 Allocation to statutory reserve -- (6,867) -- Foreign currency translation adjustment 2,394 -- 2,394 ----------- ----------- ----------- Balance, December 31, 2004 $ 10,821 $ 449,284 $ 1,666,972 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements F-4 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2004 2004 --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 45,783 Adjustments to reconcile net income to net cash provided in operating activities: Depreciation and amortization 56,944 Bad debt expense 170,323 Gain on sale of property (7,289) (Increase) / decrease in current assets: Accounts receivable 49,686 Inventory 17,515 Other receivable (41,320) Deposits (1,370) Advances to suppliers 23,256 Prepaid expense 4,418 Increase / (decrease) in current liabilities: Accounts payable (66,820) Customer deposits 18,327 Payroll payable (1,843) Welfare payable (55,444) Taxes payable 1,390 --------- Net cash provided by operating activities 213,556 --------- CASH FLOWS FROM INVESTING ACTIVITIES Receipt of cash on disposal of property 158,399 Acquisition of property & equipment (7,561) --------- Net cash provided by (used in) investing activities 150,838 --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loan - officers/shareholders 199,620 Proceeds from loans 46,807 Payment on loan receivable -- Proceeds from note payable 109,812 Payments on note payable (910,573) --------- Net cash provided by (used in) financing activities (554,334) --------- Effect exchange rate changes on cash and cash equivalents 2,394 NET INCREASE/(DECREASE) IN CASH & CASH EQUIVALENTS (187,546) CASH & CASH EQUIVALENTS, BEGINNING BALANCE 378,711 --------- CASH & CASH EQUIVALENTS, ENDING BALANCE $ 191,165 ========= The accompanying notes are an integral part of these consolidated financial statements F-5 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Heng Xing Technology Group Development Limited (the "Company") is a British Virgin Islands Corporation, incorporated on May 28, 2004. The Company is authorized to issue of 50,000 shares of common stock of $1 par value. The Company is a non-operative holding company of Shenzhen Hengtaifeng Technology Co. Ltd. ("HTF"). HTF was founded in High & New Technology Industry Zone in the city of Shenzhen, Guangding Province of People's Republic of China on July 1995, under the name Shenzhen Guangba Trade Development Co., Ltd. The Company amended its name to Shenzhen Hengtaifeng Technology Co. Ltd. on May 12, 2000. The Company is primarily engaged in developing and distributing software and hardware systems on housing fund, guarantee information management, and home plan management in the People's Republic of China. On December 14, 2004, the Company entered in to an agreement with all the shareholders of HTF to acquire all of the outstanding stock of HTF. The acquisition has been recorded as a recapitalization of HTF, with HTF being treated as the continuing entity. The historical financial statements presented are those of HTF. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, HTF. All significant inter-company accounts and transactions have been eliminated in consolidation. The acquisition of HTF on December 14, 2004, has been accounted for as a purchase and treated as a reverse acquisition (note 1). The historical results for the year ended December 31, 2004 include both the Company (from the acquisition date) and HTF (for full year). Cash and cash equivalents Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. Accounts Receivable The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. Allowance for doubtful debts amounted to $188,197 as at December 31, 2004. F-6 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Advances to suppliers The Company advances to certain vendors for purchase of its material in order to receive bulk discount and reserve the unit cost of the merchandise at a bargain rate. Once the inventory is received by the Company, the advance is adjusted against the purchased price. The advances to suppliers amounted to $303,446 at December 31, 2004. Inventories Inventories comprised of software Compact disk, Computer server and macro-storage equipment. Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Management compares the cost of inventories with the market value and allowance is made for writing down the inventories to there market value, if lower. Inventories are typically sold through distributors. Property & Equipment Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of: 30 years for building, 10 years for machinery, 5 years for office equipment and 8 years for vehicles. The Company has Capital work on progress representing the construction in progress of the Company's manufacturing plant amounting $516,365. Capital work in progress has been included in Building and improvement in the accompanying financial statements. Software development costs The Company capitalizes certain computer software development costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Costs incurred internally to create a computer software product or to develop an enhancement to an existing product are charged to expense when incurred as research and development expense until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers. The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis over three years, whichever method results in a higher level of amortization. Long-lived assets Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of December 31, 2004, there were no significant impairments of its long-lived assets. F-7 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Fair value of financial instruments Statement of financial accounting standard No. 107, Disclosures about fair value of financial instruments, requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value. Revenue Recognition The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers or services has been rendered when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. License Revenue. The Company recognizes revenue from license contracts when a non-cancelable, non-contingent license agreement has been signed, the software product has been delivered, no uncertainties exist surrounding product acceptance, fees from the agreement are fixed and determinable and collection is probable. Any revenues from software arrangements with multiple elements are allocated to each element of the arrangement based on the relative fair values using specific objective evidence as defined in the SOPs. If no such objective evidence exists, revenues from the arrangements are not recognized until the entire arrangement is completed and accepted by the customer. Once the amount of the revenue for each element is determined, the Company recognizes revenues as each element is completed and accepted by the customer. For arrangements that require significant production, modification or customization of software, the entire arrangement is accounted for by the percentage of completion method, in conformity with Accounting Research Bulletin ("ARB") No. 45 and SOP 81-1. Services Revenue. Revenue from consulting services is recognized as the services are performed for time-and-materials contracts and contract accounting is utilized for fixed-price contracts. Revenue from training and development services is recognized as the services are performed. Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most instances is one year. Payment for software maintenance received in advance is recorded on the balance sheet as deferred revenue. The maintenance revenue was insignificant during 2004. F-8 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Advertising Costs The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the year ended December 31, 2004 was $87,615. Research and Development Costs Research and development costs are charged to operations as incurred and amounted to $179,601 in 2004. Stock-based compensation In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123 requires compensation expense to be recorded (i) using the new fair value method or (ii) using the existing accounting rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and related interpretations with proforma disclosure of what net income and earnings per share would have been had the Company adopted the new fair value method. The Company uses the intrinsic value method prescribed by APB 25 and has opted for the disclosure provisions of SFAS No.123. Through December 31, 2004, the Company has not granted any stock options. Income Taxes The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. According to the Provisional Regulations of the People's Republic of China on Income Tax, the Document of Reductions and Exemptions of Income Tax for the Company has been approved by the Shenzhen local tax bureau, the Company is exempted from income tax in 2004. The Company will also have half of its income taxes exempt from 2005 to 2007. The Company had income tax exemption saving of $6,867 ($68.7 per share) in the year ended December 31, 2004. Foreign currency transactions and comprehensive income (loss) Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The functional currency of HTF is Chinese Renminbi. The unit of Renminbi is in Yuan. Cumulative translation adjustment amount and translation adjustment gain amounted to $2,394 for the year ended December 31, 2004. Accumulated other comprehensive income amounted to $10,821 on December 31, 2004. F-9 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Basic and diluted net loss per share Net loss per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Statement of Cash Flows: In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Segment Reporting Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure About Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. SFAS 131 has no effect on the Company's consolidated financial statements as substantially all of the Company's operations are conducted in one industry segment. Recent Pronouncements In November 2004, the FASB has issued FASB Statement No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("FAS No. 151"). The amendments made by FAS No. 151 are intended to improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The provisions of FAS No. 151 will be applied prospectively. The Company does not expect the adoption of FAS No. 151 to have a material impact on its consolidated financial position, results of operations or cash flows. In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective beginning in the Company's second quarter of fiscal 2005. The Company believes that the adoption of this standard will have no material impact on its financial statements. F-10 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The Company believes that the adoption of this standard will have no material impact on its financial statements. In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments." The EITF reached a consensus about the criteria that should be used to determine when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss and how that criteria should be applied to investments accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES." EITF 03-01 also included accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Additionally, EITF 03-01 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the Financial Accounting Standards Board (FASB) delayed the accounting provisions of EITF 03-01; however the disclosure requirements remain effective for annual reports ending after June 15, 2004. The Company will evaluate the impact of EITF 03-01 once final guidance is issued. 3. INVENTORIES Inventories at December 31, 2004 consist of the following: Raw and packing materials $ 130,940 Finished goods 85,985 Work in process 95,121 -------------- Total $ 312,046 ============== 4. PROPERTY AND EQUIPMENT Net property and equipment at December 31, 2004 as follows: Building & improvement $ 34,322 Capital work in progress 516,365 Machinery & equipment 185,113 Furniture and fixture 15,887 Software 88,179 -------------- 839,866 Less: Accumulated depreciation & amortization (185,516) -------------- $ 654,350 ============== Depreciation expense for the year ended December 31, 2004 was $ 56,944. F-11 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. OTHER RECEIVABLE Other receivable at December 31, 2004 consist of the following: Receivable for sale of property $ 126,324 Subsidy receivable 63,185 Loans to employees 37,809 Miscellaneous 9,034 -------------- Total $ 236,352 ============== In 2004 the Company sold a building property for $282,303 resulting in gain on disposal of $7,289. The amount was recoverable by September 10, 2004. As of December 31, 2004, the Company has a receivable of $126,324 on this transaction. The Company has a subsidy receivable from the local government amounting $63,185 for enhancement of the Company's technology. 6. SHORT TERM LOAN As of December 31, 2004, the Company has a short term loan payable amounting $121,000 to a non related party. The loan is unsecured, non-interest bearing and due on demand. 7. TAXES PAYABLE The Company has taxes payable amounting $77,288 as of December 31, 2004. The taxes payable consisted of Value-added tax of $74,654 and other miscellaneous taxes of $2,634. 8. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS The Company prepares its statements of cash flows using the indirect method as defined under the Financial Accounting Standard No. 95. The Company paid interest of $0 during the year ended December 31, 2004. The Company did not pay income tax during the years ended December 31, 2004. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During the year ended December 31, 2004, the Company disposed off a building for receivable amounting $282,303. 9. EMPLOYEE WELFARE PLAN The Company has established its own employee welfare plan in accordance with Chinese law and regulations. The Company makes annual pre-tax contributions of 14% of all employees' salaries. The total expense for the above plan amounted to $41,290 for the year ended December 31, 2004. 10. STATUTORY RESERVE In accordance with the Chinese Company Law, the company has allocated 10% of its annual net income, amounting $4,578 as statutory reserve on December 31, 2004. F-12 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 11. STATUTORY COMMON WELFARE FUND As stipulated by the Company Law of the People's Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following: (i) Making up cumulative prior years' losses, if any; (ii) Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital; (iii) Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's "Statutory common welfare fund", which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and (iv) Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting. The Company established a reserve for the annual contribution of 5% of net income to the welfare fund. The amount included in the statutory reserve for the year ended December 31, 2004 amounted to $2,289. 12. SHAREHOLDERS' EQUITY The Company was incorporated on May 28, 2004 in the territory of the British Virgin Islands. The Company issued 100 shares of its common stock of $1 par value to its founder on its inception. On December 14, 2004, the Company entered in to an agreement with the shareholders of HTF to acquire all the issued and outstanding stock of HTF for HK$2 (US $0.25). The shareholders of the Company owned HTF, prior to acquisition, in the same ratio as of their ownership ratio in the Company. The acquisition has been recorded as a recapitalization of HTF, with HTF being treated as the continuing entity. The historical financial statements presented are those of HTF. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted. 13. MAJOR CUSTOMERS AND VENDORS Major customers and vendors represent those who accounted for 10% or over of the Company's total net revenue or purchase, respectively. The Company did not have a major customer in the year ended December 31, 2004. One major vendor provided 30% of the Company's purchases for the year ended December 31, 2004. The Company did not have a payable to this vendor on December 31, 2004. The Company extends credit to its customers based upon its assessment of their credit worthiness and generally does not require collateral. F-13 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14. OTHER INCOME Technical Subsidy - The Company received subsidy income of $60,500 from local government, which grants such subsidy to middle-small enterprise to enhance its technology. Value added tax refund (VAT) - The Company received an amount of 92,065 as Value added tax refund from the local government, which supports local high-tech enterprises. 15. COMMITMENT, CONTINGENCY AND ILLEGAL ACT Commitment: HTF leases approximately 640 square meters of space it uses for its executive offices and operations in Shenzhen, China from Shenzhen Chuangwei-RGB Electronic Co., Ltd. The lease is for a term of three years from February 25, 2003 to February 24, 2006 at a monthly rent of approximately $4,400 (including property management and area condition maintenance fees). The rent is subject to adjustment by the landlord after February 25, 2005. The lease is renewable for an indefinite period of time upon one month's prior notice. HTF receives a rent subsidy of approximately $1,546 per month from July 1, 2003 to February, 2005 under the Agreement for the Entrance of Software into Shenzhen Software Enterprise Zone dated June 10, 2003. The Company leases a sales office of in Beijing, China on a year to year base. The current term is from January 1, 2005 to December 31, 2005 at a monthly rent of $1,561 (including management and air-condition maintenance fees). Future lease commitment for the twelve month periods ended December 31 is as follows: 2005 $ 53,028 2006 5,716 --------- Total $ 58,744 ========= Contingency and illegal Act: On December 15, 2003, the company purchased a property for $513,577 (RMB 4,250,724). On December 24, 2003, the president of the company borrowed $359,129 (RMB 2,970,000) from China Xing Ye Bank, Shenzhen Xiang Mi Hu Branch. The loan was obtained by mortgaging the property owned by the company. The term of the loan was from on December 31, 2003 to December 31, 2023, with an installment payable each month during the term of the loan. The company's by-laws did not permit such an act by an officer of the company. The company sold the property on April 20, 2005 for $540,050 (RMB 4,463,230). The company paid a commission fee of $18,253 (RMB 150,858) to a consultant. 16. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy. The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. The Company does not maintain fire, theft or liability insurance. The Company is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; error and omissions and natural disasters. 17. SUBSEQUENT EVENTS On December 23, 2004, the Company signed an Agreement under which the shareholders of the Company shall sell, assign, transfer, convey and deliver 100% of the issued and outstanding shares of the Company, to ATLANTIS ACQUISITION CORP II, INC. (SUB) in exchange for the issuance to the shareholders of the Company 8,856,000 shares of SUB representing 82% of the issued and outstanding common stock of SUB. On January 31, 2005, the shareholders of the Company and SUB mutually agreed to rescind the agreement. F-14 HENG XING TECHNOLOGY GROUP DEVELOPMENT LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS On January 31, 2005, the China International Enterprises Corp. (CIEC), a Delaware corporation, acquired 100% outstanding shares of the Company from its shareholders in exchange of 9,000,000 shares of common stock of CIEC, representing 83.33% of the issued and outstanding common stock of CIEC. CIEC was incorporated on January 13, 2005. CIEC has authorized (a) Sixty Million (60,000,000) Shares of common stock, and (b) One Million (1,000,000) shares of Preferred Stock, par value .001 per share, none of the preferred shares have been issued or outstanding. The exchange of shares with CIEC will be accounted for as a reverse acquisition under the purchase method of accounting since the shareholders of the Company will obtain control of CIEC. Accordingly, the merger of the two companies will be recorded as a recapitalization of the Company, with the Company being treated as the continuing entity. The financial statements of legal acquiree are not significant; therefore, no pro forma financial information is submitted. F-15 Independent Auditors' Report To the Board of Directors and Stockholders of Shenzhen Hengtaifeng Technology Co., Ltd. We have audited the accompanying balance sheet of Shenzhen Hengtaifeng Technology Co., Ltd. as of December 31, 2003 and the related statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 2003. 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 audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shenzhen Hengtaifeng Technology Co., Ltd. as of December 31, 2003 and the results of their operations and cash flows for the years ended December 31, 2003in conformity with accounting principles generally accepted in the United States of America. /s/ Rosenberg Rich Baker Berman & Company Rosenberg Rich Baker Berman & Company Bridgewater, New Jersey April 24, 2004, except for Note Commitments and Contingencies, as to which the date is May 25, 2005. F-16 Shenzhen Hengtaifeng Technology Co., Ltd. Balance Sheet December 31, 2003
Assets Current Assets Cash and equivalents $ 378,711 Accounts receivable, net 475,299 Inventories 329,561 Loans receivable - employees 37,660 Loans receivable - other 9,147 Loan to officers 199,620 Other receivable 68,708 Deposits 326,702 Prepaid expenses 6,053 ------------ Total Current Assets 1,831,461 ------------ Property, plant and equipment, net 981,167 Security deposit 7,946 ------------ Total Assets 2,820,574 ============ Liabilities and Stockholders' Equity Current Liabilities Accounts payable and accrued expenses 84,470 Notes payable 761,172 Current maturities of long-term debts 5,796 Loans payable - other 5,392 Customer deposits 30,055 Payroll payable 23,423 Welfare payable 66,172 Taxes payable 75,898 ------------ Total Current Liabilities 1,052,378 ------------ Long-term debt, net of current maturities 149,401 ------------ Total Liabilities 1,201,779 ------------ Commitment and Contingency Stockholders' Equity Common stock, $0.12 par value, 10,000,000 shares authorized, issued and outstanding 1,200,000 Accumulated other comprehensive income 8,427 Retained earnings 410,368 ------------ Total Stockholders' Equity 1,618,795 ------------ Total Liabilities and Stockholders' Equity $ 2,820,574 ============
See notes to the financial statements. F-17 Shenzhen Hengtaifeng Technology Co., Ltd. Statement of Operations
Year Ended December 31 2003 ------------ Net Sales $ 2,206,757 Cost of Good Sold 891,938 ------------ Gross Profit 1,314,819 ------------ Selling Expenses 297,926 General and Administrative Expenses 288,526 Research and Development 125,266 ------------ Total Operating Expenses 711,718 ------------ Income (Loss) From Operations 603,101 ------------ Other Income (Expense) Interest income 1,677 Interest expenses (33,040) Other income 138,099 Other expenses (2,184) Loss on impairment of assets -- ------------ Total Other Income (Expense) 104,552 ------------ Income (Loss) Before Provision for Income Taxes 707,653 Provision for Income Taxes -- ------------ Net Income (Loss) $ 707,653 ============ Weighted Average Shares Outstanding - Basic and Diluted 10,000,000 ============ Net Earning Per Share - Basic and Diluted $ 0.07 ============
See notes to the financial statements. F-18 Shenzhen Hengtaifeng Technology Co., Ltd. Statement of Changes in Stockholders' Equity For the Year Ended December 31, 2003
Common Stock --------------------------------- Accumulated $0.12 Additional (Deficit)/ Par Value Paid-In Retained Earnings Shares Stated Value Capital Income -------------- -------------- -------------- -------------- Balance, December 31, 2002 10,000,000 1,200,000 -- (297,285) Net Income -- -- -- 707,653 -------------- -------------- -------------- -------------- Foreign Currency Translation Adjustment -- -- -- -- -------------- -------------- -------------- -------------- Balance, December 31, 2003 10,000,000 $ 1,200,000 $ -- $ 410,368 ============== ============== ============== ============== Accumulated Other Comprehensive Total Equity Stockholders' -------------- -------------- Balance, December 31, 2002 7,742 910,457 Net Income -- 707,653 -------------- -------------- Foreign Currency Translation Adjustment 685 685 -------------- -------------- Balance, December 31, 2003 $ 8,427 $ 1,618,795 ============== ==============
See notes to the financial statements. F-19 Shenzhen Hengtaifeng Technology Co., Ltd. Statement of Cash Flows
Year Ended December 31 2003 ------------ Cash Flows From Operating Activities Net Income (Loss) $ 707,653 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and amortization 55,532 Bad debt expenses 11,868 Loss on impairment of assets -- Decrease (Increase) in Assets Accounts receivable (203,045) Inventories (289,833) Deposits (39,909) Security deposit (7,608) Other receivable (68,708) Prepaid expenses (3,393) Increase (Decrease) in Liabilities Accounts payable (119,238) Customer deposit 27,838 Payroll payable 11,416 Welfare payable 31,528 Taxes payable 74,593 Deferred assets -- ------------ Net Cash Provided by (Used in) Operating Activities 188,694 ------------ Cash Flow From Investing Activities Cash paid for property, plant and equipment (555,016) ------------ Net Cash Used in Investing Activities (555,016) ------------ Cash Flow From Financing Activities Proceeds from capital contribution -- Proceeds from loans receivable - employees -- Proceeds from loans to officers 74,394 Proceeds from loans receivable - other 3,950 Payment on loans receivable - employees (24,965) Payment on loans receivable - others (7,606) Proceeds from notes payable 634,360 Payment on borrowings - long-term debt (5,424) ------------ Net Cash Provided by Financing Activities 674,709 ------------ Effect of Exchange Rate Changes on Cash and Equivalents 685 ------------ Net Increase in Cash and Equivalents 309,072 Cash and Equivalent at Beginning of Year 69,639 ------------ Cash and Equivalent at End of Year $ 378,711 ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 33,040 ============ Income taxes $ -- ============
See notes to the financial statements. F-20 Shenzhen Hengtaifeng Technology Co., Ltd. Notes to the Financial Statements SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Organization Shenzhen Hengtaifeng Technology Co., Ltd. (the Company) was founded in the People's Republic of China on July 5, 1995, under the name Shenzhen Guangba Trade Development Co., Ltd and amended its name on May 12, 2000. The Company is primarily engaged in developing and distributing software and hardware systems on housing fund, guarantee information management, and home plan management in the People's Republic of China. Cash and Equivalents For the purpose of the statements of cash flows, cash equivalents include time deposits, and all highly liquid debt instruments with original maturities of three months or less. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts equal to the estimated losses that will be incurred in the collection of all receivables. The estimated losses are based on a review of the current status of the existing receivables. The allowance for doubtful accounts as of December 31, 2003 was $17,874. Inventories Inventories comprised of software compact disk, computer server and macro-storage equipment. Inventories are valued at the lower of cost (determined on a first-in, first-out basis) or market. Depreciation and Amortization The cost of property, plant and equipment is depreciated for financial reporting purposes on a straight-line basis over the estimated useful lives of the assets: 39 years for commercial buildings and improvements, 5-10 years for machinery, equipment, and vehicles, 7-10 years for furniture and fixtures, and 3-5 years for software. Repairs and maintenance expenditures which do not extend the useful lives of the related assets are expensed as incurred. Revenue Recognition The Company recognizes revenues when the following four situations have been met: (i) delivery has occurred or service has been rendered (ii) the delivery has been accepted by the customer and the product is satisfactorily tested (iii) collectibility is reasonably assured (iv) no other significant obligations of the Company exist, other than normal warranty support. License Revenue: The Company recognizes revenue from license contracts when a non-cancelable, non-contingent license agreement has been signed, the software product has been delivered, no uncertainties exist surrounding product acceptance, fees from the agreement are fixed and determinable and collection is probable. Any revenues from software arrangements with multiple elements are allocated to each element of the arrangement based on the relative fair values using specific objective evidence as defined in the SOPs. If no such objective evidence exists, revenues from the arrangements are not recognized until the entire arrangement is completed and accepted by the customer. Once the amount of the revenue for each element is determined, the Company recognizes revenues as each element is completed and accepted by the customer. For arrangements that require significant production, modification or customization of software, the entire arrangement is accounted for by the percentage of completion method, in conformity with Accounting Research Bulletin ("ARB") No. 45 and SOP 81-1. Services Revenue: Revenue from consulting services is recognized as the services are performed for time-and-materials contracts and contract accounting is utilized for fixed-price contracts. Revenue from training and development services is recognized as the services are performed. Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most instances is one year. Payment for software maintenance received in advance is recorded on the balance sheet as deferred revenue. The maintenance revenue was insignificant during 2003. Advertising Costs Advertising costs are expensed as incurred and amount to $65,647 in 2003 Shipping and Handling Costs Shipping and handling costs are charged to costs of goods sold as incurred and amounted to $1,012 in 2003. Research and Developments Costs Research and development costs are charged to operations as incurred and amounted to $125,266 in 2003. Software development costs The Company capitalizes certain computer software development costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Costs incurred internally to create a computer software product or to develop an enhancement to an existing product are charged to expense when incurred as research and development expense until technological feasibility for the respective product is established. Thereafter, all software development costs are capitalized and reported at the lower of unamortized cost or net realizable value. Capitalization ceases when the product or enhancement is available for general release to customers. The Company makes on-going evaluations of the recoverability of its capitalized software projects by comparing the amount capitalized for each product to the estimated net realizable value of the product. If such evaluations indicate that the unamortized software development costs exceed the net realizable value, the Company writes off the amount which the unamortized software development costs exceed net realizable value. Capitalized and purchased computer software development costs are being amortized ratably based on the projected revenue associated with the related software or on a straight-line basis over five years, whichever method results in a higher level of amortization. F-21 Shenzhen Hengtaifeng Technology Co., Ltd. Notes to the Financial Statements SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -(Continued) Translation of Foreign Currencies The financial statements of the Company are measured in Chinese Yuan and then translated to U.S. dollars. All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing throughout the year. Translation gains or losses resulting from the changes in the exchange rates from year-to-year are accumulated in a separate component of members' equity under accumulated other comprehensive income (loss). Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes for differences between the basis of financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes are recognized for operating losses that are available to offset future income taxes. According to the Provisional Regulation of the People's Republic of China on Income Tax, the Document of Reductions and Exemptions of Income Tax for the Company is approved by Shenzhen local tax bureau, the Company is exempt from income tax in 2003 and 2004. The Company will also have half of it's income taxes exempt from 2005 to 2007. The Company had income tax exemption savings of $129,925 (0.01 per share) in the year ended December 31, 2003. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATIONS OF BUSINESS AND CREDIT RISK The Company provides credit in the normal course of business. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. Major Customers: The following summarizes sales to major customers (each 10% or more of sale):
Sales to Number of Percentage Year Ended Major Customers Customers of Total - ------------------------------------------- ---------------------- ---------------------- --------------- 2003 $ 524,922 1 23.8% Major Suppliers: The following summarizes purchases from major suppliers (each 10% or more of purchases): Purchases from Number of Percentage Year Ended Major Suppliers Suppliers of Total - ------------------------------------------- ---------------------- ---------------------- --------------- 2003 $ 709,617 1 63.6%
F-22 Shenzhen Hengtaifeng Technology Co., Ltd. Notes to the Financial Statements
INVENTORIES Inventories at December 31, 2003 consist of the following: Raw materials $ 217,604 Working in process 9,562 Finished goods 102,395 ------------ Total $ 329,561 ============ DEPOSITS Deposits represent amounts paid to suppliers in advance LOAN TO OFFICERS Loan to officers are unsecured, non-interest bearing and due upon demand PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at cost, less accumulated depreciation and amortization at December 31, 2003 consists of the following: Buildings and improvement $ 843,832 Machinery and equipment 175,836 Furniture and fixture 19,731 Software 87,468 ------------ Subtotal 1,126,867 Less accumulated depreciation and amortization 145,700 ------------ Total $ 981,167 ============
Depreciation and amortization expense charged to operations was $55,532 in 2003. On December 2003, the Company purchased a building for $513,577. The building was financed by a loan from the Company's Chairman and President, Mr. Yuan Qing Li. In consideration of the officer financing the building, the Company has collateralized his personal loan in the amount of $358,838 with the building. The terms of the loan were 20 years starting from December 31, 2003 to December 31, 2023, with an installment payable each month during the terms. The Company sold the property on April 20, 2005 for $540,050. LOANS RECEIVABLE - EMPLOYEES Loans receivable - employee are unsecured, non-interest bearing and due on demand. LOANS RECEIVABLE - OTHER Loans receivable - other represent unsecured loans to non-related third parties, non-interest bearing and due upon demand. F-23 Shenzhen Hengtaifeng Technology Co., Ltd. Notes to the Financial Statements OTHER RECEIVABLES Other receivables represent a receivable from the ShenZhen local government of $4,650 for a rent subsidy and $64,058 for a Value Added Tax Refund from the state tax bureau in Guandong, China. NOTES PAYABLE The notes payable is comprised of the following:
Note to Huaxin Branch of Shenzhen Commercial Bank Interest at 5.841% due quarterly, and principal due April 4, 2004. Guaranteed by an unrelated third party. $ 362,463 Note to Zhenxing Branch of Construction Bank Interest at 4.8675% due quarterly, and principal due April 14, 2004. Guaranteed by an unrelated third party. 302,052 Note to Caitian Branch of Shenzhen Commercial Bank Interest at 6.372% due quarterly, and principal due December 8, 2004. Guaranteed by an unrelated third party. 96,657 ---------- Total Notes Payable $ 761,172 ==========
Guarantees The note to Huaxin Branch of Shenzhen Commercial Bank is guaranteed by an unrelated third party with similar debt. Although the debt of the third party had been paid as of September 30, 2003, the Company's debt is still guaranteed by them as of December 31, 2003 with no cost. The note to Zhenxing Branch of Construction Bank is guaranteed by payment to an unrelated third party at a cost of $9,062 annually. The note to Caitian Branch of Shenzhen Commerical Bank is guaranteed by an unrelated third party and a shareholder of the Company. In exchange for the unrelated third party guarantee, the Company paid them $200. F-24 Shenzhen Hengtaifeng Technology Co., Ltd. Notes to the Financial Statements LONG-TERM DEBT
Long-term debt is comprised of the following at December 31, 2003 Mortgage Note $ 155,197 Interest at 5.04% due in equal monthly installments of $1,124, including interest through March 27, 202.The mortgage secured by the Company's building with a net book value of $268,062 Less Current Maturities 5,796 -------------- Long-Term Debt, Net of Current Maturities $ 149,401 ============== Total maturities of long-term debt are as follows: Year Ending December 31, 2004 $ 5,796 2005 6,095 2006 6,409 2007 6,745 2008 6,398 Thereafter 123,754 -------------- Total minimum payments required $ 155,197 ============== LOANS PAYABLE - OTHER Loans payable - other represents unsecured loans from non-related third parties, non-interest bearing and due upon demand. TAXES PAYABLE Taxes payable were $75,898 as of December 31, 2003, and consist of the following: Value-added Tax $ 74,543 Education and surplus tax 1,037 City construction tax 318 -------------- Total taxes payable $ 75,898 ==============
F-25 Shenzhen Hengtaifeng Technology Co., Ltd. Notes to the Financial Statements EMPLOYEE WELFARE PLAN The Company has established an employee welfare plan in accordance with Chinese law and regulations. The Company makes annual pre-tax contributions of 14% of all employees' salaries. The total expense for the above plan amounted to $41,571 for the year ended December 31, 2003. WARRANTIES The Company warrants that all software developing and distributing by it will be free under normal use for a period of one year from the date of accepted by clients. The Company's experience for costs and expenses in connection with such warranties has been minimal and through December 31, 2003, no amount has been reserved. FAIR VALUE OF FINANCIAL INSTRUMENTS The current carrying amounts of the Company's cash and equivalents, accounts receivable, loan receivable, accounts payable and accrued expenses, and loan payable approximate their fair values on December 31,2003 due to the short term maturities of these financial instruments. For long-term investments, fair values are estimates based on quoted market value. NEW ACCOUNTING PRONOUNCEMENTS In April 2003, the FASB issued SFAS Statement No.149,"Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No.133,Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, except for certain hedging relationships designated after June 30, 2003. Most provisions of this Statement should be applied prospectively. The adoption of this statement is not expected to have a significant impact on the Company's results of operations or financial position. In May 2003, the FASB issued SFAS Statement No.150", Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities, if applicable. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The adoption of this statement is not expected to have a significant impact on the Company's results of operations or financial position. F-26 Shenzhen Hengtaifeng Technology Co., Ltd. Notes to the Financial Statements NEW ACCOUNTING PRONOUNCEMENTS (Continued) In November 2002, the FASB issued Interpretation No.45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires a company, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantees and elaborates on existing disclosure requirements related to guarantees and warranties. The initial recognition requirements are effective for the Company during the third quarter ending March 31, 2003. The adoption of FIN 45 did not have a significant impact on the Company's results of operations or financial position. In January 2003, the FASB issued FASB Interpretation No.46 ("FIN 46"),Consolidation of Variable Interest Entities, an Interpretation of ARB No.51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31,2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a significant impact on the Company' results of operations or financial position. F-27 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders China International Enterprises Corp. We have audited the accompanying balance sheet of China International Enterprises Corp. (a Delaware Corporation) as of January 30, 2005 and the related statement of operations, stockholders' deficit, and cash flows for the period from January 13, 2005 (inception) through January 30, 2005. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China International Enterprises Corp. as of January 30, 2005, and the results of its operations and its cash flows for the period from January 13, 2005 (inception), to January 30, 2005, in conformity with accounting principles generally accepted in the United States of America. The Company's financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not earned any revenue since its inception. This factor as discussed in Note 3 to the financial statements raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Kabani & Company, Inc KABANI & COMPANY, INC. CERTIFIED PUBLIC ACCOUNTANTS Huntington Beach, California February 10, 2005 F-28 CHINA INTERNATIONAL ENTERPRISES CORP. (A development stage company) BALANCE SHEET JANUARY 30, 2005 ASSETS CURRENT ASSETS: Cash & cash equivalents $ -- ------------ $ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accrued expenses $ 375 STOCKHOLDERS' DEFICIT Common stock, .001 par value; Authorized shares 60,000,000; Issued and outstanding shares 1,800,000 -- Deficit accumulated during the development stage (375) ------------ Total stockholders' deficit (375) ------------ ------------ $ -- ============
The accompanying notes are an integral part of these financial statements. F-29 CHINA INTERNATIONAL ENTERPRISES CORP. (A development stage company) STATEMENT OF OPERATIONS FOR THE PERIOD JANUARY 13, 2005 (INCEPTION) TO JANUARY 30, 2005
Net revenue $ -- Operating expenses organization cost 375 -------------- Operating loss (375) Provision for income tax -- -------------- Net loss $ (375) ============== Basic and diluted net loss per share $ (0.00) ============== Basic and diluted weighted average shares outstanding 1,800,000 ==============
The accompanying notes are an integral part of these financial statements. F-30 CHINA INTERNATIONAL ENTERPRISES CORP. (A development stage company) STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE PERIOD JANUARY 13, 2005 (INCEPTION) TO JANUARY 30, 2005
Common stock Deficit ----------------------------- accumulated Total Number of during develop- stockholders' shares Amount ment stage deficit ------------ ------------ ------------ ------------ Balance at January 13, 2005 (inception) -- $ -- -- -- Issuance of common stock 1,800,000 -- -- -- Net loss for the period January 13, 2005 (inception) through January 30, 2005 -- -- (375) (375) ------------ ------------ ------------ ------------ Balance at December 30, 2005 1,800,000 $ -- (375) (375) ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-31 CHINA INTERNATIONAL ENTERPRISES CORP. (A development stage company) STATEMENT OF CASH FLOWS FOR THE PERIOD JANUARY 13, 2005 (INCEPTION) TO JANUARY 30, 2005 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (375) Adjustments to reconcile net loss to net cash used in operating activities: Increase in current assets and current liabilities: Accrued expense 375 ------------ Net cash used in operating activities -- ------------ NET INCREASE IN CASH & CASH EQUIVALENTS -- CASH & CASH EQUIVALENTS, BEGINNING BALANCE -- ------------ CASH & CASH EQUIVALENTS, ENDING BALANCE $ -- ============ The accompanying notes are an integral part of these financial statements. F-32 CHINA INTERNATIONAL ENTERPRISES CORP. (A development stage company) NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION China International Enterprises Corp. ("the Company") is a development stage enterprise incorporated in the State of Delaware on January 13, 2005. The Company has had no significant operations since its inception. The Company is authorized to do any legal business activity as controlled by Delaware law. The accounting policies of the Company are in accordance with generally accepted accounting principles and conform to the standards applicable to development stage companies. The Company's fiscal year ends on December 31, 2005. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents The Company considers all liquid investments with a maturity of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents. Accrued expenses Accrued expenses at January 30, 2005 amounted to $375, which comprised of organization costs. Revenue Recognition The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue will be recognized when services are rendered. Generally, the Company will extend credit to its customers/clients and would not require collateral. The Company will perform ongoing credit evaluations of its customers/clients. Income taxes Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted laws and rates applicable to the periods in which the differences are expected to affect taxable income (loss). Valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Start-Up Costs Start-up costs include legal and professional fees. In accordance with Statement of Position 98-5, "Costs of Start-Up Activities," these costs have been expensed as incurred. F-33 CHINA INTERNATIONAL ENTERPRISES CORP. (A development stage company) NOTES TO FINANCIAL STATEMENTS Basic and diluted net loss per share Net loss per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), "Earnings per share". Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Development Stage Enterprise The Company is a development stage enterprise, as defined in Financial Accounting Standards Board No. 7. The Company`s planned principal operations have not commenced, and, accordingly, no revenue has been derived during this period. Accounting developments In November 2004, the FASB has issued FASB Statement No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("FAS No. 151"). The amendments made by FAS No. 151 are intended to improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The provisions of FAS No. 151 will be applied prospectively. The Company does not expect the adoption of FAS No. 151 to have a material impact on its consolidated financial position, results of operations or cash flows. In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective beginning in the Company's second quarter of fiscal 2006. The Company believes that the adoption of this standard will have no material impact on its financial statements. In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of Nonmonetary Assets." The Statement is an amendment of APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The Company believes that the adoption of this standard will have no material impact on its financial statements. In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments." The EITF reached a consensus about the criteria that should be used to determine when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss and how that criteria should be applied to investments accounted for under SFAS No. 115, "ACCOUNTING IN CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES." EITF 03-01 also included accounting considerations F-34 CHINA INTERNATIONAL ENTERPRISES CORP. (A development stage company) NOTES TO FINANCIAL STATEMENTS subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Additionally, EITF 03-01 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the Financial Accounting Standards Board (FASB) delayed the accounting provisions of EITF 03-01; however the disclosure requirements remain effective for annual reports ending after June 15, 2004. The Company will evaluate the impact of EITF 03-01 once final guidance is issued. 3. GOING CONCERN As of January 30, 2005, the Company has no operating history under its current structure, which raises substantial doubt about the Company's ability to continue as a going concern. The Company's has not earned any revenue from operations since its inception. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management has taken the following steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue as a going concern. On January 31, 2005, the Company acquired 100% outstanding shares of Heng Xing Technology Group Development Limited from its shareholders in exchange of 9,000,000 shares of common stock of the Company, representing 83.33% of its issued and outstanding common stock on the date of acquisition (note 6). Heng Xing Technology Group Development Limited is a non-operative holding company of Shenzhen Hengtaifeng Technology Co. Ltd. which is located in High & New Technology Industry Zone in the city of Shenzhen, Guangding Province of People's Republic of China. 4. SHAREHOLDERS' EQUITY The Company has authorized (a) Sixty Million (60,000,000) shares of common stock, par value .001 per share and (b) One Million (1,000,000) shares of Preferred Stock, par value .001 per share, none of which shares shall be issued and outstanding. On the formation of the Company, the Company issued 1,800,000 shares representing the initial capitalization of the Company. 5. INCOME TAXES As the Company has not generated taxable income since its inception, no provision for income taxes has been made. At January 30, 2005, the Company did not have any significant net operating loss carry forwards, deferred tax liabilities or deferred tax assets. 6. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS The Company prepares its statements of cash flows using the indirect method as defined under the Financial Accounting Standard No. 95. The Company has paid $0 for income tax and none for interest, since its inception through January 30, 2005. 7. SUBSEQUENT EVENTS On January 31, 2005, the Company, acquired 100% outstanding shares of Heng Xing Technology Group Development Limited from its shareholders in exchange of F-35 CHINA INTERNATIONAL ENTERPRISES CORP. (A development stage company) NOTES TO FINANCIAL STATEMENTS 9,000,000 shares of the Company's common stock, representing 83.33% of the issued and outstanding common stock of the Company at the date of the acquisition. Heng Xing Technology Group Development Limited ("HXT") is a British Virgin Islands Corporation, incorporated on May 28, 2004. HXT is authorized to issue of 50,000 shares of common stock of $1 par value. HXT is a non-operative holding company of Shenzhen Hengtaifeng Technology Co. Ltd. ("HTF"). HTF was founded in High & New Technology Industry Zone in the city of Shenzhen, Guangding Province of People's Republic of China on July 1995, under the name Shenzhen Guangba Trade Development Co., Ltd. HTF is primarily engaged in developing and distributing software and hardware systems on housing fund, guarantee information management, and home plan management in the People's Republic of China. The exchange of shares with HXT will be accounted for as a reverse acquisition under the purchase method of accounting since the shareholders of HXT obtained the control of the Combined Company. Accordingly, the merger of the two companies will be recorded as a recapitalization of HXT, with the HXT being treated as the continuing entity. The condensed financial statements of HXT, as on December 31, 2004, are as follows: Balance Sheet: Total current assets $ 1, 299, 934 Property & equipment 654,350 Deposits 9,316 -------------- Total assets $ 1, 963,600 ============== Current liabilities $ 296,628 Stockholders' equity 1,666,972 -------------- Total liabilities and stockholders' equity $ 1,963,600 ============== Income Statement: Net Revenue $ 1,373,079 Cost of revenue 377,676 -------------- Gross profit 995,403 Total Operating expenses 1,127,114 -------------- Loss from operations (131,711) VAT tax refund 92,065 Technology subsidy 60,500 Other income 24,929 -------------- Total other income 177,494 -------------- Net income $ 45,783 ============== F-36 PART II: INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. Indemnification of Directors and Officers Pursuant to Article V, Section 1 of our By-Laws, we may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that he or she is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceedings, had no reasonable cause to believe his or her conduct was unlawful. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to Directors, Officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore unenforceable. ITEM 25. Other Expenses of Issuance and Distribution Our expenses in connection with the issuance and distribution of the securities being registered, other than the underwriting discount, are estimated as follows: SEC Registration Fee $127.12 Printing Expenses * Legal Fees and Expenses $40,000 Accountants' Fees and Expenses $80,000 Blue Sky Fees and Expenses * Miscellaneous Expenses * Total * *to be supplied by amendment ITEM 26. Recent Sales of Unregistered Securities In the preceding three years, we have issued the following securities that were not registered under the Securities Act: On January 31, 2005, we issued and sold for $.001 per share the following number of shares to the following persons: Name Shares ---- ------ Huakang Zhou 540,000 On January 31, 2005, we issued 610,000 shares of Common Stock to Warner and 650,000 shares of Common stock to AUS as partial payment for services provided to us, as described more fully in the prospectus to this Registration Statement under the heading "Certain Relationships and Related Party Transactions". II-1 The issuance of the above shares was accomplished in reliance upon Section 4(2) of the Securities Act. The facts relied upon for the exemption were that the purchasers were sophisticated investors and the shares were offered and sold in a private transaction. On January 31, 2005, we issued an aggregate of 9,000,000 shares of our Common Stock to three persons in exchange for the transfer to us of all of the outstanding common stock of Heng Xing Technology Group Development Corp., a British Virgin Islands company. The issuance of the shares was accomplished in reliance upon Regulation S promulgated under the Securities Act. The facts relied upon for the exemption were that each of the persons acquiring our Common Stock in the transaction was a non-U.S. person as defined under the Securities Act. ITEM 27. Exhibits 3.1 Certificate of Incorporation. (1) 3.2 By-laws.(1) 5.1 Opinion re legality of the Common Stock being registered. (1) 10.1 Share Exchange Agreement, dated as of January 31, 2005 among the Company, Heng Xing Technology Group Development Limited, Li Yuan Qing, Chen Ling and Qiu Zhen Liang. (1) 10.2 Cooperation Agreement for Lenovo Products and its Business Terms , dated March 24, 2004, by and between Lenovo (Shenzhen) Co., Ltd. and Shenzhen Hengtaifeng Technology Co., Ltd.* 10.3 Cooperation Agreement of Service Channel with Lenovo (Master Agreement) and Commercial Articles dated March 31, 2005 by and between Lenovo (Shenzhen) Co., Ltd, and Shenzhen Hengtaifeng Technology Co., Ltd.* 10.4 Co-development Agreement dated November 12, 2002, by and between Shenzhen Small & Medium Enterprises Credit Guarantee Center.* 10.5 PartnerWorld Agreement - International Basic Terms, dated December 12, 2000, between the Company and IBM.* 16.1 Letter of Rosenberg Rich Baker Berman & Company on Change of Certifying Accountant.* 21.1 List of subsidiaries. (1) 23.1 Consent of counsel to the use of the opinion annexed at Exhibit 5.1 is contained in the opinion annexed at Exhibit 5.1 (1) 23.2 Consent of Kabani & Company, Inc. to the use of their report.* 23.3 Consent of Rosenberg Rich Baker Berman & Company to the use of their report.* - ------------------------- * Filed herewith. (1) Previously filed with the Company's Preliminary Registration Statement on Form SB-2 filed with the Commission on February 28, 2005. II-2 ITEM 28. Undertakings The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: i. To include any prospectus required by Section 10(a) (3) of the Securities Act; ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement(or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, thereunto duly in the City of Shenzhen, PRC, on May 27, 2005. CHINA INTERNATIONAL ENTERPRISES CORP. By: /s/ Li Yuan Qing -------------------- Li Yuan Qing Chief Executive Officer and Director By: /s/ Shen Ding Hong --------------------- Chief Accounting Officer Chief Financial Officer and Director In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated. Name and Title Date /s/ Li Yuan Qing - ---------------------------------- May 27, 2005 Li Yuan Qing Chief Executive Officer and Director /s/ Shen Ding Hong - ---------------------------------- May 27, 2005 Shen Ding Hong Chief Accounting Officer Chief Financial Officer and Director II-4 /s/ Wu Jian Ping May 27, 2005 - ---------------------------------- Wu Jian Ping, Director /s/ Norman Fuchs - --------------------------------------- May 27, 2005 Norman Fuchs, Director II-5
EX-10.2 2 v017947_ex10-2.txt Exhibit 10.2 Cooperation Agreement for Lenovo Products This Agreement is entered on March 24, 2004 by and between Lenovo (Shenzhen) Co., Ltd (hereinafter known as "Party A") and the Shenzhen Hengtaifeng Technology Co., Ltd (hereinafter known as "Party B"). WHEREAS: Party B intends to become Party A's partner dedicating in sales of Lenovo products (hereinafter known as "Product"), and Party A agrees to accept Party B as its partner. THEREFORE, the both parties hereto hereby reached the following Agreement based on the principal for mutual rewarding and beneficial relationship, and are committed to the performance of and compliance with all the terms and conditions of this Agreement. I: Definitions Unless otherwise specified by the both parties, the following terms under this Agreement and its Appendices shall indicate the meanings as provided below: 1. Partner: Those entities that have signed this Cooperation Agreement for Lenovo Products and its Appendices with Party A to establish a stable cooperation relationship with Party A. 2. Products: Any products that Party B purchases according to the Product Policy directly from Party A or indirectly from other partners of Party A for sales to third parties, including the products under Party A's own brands, as well as those products which are under other brands but are bundled together with Party A's own products for tie-in sales. 3. Users: Citizens and corporations who purchase the Products 4. Agency Price: The price at which Party A sells its Products to the Partners, or the price at which the Partners sell the Products to each others. 5. Media Price: The unified price of the Products publicized in medias 6. The Lowest Retail Price: The lowest price at which the Partners sell the Products to individual users, which is to be published by Party A. 7. The Lowest Sales Price: The lowest price at which the Partners sell the Products to users other than the individual users, which is to be published by Party A. 8. Sales Discount: The price discounts that Party A may grant to Party B based on factors such as Party B's purchase volume and price fluctuation. II: Establishment of the Cooperation Relationship 1 1. During the term of the cooperation, Party B may, upon Party A's written authorization, use Party A's name and logo, but such authorization is only limited to the commercial activities that are related to the performance of this Agreement. Without Party A's written consent, Party B shall never allow any third party to use Party A's name and logo. Party B has no right to bring out any objection against or any modification request on Party A's name and logo. Upon termination of this Agreement, Party A shall stop using Party A's name and logo immediately. Party B has the responsibility to report to Party A regarding any third party's conducts that may infringe Party A's rights and benefits on its name and logo. 2. Party B shall not indicate or imply that it has any special relationship with Party A beyond the cooperation relationship defined in this Agreement by using those words with exclusive connotations such as "Lenovo's General (Exclusive/Sole) Agency in XXX", "Lenovo XXX Sales Center" or "Lenovo XXXX Training Center" or by any other methods. When using Party A's name and logo, Party B shall not intentionally make the Users mistakenly perceive it as Party A or Party A's offices, branches or subsidiaries by hiding Party B's own name and highlighting Party A's name & logo or by using other misleading means. 3. During the term of the cooperation, if the parties hereto need to cooperate with each other for any special projects to better serve the Users, such cooperation relationship and any actions carried out based on such cooperation relationship shall still be subject to the terms and conditions of this Agreement. 4. Except for the cooperation relationship expressively described in this Agreement and its Appendices, Party A and Party B are independent of each other, and shall take no legal responsibilities for any other conducts of the other party. III: Rights and Obligations of Party B 1. Party B shall, according to Party A's request, make their best efforts to promote the sales of the Products, perform its obligations specified in this Agreement and the Appendices, and conduct its business based on the principles of fairness and integrity. 2. Unless with the written consents from the both parties, Party B has no right to provide the Products or services to the Users or carry out any other civil activities under Party A's name. 3. Party B shall help protect Party A's rights and benefits by NOT carrying out any marketing activities against Party A's rights and benefits or adopting any market operation strategies that may conflict with Party A's rights and benefits. 4. Before the expiration of the Agreement and during the renewal period, Party B shall operate its business independently by recruiting new employees, developing sub-distributors or other partners, monitoring and taking responsibilities for these sub-distributors or other partners. 5. Upon Party A's request, Party B shall provide to Party A the qualification documents relating to its own operations, and ensure these qualification documents are true, legal and valid. The said qualification documents include but are not limited to the Business License, Organization Code Certificate and Taxation Registration Certificate that have been duly verified in annual inspections, as well as the photocopies of the ID card of the legal representative of the company, etc. 2 6. Party B agrees and undertakes: (1) to establish its own sales team and to invest with necessary funds and personnel to ensure the performance of its obligations and the successful sales of the Products; (2) to provide market demand information to Party A and feedback with users' complaints about Party A's Products, and help Party A deal with the users' complaints or act on behalf of Party A according to Party A's reasonable request to deal with the users' complaints in a timely and appropriate manner; (3) to provide to the users the presentations, pictures and samples relating to the Products as well as other information, materials and items provided by Party A for sales purpose; to promote the Products and Party A's brand using proper methods (such as participating in the industry fairs or exhibitions) (4) according to the specifications in the Appendices or Party A's request, to order the Products, pay the Product prices, carry out necessary procedures to accept the goods, and provide Product-related services to the users; (5) the Products will only be sold to the customers in mainland China. When selling the Products or carrying out marketing activities relating to the sales of the Products, Party B shall comply with all relevant laws, regulations and rules as well as the sales policies Party A may publish from time to time, and shall not carry out any conducts in any forms that may cause harm to Party A or Party A's brand. IV: Rights and Obligations of Party A 1. Party A has the right to carry out a "business verification" on Party B's business operation level. Should the result of this "business verification" falls below Party A's requested standard, Party A will be entitled to cease providing the Products to Party B till the termination of this Agreement, and will be entitled to request other partners to cease providing Products to Party B and to stop cooperation; 2. Party A shall provide the Products to Party B according to the valid orders or sales contracts confirmed by both parties. Party A may determine the proper transportation methods at its own discretion, and according to the Party B's delivery information, deliver the Products to the delivery place specified by Party B; 3. Party A has the right to replace the Product ordered by Party B with other Product of higher configurations at the same price; 4. When Party B's sales activities breach the stipulations of the Agreement and its Appendices, or when Party A based on certain information believes that Party B's sales activities have already caused or will cause adverse effect to the market, Party A will be entitled to cease providing the Products to Party B, and shall also have the right to request other partners to cease providing the Products to Party B; 5. Party A shall help protect Party B's rights and benefits by NOT carrying out any sales programs or adopting any market strategies that may conflict with the terms and conditions set out in this Agreement and its Appendices; 6. During the effective period of the Agreement, Party A shall provide relevant support and incentive reward to Party B as stipulated in the Agreement and its Appendices. 3 7. Unless with the written consents from the both parties, Party A has no right to provide the Products or services to the Users or carry out any other civil activities under Party B's name. 8. Party A shall perform its obligations specified in this Agreement and the Appendices and conduct the business based on the principles of fairness and integrity. Party A agrees and undertakes: (1) to provide to Party B all relevant information and materials relating to the Products, and to provide assistance in Party A's marketing efforts; (2) to provide to Party B all relevant technical supports relating to the Products; (3) to provide to Party B the relevant technical trainings, Product trainings as well as the trainings regarding Party A's sales model; (4) to provide to the Users the after-sales maintenance services through its authorized maintenance organizations; (5) to receive and deal with in a timely manner any complaints lodged by Party B against Party A's employees; V: Party B's Sales Activities 1. Party B shall not sell the Products at a price below the Lowest Retail Price and the Lowest Sales Price. When marketing the Products using advertisement means, Party B shall follow the Media Price. Unless otherwise agreed by the both parties, Party A shall use the current Agency Price when selling Products to Party B; 2. Party B shall cooperate with Party A to maintain a favorable market environment for the Products, and shall strictly follow the price standards published by Party A without making any changes to the prices on its own; 3. In the case that Party A requests Party B to cease providing the Products to any partners or users who breach the agreements or cause disturbance to the market environment, Party B shall give its full cooperation; 4. Unless otherwise agreed by the both parties, Party B SHALL NOT alter the internal or external packages of the Products, attach any misleading appendages on the internal or external packages, or replace, add/deduct or destroy any materials or accessories attached to the Products upon dispatch from the production plant; 5. Party B shall not use any deceiving or threatening means to sell the Products, to suppress users' complaints or to refuse users' reasonable requests for maintenance; 6. Party B should be held liable if it fails to perform its obligations under this Agreement, and should provide the indemnity to Party A according to the actual amount of losses if any damage is incurred by Party A; In the case of serious violation to the obligations under this Agreement by Party B, Party A will be entitled to terminate this Agreement. VI: Liability for Breach and The Termination of The Agreement 1. Both parties hereto shall perform and observe all the terms and conditions of the Agreement and its Appendices. In the case of any breach of the 4 Agreement and its Appendices by one party, and upon the other party's notice requesting a remedy, the breaching party shall stop its violation activities immediately, and indemnify the other party for the loss it may have incurred; 2. If Party B fails to pay to Party A by the specified payment date, Party A will be entitled to request Party B to pay a penalty fee according to the penalty fee ratio previously agreed by the both parties or according to the highest ratio allowed by law, whichever is higher. In the case that the penalty fee ratio specified in the Product Policy is different from that in other Appendices, the ratio in the Product Policy shall prevail as the standard for execution; 3. Party A and Party B may agree for other liabilities for breach of the Agreement besides the liability specified in this section. However, Party A shall not be held liable for any indirect, contingent and consequential losses incurred by Party B during its cooperation with Party A; 4. If any party breaches the obligations or undertakings under this Agreement, the other party shall be entitled to terminate the Agreement before its due expiration; 5. When there is any change to the control power or ownership of Party B or Party B's affiliate companies, or in the events of bankruptcy, liquidation or other significant changes in other operational situations of Party B or Party B's affiliate companies, Party A shall be entitled to take the following actions: (1) To cease providing the Products; (2) To deliver the Products only after receiving the payment in account; (3) To request Party B to provide guarantees; (4) To terminate this Agreement. After termination of this Agreement, Party B shall, within 15 days of such termination, return to Party A all the relevant materials and items previously provided to Party B by Party A. VII: Transfer of Ownership and Risks 1. During the effective period of the Agreement, the ownership of the Product purchased by Party B will be transferred from Party A to Party B after Party B pays the full amount of the Product price to Party A; 2. The risks, such as loss or destruction of the Product, will be transferred to Party B from the day when Party B or Party B's consignee receives the Product. VIII: Obligations for Confidentiality 1. During the effective period of the Agreement and within three years after termination/expiration of the Agreement, without the written consent from the other party, any parties shall not in any form disclose the execution of this Agreement, the content of this Agreement, and the other party's information it may obtain during the performance of this Agreement; 2. Without Party A's written consent, Party B shall not disclose to any third party the prices at which it conducts the transactions with Party A. 5 IX: Force Majeure 1. Matters of Force Majeure indicate the objective situations that are not foreseeable when Party A and Party B are establishing this Agreement and whose occurrence and consequences are unconquerable and inevitable. 2. If any party fails to fully and partly perform its obligations under this Agreement due to any cause of Force Majeure, the party affected by such cause of Force Majeure shall not be held responsible for its breach of the Agreement. However, the affected party should inform the other party of such Force Majeure matters immediately, and shall present relevant certifications provided by concerned governmental authorities or notarization organizations to prove the occurrence of the Force Majeure matters. 3. After the cause of Force Majeure is eliminated, if the party that was affected by the Force Majeure matters can continue to execute the Agreement, it shall inform the other party immediately. If the other party agrees to continue executing this Agreement, the affected party shall then continue to execute the Agreement. 4. If the Force Majeure matters take place after any party has delayed performing its obligations, the affected party will not be exempt from its liability. X: Dispute Resolution and The Governing Law 1. If there is any dispute arising out of or in connection with the execution and performance of the Agreement, both parties hereto shall try to settle it by amicable negotiations. If the negotiations fail to settle the dispute, the parties may bring out a lawsuit in the court with proper jurisdiction in the place where Party A's premise is located. 2. This Agreement shall be construed using laws of People's Republic of China. XI: Miscellaneous 1. If any terms or conditions of this Agreement is deemed invalid by any authorities with proper jurisdiction, the rest part of the Agreement shall still stay in full force. 2. When the important information of a party (such as the address, accountant number and legal representatives) are changed, which may affect the business cooperation between the two parties, such party shall inform the other party of such changes immediately. 3. Without the consent from the other party, neither party shall transfer this Agreement and the rights and obligations under this Agreement to any third party including their own affiliate companies. If this Agreement is transferred upon the consent from both parties, the transferor shall be responsible for the conducts of the transferee, and shall undertake the joint discharge liability for any debts that may arise in execution of this Agreement. 4. The Appendices of this Agreement shall have the same legal binding force as the Agreement itself. If there is any conflict between the Agreement and the Appendices, the terms and conditions in the Agreement shall prevail. The Appendices of this Agreement include but are not limited to: 6 (1) Business Terms (2) Product Policy Terms (3) Orders and sales contracts signed for specific transactions (4) Documents created for supplements or amendments of this Agreements and its Appendices 5. This Agreement is made in two duplicates, and each party holds one duplicate copy with same legal binding force. 6. Any supplements and amendments to this Agreement can only be made in written documents with stamps sealed by both parties of the Agreement. Such documents are an integral part of this Agreement with legal binding force. 7. This Agreement is entered into effect from April 1, 2004, and shall expire on March 31, 2005. If both parties agree to extend the cooperation relationship after March 31, 2005, this Agreement will still stay in effect before the parties sign a new cooperation agreement. However, this Agreement will not continue to stay in effect after March 31, 2007 the latest. During the effective period of the Agreement, the parties will sign the Appendices such as the Business Terms and the Product Policy Terms in succession. If Party B does not agree with and sign on the Business Terms and the Product Policy Terms, this Agreement will be terminated. Party A: Lenovo (Shenzhen) Electronics Co.,Ltd [Sealed with the stamp] Signed and with a corporate seal Dated: March 29, 2004 Party B: Shenzhen Hengtaifeng Technology Co.,Ltd [Sealed with the stamp] Signed and with a corporate seal Dated: March 25, 2004 7 Business Terms of Lenovo Products Cooperation Agreement I. Constitution of The Agreement and Its Binding Force As an Appendix to the Lenovo Products Cooperation Agreement, the Business Terms shall be binding force upon and be complying with by all parties under the Agreement. II. The Rights and Obligations of Party A and Party B 1. Party B shall, via the e-business system specified by Party A, provide to Party A all the basic information required for the execution of the Agreement and its Appendices, and is responsible for the authenticity of such information. 2. In the case that Party A and Party B had already established the cooperation relationship before execution of the Lenovo Products Cooperation Agreement and that Party B had already provided the basic information to Party A, after the Lenovo Products Cooperation Agreement is entered into effect, Party A will continue to use such basic information for the execution of the Agreement if Party B does not change its basic information via the e-business system specified by Party A. 3. After communication and negotiation with Party A, Party B can officially submit its orders for Products to Party A. Upon confirmation by Party A, these order for Products will be deemed valid and become a part of the Agreement, and shall be subject to the terms and conditions of the Agreement. Party B's order for Products, once submitted, shall have binding force upon Party B itself. 4. If Party B provides fake information (such as the fake license, stamps, certificate, fake bank remittance receipts, and fake sales contracts) to Party A, Party A should be entitled to terminate the Agreement. 5. For the liability for breach of agreements and the business operation details, please refer to the LENOVO BUSINESS GUIDELINES. Party B agrees with the stipulations regarding its liability set forth in the GUIDELINES. III. Products Ordering 1. Method of ordering (1) Party B places an electronic order to Party A on Lenovo's e-business website at: http://agent.lenovo.com; (2) Party B places a paper-based order to Party A according to the order format published on Lenovo's e-business website; When placing the order using method (1), Party B needs to fax to Party A a paper-based copy with the corporate stamp sealed on it, or "sign" on the 8 electronic order using the digital certificate. If the fund verification is in process when Party B is placing an order, the order can be successfully submitted only after it is verified to possess sufficient fund. For the detailed operations of the electronic orders and other important notices, please refer to the Electronic Order Operational Guidelines provided by Party A. 2. If the following terms have been clearly defined by Party A or Party B in the orders, the definition in the orders shall be followed; If they are not defined or only have ambiguous definitions, the following stipulations shall be observed: (1) The Goods: Party B shall clearly specify the name, model and major parameters of the Products in its orders. If these are not specified or are only specified with ambiguous information, the goods finally delivered will then be deemed to have met the requirements. (2) The Quantity: Party B shall clearly specify the quantity of the ordered Products in its orders. (3) The Price: Party B shall clearly specify the unit prices and the total price of the ordered Products in its orders. 3. Without Party A's permission, Party B can not withdraw or alter the orders once they are submitted, otherwise it will be deemed as breach to the Agreement and Party B will be held liable for such breach. If Party B, after submitting an order, fails to carry out the follow-up procedures as prescribed and consequently impedes Party implementing such order, it will be deemed as that Party B has withdrawn such order, and in that, Party B shall pay to Party A a certain amount of penalty fee as agreed previously. 4. If fund verification is performed after confirmation of Party B's order, but Party B fails to remit the money for such order within specified period of time, Party A will be entitled to carry out the withdrawal operation with the unpaid order and request Party B to pay the penalty fee as agreed previously. 5. Party B shall, via Party A's e-business system, provide market forecast and place orders to buy Party A's listed Products. Party B may modify the market forecast it has provided to Party A. 6. If Party A requests Party B to share with Party A its business data relating to Party A in order to enhance the overall operation efficiency of the both parties, Party B shall cooperate to provide these accurate business data. Party B who provides the requested data in a timely and accurate manner as required by Party A will receive some rewards from Party A. If Party B fails to do so, Party A may hold Party B liable for breach. 7. If the cooperation between the two parties develops smoothly, Party A may, upon Party B's consent, conduct transactions with Party B on a "Payment after Delivery" (hereinafter referred to as "Sell on Credit") basis. In those cases, Party A may lower down or deduct the full or part of the rewards that were to be provided to Party B, thus to compensate Party B's increased operational cost due to the "Sell on Credit" practice. The cap on the credit amount and the method/ratio of lowering down/deducting the rewards shall be determined by Party A. IV. Payment of Goods 1. In the orders, Party B shall clearly specify the payment due date of such orders, and shall pay the due amount by the specified due date. If the due date is unspecified or not clearly specified, Party B is supposed to pay the full amount in lump sum within one working day of the delivery of the ordered goods. 9 2. Party A may issue the invoices upon shipment. But both parties hereby confirm that: such invoices shall not be deemed as the voucher certifying that Party B has made the payment. 3. If Party A fails to pay for the goods by due time, Party A will be entitled to stop the shipment of goods to Party B, and shall not be held liable for such delay of delivery. If Party B's payment is delayed for not more than three days (including the third day), a penalty fee at 4/10000 of the overdue amount for each day past due will be imposed starting from the first day past due; If Party B's payment is delayed for more than three days, a penalty fee at 4/10000 of the overdue amount for each day past due will be imposed starting from the day Party A starts the sales of the involved goods. 4. Party B shall inform Party A in written form once it has remitted the payment for goods. Party A writes off the corresponding amount in Party B's "Account Payable" according to the order number provided by Party B. If Party B does not provide the order number, or provides a wrong order number, which makes Party A unable to write off in the "Account Payable" and leads to the delay of Party B's payment for goods, Party B shall be held liable for such delay. 5. If the invoice can not be used to countervail the tax for any reasons other than Party A's fault, Party A will not change the invoice or re-issue new invoice. If the invoice can not be used to countervail the tax due to Party A's fault, Party B shall contact Party A within 10 days of receipt of such invoice and mail back the invoice to request change. Any invoice mailed back after the specified date will not be changed; The Add-Value Invoice which Party B requests for change must bear the "Unable to Verify" stamp sealed by the taxation bureau, otherwise Party A will not agree to change it. A the beginning of each month, Party B shall check the transaction records and the invoices of previous month according to the Account Checking Sheet provided by Party A, and after verifying the accuracy and completeness of the data, shall seal with its corporate stamp/financial stamp on such Account Checking Sheet and fax it to Party A. If Party B does not verify and return such Account Checking Sheet within specified time limit, Party A will be entitled to cease providing the Products to Party B until Party A receives Account Checking Sheet verified by both parties. V. Sales Discount 1. If the cooperation between the both parties develops smoothly, Party A may, according to the Agreement, provide incentive reward to Party B in the form of sales discount. The constitution of such sales discount will be agreed by both parties in the Product Policy Terms. 2. In the Product Policy Terms, the sales incentive reward is calculated based on Party B's total purchase volume from Party A (L,) consisting of two parts of net values - the value of the sales invoice issued by Party A, and the sales discount 3. After the termination of the cooperation, the unused sales discount will become void, and Party B has no right to request Party A to cash it. 4. The sales discount is only applicable for Party B's purchase of Party A's Products. The sales discount generated based on the Product Policy Terms of a Product can only be used for purchase of the same Product. The sales discount amount for each order can not exceed 15% of the total amount of such order. 10 VI Shipment and Delivery of The Goods 1. Party B shall clearly specify the expected delivery time in its order. If the delivery time is unspecified or not clearly specified, the actual delivery time will be deemed as having met the requirement. 2. Party B shall clearly specify the expected shipment method in its order. If the shipment method is unspecified or not clearly specified, Party A will be entitled to choose any shipment method it may deem appropriate, and deliver the goods to the First Delivery Address that Party B registers in Party A's e-business system. 3. Party A may, according to Party B's request in its order, deliver the goods to an address other than the First Delivery Address, or take any special shipment method as requested by Party B, provided that Party B will undertake the additional freight arising. The freight will be calculated based on the standard rates published by Party B for that period of time. Party A has the right to request Party B to pay the freight in cash, or may deduct the freight from Party B's payment for goods or from its sales discounts. 4. Party B may entrust other carriers to deliver the goods according to the delivery information that Party B has provided to Party A. 5. For "door-to-door" shipment, the goods will be delivered in a manner of "delivery beside the vehicle" - Party A delivers the goods to the delivery address specified in the order (free delivery), and Party B shall, after checking and verifying the intactness and completeness of the goods, seal on the delivery checklist with the Special Goods Delivery Stamp (that has been registered with Party B) or with its corporate stamp, or sign on the delivery checklist by the contact person specified in the order and provide the photocopy of the ID Card of such contact person. By this, the delivery is deemed completed and concluded. After the completion of delivery, Party B shall be responsible for moving the goods into its stock house on its own. If Party B does not carry out the aforementioned delivery-acceptance procedure, Party A will then be entitled to carry the goods back and request Party B to undertake any losses that may be caused. 6. For shipment methods other than the "door-to-door" shipment, the goods will be delivered in a manner of "railway station (or airport) delivery" - Party A delivers the goods to the closest railway station (or airport) in the city (county) in which Party B's registered delivery address (free delivery) is located, and sends the collection voucher (bill of lading) to Party B. By this, the delivery is deemed completed and concluded. Party B shall go to the railway station (or airport) with the collection voucher to pick-up the goods on its own. 7. When the goods is delivered to the delivery address specified in the order, Party B shall check and verify the intactness and completeness of the goods, carry out all the relevant procedures and confirm its acceptance of the delivery in a timely manner. If Party B refuses to accept the delivery, Party A then is entitled to carry the goods back and request Party B to undertake any losses that may be caused. If Party B finds a part of the goods is defective when checking and verifying, the rest part of the goods which is not defective shall not be refused. If Party B refuses to accept the rest part of the goods which is not defective, Party A will be entitled to carry the goods back and request Party B to undertake any losses that may be caused. The aforementioned 11 expenses and losses will be deducted by Party A from Party B's payment for goods or from its sales discounts, and meanwhile Party A will be entitled to ceasing providing Products to Party B until Party B pays off all the aforementioned expenses and losses. 8. Party B shall carry out the checking and acceptance procedure together with the carrier. It shall not sign for acceptance before the package quantity and Product names of the goods are verified and confirmed correct; If Party B notices any suspicious conditions such breakage of package or unexpected weight loss, it shall check the goods with the carrier, record the conditions on papers, and ask the carrier to sign (or seal) on it to confirm. If the shipment is made by train or by air and Party B itself is responsible for picking up of the goods, Party B shall also present the reports for the joint-checking results provided by the involved railway or air forwarder. In these cases, Party B shall inform Party A of such situation within two working days of "delivery-beside-vehicle" or picking up the goods from the railway station or airport, and failure of informing of the situation within this time limit will be deemed as Party B's acceptance of the delivery. 9. If Party B discovers that any Product is defective or any attached documents or spare parts is defective/missing, it shall inform the Party A when checking the goods at delivery or within one week of acceptance. If the defectiveness meets standard of "Defectiveness at First Opening of The Box" as specified in the Product Policy Terms, the defective Product will be disposed of as so. However, if Party B fails to inform Party A of such situation, it will be deemed that the Product quality has been verified and accepted. VII. The Services 1. Party B's Principles of Services for Users (1) When users are purchasing the listed Products, Party B shall take its initiative to accurately introduce to the users the Lenovo's Product Maintenance Policy and the Service Commitments, and inform them of the authorized Lenovo Products maintenance organizations or training organizations (including their names, addresses and contact phone numbers) in nearby places. If Party B is not Party A's authorized maintenance organization, it shall not use any misleading descriptions to make the users believe it is an authorized Lenovo Products maintenance organization. (2) If any listed Product requires checking and test running by opening the package box, Party B shall conduct the testing running when selling out such Product and ask the buyers to sign to confirm. Party B shall help every PC buyer register on Party A's Sun Shine Website at http://www.Lenovo.com or through the Sun Shine Service Hotline 800-810-8888, which will enable the buyer to enjoy Lenovo's high quality services. (3) If Party B on its own undertakes to provide services, including but not limited to the addition/deduction/replacement of the listed Products or the software/hardware configuration of such listed Products, the complimenting away of other products, and other services beyond those services specified in the Standard Maintenance Service Commitment, Party B shall declare that such services are not 12 to be provided by Party A, and shall be responsible for any liability in connection with such undertakings. (4) Party B shall cooperate with Party A to deal with the users' complaints, or use other methods to assist Party A to solve any problems arising in services. (5) If Party B has developed its own non-Lenovo sales channels (identified by the product sales stamp) to sell Party A's Products, Party B shall restrain such channels to observe these service principles and to undertake following service obligations. Any violations by such channels will be considered as the violations by Party B, and in that case, Party B shall be held liable for such violations. 2. Party B's Service Obligations (1) When the users are purchasing the products, Party B shall: make the introduction to the performance, use method, maintenance and quality guarantees of the goods; issue valid invoices (with all relevant information including PC name, model, dispatch number and purchase date, etc.) and the Quality Guarantee Certificate; provide all the documents listed in the packaged checklist, including the Product Specification, Quality Certificate and Maintenance Certificate, etc.; for personal consumers, write down all the dispatch numbers of the purchased Products on the valid invoices. (2) Party B shall remind the users to fill in all the product-specific data and to keep in a proper place the data and other information/materials (such as the Maintenance Certificate, Package Checklist) that the users would need to present when requesting services; Party B shall help the users how to find the relevant information (how to find the Package Checklist? The dispatch number can be found in the Package Checklist or on the bar code pasted on the back or side of the main frame of the PC). (3) When registering with or requesting maintenance from Party A on behalf of the user and upon the user's entrustment, Party B shall provide to Party A the authentic and valid user information and Product information (including the user' name, telephone number and the dispatch number of such purchase Product) according to Party A's request. (4) For those Products that meet the standards for returning or replacement, Party B shall carry out the returning or replacement procedures for the users according to the stipulations, and shall not intentionally delay or refuse without acceptable reasons. (5) If any user lodges complaint relating to the Products to Party B, Party B shall receive it immediately and deal with such complaint according to the service obligations specified in the Agreement. If the complaint falls into Party A's service scope, Party B shall try its best to pacify the users first. Party B shall record the user's requirement, and dial the Lenovo Sun Shine Service Hotline 800-810-8888 within 0.5 working days of receiving such complaint to inform Party A of the details. Party B has the obligation to cooperate with Party B to solve the problem and prevent it from deterioration, and shall not just ignore user's requirement. (6) If Party B on its own adds/deducts/replaces the Products or the software/hardware configuration of such Products, compliments away other products, and offers other services beyond those services specified in the Standard Maintenance Service Commitment, Party B shall first of all make sure the Product can function properly, shall issue to the users the corresponding configuration 13 certificates, valid invoices or service commitment documents, and shall keep its words by providing all the agreed services. 3. Party B's Liability for Breach of Agreement (1) If Party B registers with or requests maintenance from Party A on behalf of users, and if it's verified by Party A's service organizations that Party B has provided fake user information and listed Product information (including but not limited to the purchase invoice, purchase date, product model, dispatch number and package checklist, etc.), Party A will annunciate this on Lenovo's master website, and Party B shall compensate the loss incurred by the user and Lenovo for failure of enjoying/offering the service caused by Party B's misconduct, and shall pay RMB 1,000 to Party A as the penalty. (2) If there is any upgraded complaint, serious complaint or damage to Party A's brand image resulted from Party B's misconduct, Party A, besides undertaking all the losses relating to dealing with user's complaints (such as the value depreciation of the replaced Products: calculated according to the relevant state regulations regarding the Quality Guarantee policies), shall pay RMB 1,000 - 2,000 as the penalty for the first time of complaint; RMB 2,000 - 5,000 for the second time of complaint; and RMB 10,000 - for the third time of complaint. Meantime, Party A will annunciate this on Lenovo's master website. If Party B's misconduct leads to user's complaint resulting in any damage to Party A's reputation (such as negative exposure on medias), Party A will be entitled to terminate the cooperation with Party B. (3) When the non-Lenovo channels (identified by the product sales stamp) developed by Party B itself are selling the Products, Party B shall still be subject to aforementioned liability. (4) In the case of violation against any other regulations in the service terms, Party B shall be held liable according to the relevant regulations in the Product Policy Terms. Party A: Lenovo (Shenzhen) Electronics Co., Ltd Signed and with a corporate seal Dated: March 29, 2004 Party B: Shenzhen Hengtaifeng Technology Co. Ltd Signed and with a corporate seal Dated: March 25, 2004 14 EX-10.3 3 v017947_ex10-3.txt Exhibit 10.3 Confidential Information Name of the Channel Partner: Shenzhen Hengtaifeng Technology Co., Ltd. Number of the Channel Partner: 0100027889 Registration Number of the Channel Partner: 2052215 Cooperation Agreement of Service Channel with LENOVO Year 2005 Cooperation Agreement of Service Channel with LENOVO (Master Agreement) Number: ____________ Date of Effectiveness: ____________ Thanks for becoming a Channel Partner of LENOVO (Number:0100027889) and develop yourself together with us. All our agreements include the Cooperation Agreement of Service Channel with LENOVO (the Agreement) and the Affiliated Commercial Articles of the Cooperation Agreement of Service Channel (Commercial Articles), which shall supersede all the oral or written contracts concerning relevant services interchanged between both parties before. With representatives of both parties having signed the Agreement and the Affiliated Commercial Articles below, we confirm that both parties accept all the contents of the Agreement and the Affiliated Commercial Articles. The signed agreement and every signed Affiliated Agreement shall form an integral part. All the conditions of the Agreement and the Commercial Articles shall be applied to every Affiliated Agreement. With the agreement and Commercial Articles signed, 1) both parties agree that reliable copies of the contract (e.g. Xerox or fax) are regarded as the original version; 2) all the Products defined therein are restricted by the agreement. Signature with valid stamp LENOVO: with the Stamp of Lenovo Shenzhen Electronic Co.,Ltd. Representative (Print) Representative Signature: Pan Hai Position: Date: April 1, 2005 Address: Telephone: Fax: Email: Signature with valid stamp Channel Partner: (stamp) Shenzhen Hengtaifeng Technology Co., Ltd. Representative (print) Signed: representative of LENOVO Position: Date: March 31, 2005 Address: No.5 Floor 6, Block A, Skyworth Building, Hi-tech Industrial Park, Nanshan District, Shenzhen Telephone: 26743582 Fax: 26743552 Email: info@htf.com.cn Cooperation Agreement of Service Channel with LENOVO (Master Agreement) The Cooperation Agreement of Service Channel with LENOVO ("the Agreement"/"Master Agreement") is signed by the two parties as indicated on the first page: LENOVO Corporation (hereinafter referred to as LENOVO) and its Service Channel partner (hereinafter referred to as Your Company). According to the Agreement, Your Company is authorized to be the service channel for the Product of LENOVO. 1 Scope of the Agreement 1.1 Affiliated Agreements: The Agreement is a general contract between LENOVO and its Service Channel partner. Your Company is authorized to be the channel seller of our product by signing the Agreement. Special items concerning the selling Products are described in relevant Commercial Articles and items of product policies (called `Affiliated Agreements as defined below). Affiliated Agreements confirm the scope and way in which Your Company can get the Products and/or services. Every Affiliated Agreement, together with the Agreement, constitutes an independent contract (The Cooperation Agreement of Service Channel). The Affiliated Agreements can be supplemented or canceled under the consensus of both parties. But Your Company is authorized to have the Products and/or services under the Agreement only when the Commercial Articles and one or more applicable product policy are signed and come into effect. 1.2 Priority: Should there be no conflict between the Affiliated Agreements and the Agreement, the Affiliated Agreements would be applied in priority; otherwise the Agreement is applied with priority, regardless of any contrast stipulations from any indents, agreements or other documentations displayed by Your Company. 2. Definition The following expressions are defined as below, unless the context indicates otherwise: 2.1 Articles of Product Policy are an Affiliated Agreement to this one. It provides rewards, marketing supports and service supports from LENOVO to Your Company. 2.2 Related agreements refer to the Agreement and other agreements related to this Agreement, including the Affiliated Agreements, service agreement of the e-commercial system and other supplemented or amended documents. 2.3 Products refers to Products purchased under the Articles of Product Policy, which are sold to a third party by Your Company. It contains Products with a brand owned by LENOVO and the brands distributed by LENOVO or where LENOVO sells as an agent. 2.4 Channel refers to any legitimately established entity that sells LENOVO Products. 2.5 Authorized Channel means any legitimately established entity, including Your Company, which has signed a service channel agreement with LENOVO and sell Products within the scope authorized by Lenovo. Authorized Channel means the same as channel if there are no specific stipulations. 2.6 Distributions means transactions that provide a third party with Products via sales, lease or in any other ways. Should there be any stipulations regarding ways of distribution in the Agreement concerning LENOVO's product policy, such items shall prevail. 2.7 Marketing means all the activities relating to the Products' sales and promotion, including advertisement, promotion, exhibition and services, etc. 2.8 Pricing Policy refers to the documentations, regulations, requirements, opinions and memorandums, concerning Your Company's selling price, which are cited from the Agreement and its relevant articles or are publicized or notified by LENOVO. 2.9 Purchasing Price refers to the Products' selling price or the inter-exchange price among LENOVO's service channels, which are fixed by LENOVO according to its Pricing Policy. Sometimes they shall be called "channel price" or "agent price, unless specially notified. 2.10 Media Price: According to LENOVO's Pricing Policy, there shall be a unified price when a Product is advertised on the media. 2.11 Lowest Retail Price: means the lowest retail price within Your Company's authorized marketing region announced by LENOVO or negotiated by both parties. 2.12 Lowest Item Price refers to Your Company's lowest selling price concerning a single item, which is announced by LENOVO or negotiated by both parties. 2.13 Terminate Customer refers to any individual or kinds of entities that purchase the Products for self usage. 2.14 Selling Discount refers to the preferred price offered by. LENOVO. 2.15 Lower Channel refers to the one or several parties who accept/buy in Products when marketing or selling Products. 2.16 Upper Channel refers to the one or several parties who offer/sell Products when marketing or selling Products. 2.17 Authorized Region refers to a region within which the channel is entitled to sell LENOVO Products. The Authorized Region is stipulated in the Articles of Products Policy, should there be no other prescriptions. 2.18 Authorized Client refers to the clients within the Authorized Region to market and sell Products. The Authorized Clients are stipulated in the Articles of Products Policy, should there be no other prescriptions. 2.19 Appointed Website refers to the e-commerce website defined in the Commercial Articles with the address: http://agent.LENOVO.com and the GREAT LENOVO website with the address http://dlx.LENOVO.com. The latter shall be the only Appointed Website if Your Company is not authorized to log in the e-commerce website. 2.20 Trademark refers to any trademarks, trade names, symbols, marks, designs, business decoration and other unique expressions or tokens possessed or used by either party separately. 2.21 Affiliated Party means a company that is controlled by one company or controls that company, or jointly controls a third company with one company, or is under the same control of a third company with one company. The "company" here refers to any companies, enterprises or legal entities; "control" means having a direct or indirect influence or managing power on the referred company through ownerships, purchases with voting rights, contracts or other means. 2.22 Supporting Documents means any of LENOVO agreements of customer license, product brochures, blueprints, circuit diagrams, customer handbooks, marketing promotion materials, quality certificates, repairing guarantees and other analogous documents and materials. 3 Authorization 3.1 Once having signed the Articles of Product Policy, Your Company is entitled to sell Products within the Authorized Region and term, in the identity (appointed identity) authorized in the Articles of Product Policy and in the way confirmed in the Articles of Product Policy. The premise of having LENOVO's authorized identity to sell the Products is to observe the articles and conditions of this Agreement and perform them strictly. 3.2 LENOVO's authorization to Your Company is confined to what have been stipulated in the Articles of Product Policy and other relevant items in the Affiliated Agreements. There is no other authorization. Your Company shall not engage in any activities in any LENOVO-related identities that are not authorized, including, but not limited to, the implication of having relations with LENOVO which are not clarified in the Agreement. 4 Independent Entity 4.1 LENOVO and Your Company have no dependent relations except for the cooperation undertake in the Agreement. Neither party shall bear legal responsibilities for the other's activities. 4.2 Your Company is neither an association of LENOVO, nor a branch or a subsidiary of LENOVO or LENOVO's associations. Your Company, when using LENOVO's name or remarks, shall not confuse customers that you are LENOVO's branch, association or subsidiary through concealing Your Company's name, emphasizing LENOVO's name and remarks, or any other methods that may cause mistakes. In all the involved agreements, except definitely stated, all the product agents and proxies of LENOVO mentioned therein are the independent commercial entities or agencies running under its own name, but not any civil agents in any sense. Your Company shall do all the IT and other types of exchanges that are directly or indirectly related to the Products in your own name, but shall not engage in any activities in an implied or definitely notified identity of LENOVO's civil agent. Your Company shall not use LENOVO's credit as a mortgage in any form. 4.3 Except for a written consensus by both parties in advance, Your Company is not entitled to provide customers with Products, services or other activities in LENOVO's name. 4.4 During the term and the extended term of the Agreement, Your Company shall have an independent operation and recruitment, and shall develop Lower Channels under the authorization in the Articles of Product Policy. Your Company shall supervise and be responsible for your employees and your Lower Channels. 4.5 Except for a written consensus by both parties in advance, LENOVO is not entitled to engage in any other civil activities in Your Company's name. 5 Legitimacy 5.1 Your Company shall acquire and keep the authoritative licenses and permissions which are necessary to the performance of the Agreement and required by law or the government. Such licenses and permissions include, but not limit to: licenses and permissions for purchase, distribution, advertisement, storage and marketing within the Authorized Region. 5.2 According to LENOVO's requirements, Your Company shall display to LENOVO the certificates regarding your distribution capacity, which include, but not limit to: corporation status registered and annually checked by the Industry and Commerce Administration Bureau and the photocopy of the legal representative's ID card. Your Company shall also guarantee the authenticity, legitimacy and continuous validity of such documentations. 5.3 Your Company shall observe the relevant laws and LENOVO's newly released channel cooperation policies. You shall not do anything that may bring harm to LENOVO and its brands. 5.4 Your Company shall only sell the Products supplied by LENOVO in mainland China. As those Products may be bound by certain export restriction laws, including the American ones, Your Company shall observe all the applicable export restriction laws and regulations. According to such laws, Your Company shall not provide certain Products to the restricted countries, entities or individuals, nor to the entities and individuals that are engaging in prohibited activities in any form. Such Products shall not be used in the restricted fields, either. Hence, Your Company shall keep up with relevant laws. Your Company agrees to defend and compensate for LENOVO in order to keep LENOVO from the damages caused by Your Company in case you have breached this article. 6 Purchase and Payment 6.1Your Company shall order LENOVO's Products, pay for them and take them over according to LENOVO's requirements stated in the Commercial Articles. 6.2 LENOVO shall provide Your Company with Products according to the order form confirmed by both parties or to the additionally signed sales contract. LENOVO shall substitute Your Company's ordered Products with more highly equipped ones on condition that the prices remain. 6.3 During the validation of the Agreement, ownership of Your Company's ordered Products shall transfer to Your Company after you have paid up the whole sum of money. Risks of extinguishment, damage, etc. shall transfer to Your Company on the day of delivery. 7 Product Sales 7.1 Sales Territory 7.1.1 Your Company shall sell Products or hold relevant sales activities in the Authorized Region and to the Authorized Clients stipulated in the Articles of Product Policy. But you shall not sell Products or hold any relevant sales activities out of the Authorized Region and to the unauthorized Clients, including, but not limit to, promoting or delivery Products to the unauthorized Clients or out of the Authorized Region in any form, or establishing branches or inventory house out of the Authorized Region for the purpose above. Without LENOVO's written permission in advance, Your Company shall not acquire Products out of the Authorized Region, which are to be sold inside the Authorized Region. 7.1.2 With LENOVO's written permission, Your Company is entitled to carry out the nationwide, unified projects or the trans-region customer projects. Those nationwide, unified projects or trans-region customer projects without LENOVO's recorded permissions are considered as trans-region sales or trans-region transfer. 7.1.3 LENOVO would add regional marks to the Products or their packages. Selling Products without right regional marks are regarded as trans-region sales or trans-region transfer. Region division refers to the market division in the same year. 7.1.4 Your Company shall submit all the demanding information within your Authorized Region to LENOVO, i.e. all the Products' offering prices, purchase demands, order of goods and other consultations. Your Company shall also submit such materials to your Upper Channel if they stem from the Authorized Region of the Upper Channel. 7.2 Your Company shall establish essential selling agencies, invest necessary funds and faculties and make every effort to sell and promote Products within the Authorized Region. Except for what are stated in the Agreement, or supported by LENOVO, or negotiated by both parties, Your Company shall bear all the costs and expenses caused by buying in, promoting and selling Products. Your Company shall operate under the principle of honesty and fair dealing, and shall not sell Products by malfeasant means such as deception and threatening. 7.3 Your Company shall keep an appropriate purchase of the contract Products and preserve the promotion materials such as pamphlets, advertisements, etc. Such materials shall make a complete and correct introduction to the Products. 7.4 Your Company shall always employ technically qualified staffs, who are also necessary and responsible for the overall product promotion within the whole Authorized Region. Sales staff shall, according to LENOVO's policies, take the training required by LENOVO. 7.5 Your Company shall, according to LENOVO's channel supervision regulations, meet LENOVO's representatives regularly or at times, in order to discuss the process of product sales within the Authorized Region and consult about the sales proposal and sales strategies aiming at voluminous product promotion. 7.6 Sales quotas supposed to be completed by Your Company are stated in the Articles of Product Policy. If Your Company cannot complete the negotiated sales quota, your rewards and supports would be altered or canceled according to the Articles of Product Policy. LENOVO is entitled to notify Your Company in written form three months in advance that it would terminate certain items of product policies. 7.7 Your Company shall not change the inside or outside packages, or add appendages that may mislead customers, unless the two parties have additional contracts. Without LENOVO's written authorization in advance, Your Company shall not unseal the Products or make installations, including no altering or amending the documentations, materials and fittings enclosed with the Products when they leave factory. 7.8 Your Company shall maintain a reasonable market price and avoid any unfair price competition. If LENOVO makes any requirements or opinions with respect to the Products' sales price and quoting methods due to differed sales methods, Your Company shall inform LENOVO in written form and gain its written permission in advance when you want to: 1) sell the product in a price lower than LENOVO required one; 2) publicize a price lower than LENOVO's quotation in the media (including the quotation and other advertising materials made by Your Company); 3) have any other sales prices and quoted methods different from LENOVO. 8 Service 8.1 Your Company shall provide customers with services that a distributor should do according to LENOVO's service channel agreement, service regulations and relevant laws. Your Company shall not discourage customers' complaints or reject their proper service requirements. 8.2Your Company shall teach customers to use the Products correctly. You shall also provide them with complete product introductions, pictures, samples and other relevant information, materials and goods which are offered by LENOVO or made by Your Company according to LENOVO `s requirements and standards. 8.3 During the selling process, Your Company shall introduce to the Lower Channels (if there are any) and/or customers relevant product service policies (including repairing guarantee) and the authorized repairing and/or training agencies relating to the Products. Your Company's introduction to the service policies shall strictly stick to the service policies concerning product standards released by LENOVO or the special service policies tailored for certain Products or clients. 8.4 Should there be no extra contracts, Your Company shall, according to relevant service policies, provide customers with such a service that should a repairable failure occurs during the period guaranteed in the product policies, Your Company shall change the Products or withdraw the Products and pay back the money of goods. 8.5 If, according to relevant product policies, Your Company is responsible to provide customers with integration or installation services and all or part of the repairing services including fixing, changing or withdrawing the Products, such services are limited to LENOVO's standards: 1) Your Company shall be equipped with sufficient technically qualified staffs to guarantee a immediate and effective services to customers; 2) Your Company shall have a sufficient storage of Products and/or spare parts to satisfy the needs of after-sale services within the Authorized Region; 3) Your Company shall guarantee that the after-sale services are valid to every customer buys Products from Your Company within the Authorized Region. 8.6 If Your Company is responsible or obligate to provide such services according to LENOVO's service channel agreement, service regulations and relevant laws, Your Company shall respond to and handle customers' service requirements within the period of time stipulated in LENOVO's service standards. If Your Company is not responsible or obligate to provide such services, you should transfer such services to LENOVO or LENOVO's authorized repairing agencies. If a customer requires repairing the product and/or its spare parts which can be returned to the LENOVO's factory or other LENOVO-appoint repairing agencies, Your Company shall report to LENOVO honestly and in due process. The Products are retuned according to LENOVO's authorization and would be delivered to customers after repairing. 8.7 If Your Company makes any extra undertakings to customers beyond LENOVO's definite undertaking in the service policies, or provides customers with any attached materials or goods together with LENOVO's Products, Your Company shall inform customers that such services and attachments are provided and guaranteed merely by Your Company. Your Company shall be responsible to settle down the complaints or disputes caused by your own service undertaking or its performance. 9 Channel Development 9.1 "Channel development", or the analogous concepts/expressions specially mentioned in the Agreement or involved agreements, means that Your Company seeks Lower Channels and establishes comparatively frequent exchange relations concerning the Products with them. Your Company is not entitled to develop any Lower Channels, except for LENOVO's special authorization. 9.2 If Your Company is authorized to develop Lower Channels according to the signed Articles of Product Policy, Your Company shall develop Lower Channels regarding certain Products according to the plans that are negotiated by LENOVO and Your Company and are signed in the Articles of Product Policy or stipulated in other forms. 9.3 Your Company shall guarantee that, with LENOVO's authorization, you should sign a channel agreement with the developed lower channel under the LENOVO's required form and standard. Such channel agreements shall include articles that are essentially the same as articles 3i(cent)4i(cent)5i(cent)7i(cent)8i(cent)11i(cent)12i(cent)13i(cent)14i(cent)15i (cent)16i(cent)17 in the Agreement and are necessary to the agreements' performance. 9.4 Your Company shall submit the statistics of the lower channel to LENOVO's regularly according to the scope, standard and forms stipulated in LENOVO's channel supervision charters. 10 LENOVO's Supports Pricing support 10.1.1 LENOVO shall, according to Your Company's application, offer you a preferred price to the special selling projects focusing on certain customers (pricing support). Such supports include, but not limit to bidding projects. The manipulation and disposal to the bidding projects shall observe the principles of pricing support. 10.1.2 Your Company, when applying for pricing support, shall observe all the processes and rules concerning the application of LENOVO pricing support guarantee the authenticity, integrality and veracity of all the application information. Your Company's Products, which enjoy a pricing support applied by Your Company, shall be correctly sold to the appointed clients demonstrated in Your Company's application of certain special sales projects. 10.1.4 LENOVO would add a mark of "specially supplied" or other analogous marks (specially supplied Products) to the packages of such Products. Your Company shall not purchase or sell any Products with pricing supports acquired from a third party other than LENOVO (including other channels of LENOVO). 10.1.5 LENOVO shall, according to its reasonable judgments and selection, give an after-sale discount and/or deposit to its pricing supports. The operation methods and standards are stipulated in the relevant policies or proposals released by LENOVO. 10.1.6 If Your Company's reputation does not reach the LENOVO required level when applying for product's pricing support, Your Company shall ask a third company that reaches LENOVO `s reputation level to make assurance for Your Company. The third company shall bear a joint liability with Your Company. 10.2 LENOVO shall, according to its product policies and its reasonable judgments, provide Your Company with sample introductions, technical brochures and advertising materials in order to support Your Company's product promotion within the Authorized Region. 10.3 Both LENOVO and Your Company shall propose special marketing activities aiming at given clients or marketing goals. LENOVO would provide Your Company with case support with respect to product, technology, price, sales, and policies according to its reasonable judgments (case support), on condition that LENOVO confirms such activities do correspond with LENOVO's current marketing policies. 10.4 Rewards 10.4.1 Rewards means that LENOVO would, according to LENOVO's marketing and product policies, provide Your Company with material supports unilaterally for your continuous sales of LENOVO's Products. Such rewards include, but not limit to, sales reward, fund, price protection, support, encouragement, discount, preference and other relevant expressions mentioned in the Agreement and any other involved agreements. Such rewards shall not be explained as LENOVO's due payments or other obligations to Your Company, even if such rewards have been issued and informed Your Company according to involved agreements and LENOVO's marketing and product policies. 10.4.2 LENOVO would reward Your Company according to your signed Articles of Product Policy and other involved agreements. Your Company shall question the amount of the reward within three months starting from the day on which LENOVO notifies Your Company of the reward. 10.4.3 Your Company shall enjoy the reward only by having discounts in ordering Products, except for LENOVO's additional written permission. The discount based on certain Products shall only be used in ordering the same Products continuously. Sales discount shall not exceed 15% of the total amount of every order form. 10.4.4 LENOVO is, according to specific product and marketing policies, entitled to amend or alter the rewarding matters and methods based on LENOVO's unilateral judgments. 10.5 LENOVO shall, basing on its reasonable judgments and selections, offer marketing supports to Your Company's product sales activities according to the issued advertising strategies for certain brands or Products, including advertising, participating or holding categories of exhibitions and displays. LENOVO shall give supports for Your Company's participation and organization of such activities according to Your Company's application, provided that such activities do not breach LENOVO's temporal policies and strategies. 10.6 LENOVO would consider its marketing policies and provide Your Company with trainings regarding product sales, technical capacity and repairing services, in order to enable Your Company to fulfill the obligations provided in the channel agreement properly. Training costs are shared by Your Company and LENOVO, or paid according to the policies released by LENOVO then. 10.7 Product Guarantee 10.7.1 LENOVO guarantees the legitimate ownership of the delivered Products. 10.7.2 LENOVO guarantees that its delivered Products conform to the national mandatory standards and have no defects that may affect the regular use at the delivery. LENOVO delivered Products only serve for general purposes, other than all the special purposes, like applications which may cause property loss or personal damages. 10.7.3 According to the quality guarantee stated above, should there be any product failures within the scope and period of the guarantee, LENOVO would provide customers with free repairing services (repairing guarantee) based on the repairing undertaking. Quality guarantee and repairing of the non-LENOVO made Products shall be based on the undertaking standards and methods of the original factories. LENOVO would assist Your Company for the coordination. If the repairing requirement exceeds the period of guarantee, LENOVO would provide a compensated repairing service and the amount would be lawful and commercially reasonable. The repairing guarantee or would be provided by Your Company or other repairing agencies authorized by LENOVO. 10.7.4 LENOVO provides Your Company with material reimbursement support. According to, and only according to such a policy, Your Company shall return to LENOVO's appointed repairing agencies those returnable Products and/or spare parts which are within the scope of repairing guarantee but exceed the period of repairing guarantee. 10.7.5 LENOVO would provide customers with post-sale repairing services through the authorized repairing agencies, including Your Company. The rights, obligations and scope of the post-sale repairing services provided by Your Company shall stick to the Agreement and other relevant product service policies. 10.7.6 LENOVO service policies are confirmed in these documents: 1) product service policies provided by LENOVO or attached with Products; 2) service policies regarding certain Products released and continuously renewed on LENOVO website. 10.7.7 Except for additional stipulations in Your Company's order form or other types of sales contracts, LENOVO's responsibilities for Products and services are limited to LENOVO definite undertakings. LENOVO shall not bear any product responsibilities that are stipulated, tacit, etc. LENOVO's responsibility for a specific product and/or service shall not exceed its actual exchanging price. LENOVO is not responsible for any indirect, occasional or incidental damages. 10.8 LENOVO would handle Your Company's complaint about our staff's bribery, abuse of power, malfeasance, etc. in time, in order to maintain Your Company's legal interests. 11 Marketing Activities 11.1 Your Company shall not publish, display in any form or use the advertising or promoting materials relevant to contract Products, unless such advertising or promoting materials are offered by LENOVO or are used for product consultancy or promotion agreed by both parties. 11.2 Your Company shall not make any explanation or assurance on a product and/or service without authorization, unless LENOVO issues permission in written form or there are clear, irrevocable expressions in the LENOVO-released written materials. Your Company's advertisements for the contract Products and/or LENOVO-offered services are limited to LENOVO's definite undertakings. If Your Company makes any extra undertakings to customers, you shall notify them that Your Company, other than LENOVO, would be responsible for such undertakings. 11.3 In spite of the stipulations above, Your Company shall observe LENOVO's marketing strategies and proposals and make appropriate efforts to participate and organize product marketing activities, such as advertising, participating in exhibitions and displays, expanding product sales. 12 Report 12.1Your Company shall often report to LENOVO the marketing develop situation of certain LENOVO's Products within your Authorized Region and provide information on market demands and changes of the local laws and regulations. Your Company shall submit to LENOVO your sales information and statistics ("sales information") in the LENOVO-offered format via the "statistical system of channel purchase, sales and inventory and customer information". Such statistics shall be complete, timely, authentic and correct. LENOVO would check and verify the information according to stipulations in the Agreement and other involved agreements, as well as the rules and policies newly released by LENOVO or notified to Your Company. LENOVO would calculate sales rewards for Your Company according to this actual sales information. 12.2 Your Company shall regularly report to LENOVO detailed information on future sales and inventory, as well as other statistical estimations required by LENOVO for budgets and new production plans. 12.3 Your Company shall report to LENOVO all the complaints about LENOVO's Products and their acquirable proofs and other relevant matters, in order to guarantee LENOVO immediate and proper solutions to such complaints. Should there be any disputes between Your Company and customers concerning Products' capabilities, qualities and relevant services, Your Company shall not make any litigation settlement action without LENOVO written permission. 13 Market management 13.1 In order to ensure the corporate interest of LENOVO and all its channels including Your Company, should a channel holds product sales activities which breach relevant channel agreements and the price, market service and other stipulations cited therein, or have made or may make negative effects on the market order or LENOVO's Products, LENOVO is entitled to terminate such activities based on its own knowledge and to stop supplying the channel with Products and services immediately or after it informs the channel. 13.2 LENOVO shall require its channels, including Your Company, to stop supplying Products to the channel that violates the rules. Your Company shall stop supplying Products to the controlled channel directly or indirectly as soon as you receive LENOVO's inform or notification based on the Agreement. 13.3 Should Your Company discovers any channels whose actions violate the Agreement or other agreements involved, you shall report to LENOVO and help for the investigation. If the information is firstly given by Your Company and is true in the investigation, LENOVO shall increase your sales reward by RMB300~RMB50,000. 13.4 Your Company shall maintain LENOVO's interests and not make any actions that is against LENOVO's interests or adopt any marketing strategies that conflicts with LENOVO's interests. 14 Channel supervision 14.1 LENOVO is entitled to evaluate and/or authenticate Your Company's performance of the channel agreement, commercial operations, money investments and service level. If the evaluation result does not reach LENOVO's standards or cannot pass LENOVO's authentication, LENOVO shall, according to the result of evaluation and/or authentication, 1) alter the authorization, authorized credits or the rewards and supports to Your Company; 2) suspend the supply of certain Products to Your Company; or even 3) terminate the channel agreements and/or any involved agreements (including but not limit to any articles of product policies). LENOVO is entitled to require other channels to stop supplying Products to Your Company. LENOVO's standards of evaluation and/or authentication are performed under the standards which are released by LENOVO and are valid within the period. 14.2 LENOVO shall audit Your Company's performance of the channel agreement through regular or irregular inspections (to inspect the quotations, telephone records, secret interviews, customer surveys, etc.) or complaints or reports from other channels. Your Company shall be responsible to supervise your Lower Channels (regardless of LENOVO's authorization), if there are any, in order to guarantee that Your Company's Lower Channels runs in accord with the channel agreement signed by LENOVO and Your Company. Should there be any dealings of Your Company's Lower Channels that violates the Agreement, you shall be responsible for that and take effective actions to rectify such dealings. Your actions shall include, but not limit to, dissolution of any signed agreement. 14.3 Your Company agrees to reserve complete and correct this year's and the past three years' records of your finance and Products' purchase, sales and inventory. Such records shall include all the statistics and information which LENOVO uses to check your performance of the channel agreements and according to the channel agreement and other involved agreements that are supposed to be reported. Your Company shall submit to LENOVO your vigorous statistics of sales and other items in the manner stipulated or permitted by LENOVO, including but not limit to, sales quantity, inventory and capital flows. LENOVO would verify the statistics and information submitted by Your Company and offer Your Company with rewards and other supports based on your statistics that are considered authentic. The statistics which does not correspond with LENOVO rules are null and void. 14.4 During the valid or extended period of the Agreement, LENOVO can audit Your Company's records in due notification. Such audits shall be carried out by LENOVO's inside staffs or independent audits entrusted by LENOVO. Audits would report to LENOVO about your proper performance or the channel agreement. Audits would not exceed twice every twelve (12) months. But LENOVO is entitled to make temporary audits in Your Company in eight hours after informing your LENOVO's suspects your performance of the channel agreement with justifiable reasons. Audit costs are born by LENOVO, unless the audits discover that Your Company does not perform the channel agreement appropriately within the auditing report period. Should the circumstance occurs, Your Company shall be responsible for all the audit expenses in addition to paying LENOVO your penalty and other items that are suppose to be paid by Your Company. 15 Intellectual property rights 15.1 It is confirmed by both parties that unless there is other express agreement, neither party acquires any intellectual property rights or other related rights from the other party from the signing and implementation of this Agreement. 15.2 Within the authorized period of certain Products as agreed by the parties, Your Company may have the license of a series of LENOVO's non-monopoly and non-transferable Intellectual property rights. Such Intellectual property rights refer to the trademarks, trade names, patents, copyrights and designs regarding certain Products, possessed by LENOVO or authorized to Your Company's use by LENOVO. To LENOVO's knowledge at the time of signing the Agreement, such Intellectual property rights do not violate a third party's intellectual property rights within the Authorized Region. Your Company may not have any dissents or amendment to LENOVO's trademarks. 15.3 All or one of the patents, trademarks, copyrights and designs relating to the contract Products, as well as their literal introductions, are and will be LENOVO's property. Your Company shall not change or remove any product signs or property manifestos relating to LENOVO's property ownership. Your Company shall not register the rights and properties mentioned above in your own name or allow others to do so, nor can you register patents, trademarks, trade names, copyrights and designs that are imposturous or the same as or similar to LENOVO, no matter the channel agreement still binds or has terminated. Your Company shall not allow a third party to use LENOVO's intellectual property rights without LENOVO's written permission. Your Company shall stop having LENOVO's intellectual property rights as soon as the Agreement terminates. 15.4 Your Company shall not produce, make or counterfeit any contract Products or its assemblies no matter the Agreement terminates or not, nor can you sell the Products with LENOVO's trademarks or any other LENOVO's marks or symbols which are not supplied by LENOVO or its Channels. 15.5 The use of LENOVO's trademarks, special signs and other unique commercial expressions by Your Company shall be under LENOVO's authorizations in written form, and shall follow LENOVO's instructive documents. 15.6 Should Your Company notice or discover any infringement of LENOVO's patents, trademarks, trade names, copyrights and designs (regardless of apparent or potential), or lawsuits, petitions, counterfeits and unfair competitions relating to LENOVO, you shall notify LENOVO of all such dealings within reasonable time. Besides, Your Company shall provide LENOVO with necessary assistance, including collecting evidence materials, file a joint lawsuit together with LENOVO, etc. LENOVO agrees that it would bear all the legal costs of such litigations, unless otherwise agreed by the parties. 16 Confidentiality Before signing the Agreement or during its valid period, the commercial, marketing, technical, scientific or other types of materials which have been or would be disclosed from one party (the disclosing party) to the other (the receiving party) shall be designated as confidential information (or similar expressions) at their disclosure, or disclosed secretly, or confirmed to be confidential information under a reasonable judgment by both parties. 16.1.1 Confidential information shall be kept secretly. 16.1.2 Confidential information shall not be used for the purposes not stated in the Agreement. 16.1.3 Confidential information shall not be disclosed to any agency other than the employee of one party who shall know the information due to his/her own duty (or associations, lawyers, accountants or consultants of that party). The personnel mentioned above shall sign an Agreement of Confidentiality in written form, whose confidentiality obligations shall be as serious as, if no more than, this article. 16.2 Article 16.1 is not applicable to the information below: 16.2.1 The non-receiving party has written records that suggest it has already known the information before the disclosure from the disclosing party. 16.2.2 The information has been, or would be publicized not by the receiving party's violation of the confidentiality obligation. 16.2.3 The receiving party acquires the information from a third party who is not bound for the confidentiality obligation. 16.3 During the administrative and legal proceeding, the receiving party shall, according to the commands or requirements of the authorities with qualified jurisdictions, disclose the confidential information that is necessary as required by the administrative or legal proceeding. A written notification to the other party shall be sent before such disclosures. 16.4 Your Company shall not issue any newsletter or other promotion of any news with direct or indirect relations to the Agreement and other related agreements. 16.5 After the expiration or termination of the Agreement, or at the request of the disclosing party, the receiving party shall: 1) return (or extinguish at the request of the other party) all the materials that contain the confidential information (including photocopies) to the other party; and 2) issue a written guarantee within ten days after the request that the above mentioned materials have been returned to the other party or extinguished. 17 Remedies 17.1 General Rules 17.1.1 Either party, if breaches the contract, shall take reasonable remedial measures as acceptable to the other party to rectify its breach of the contract upon its notice of the breach or the receipt of the notice of breach from the other party. 17.1.2 Both parties agree that it is necessary to observe the Agreement and the agreements involved in order to maintain the interests of Your Company and LENOVO, as well as all the LENOVO's Channels. As any breach of the Agreement and the agreements involved would cause damages to others, the breaching party shall make immediate and sufficient compensations for its breach of the contract. When it may be difficult to calculate the amount of damages, both parties consider it necessary to fix the penalty in advance. Both parties agree that the penalty fixed in the Agreement is reasonable and shall be paid as soon as a breach of contract occurs without proving the damages. Additionally, the non-breaching party is entitled to judge the amount that shall be paid by the breaching party unilaterally within the range of amount stipulated in the Agreement. In the event that the penalty paid by the breaching party cannot cover the damages of the non-breaching party, the non-breaching party is entitled to a petition of continuous compensation. Damages mentioned in the Agreement shall include the non-breaching party's damages caused by a breach of contract, as well as the legal costs and expenses, including investigation, arbitration, litigation, payments for lawyers, etc. 17.1.3 The penalty and compensation born by Your Company shall be firstly deducted from the rewards and supports for Your Company. If such deduction cannot cover all the penalty and compensation, LENOVO is entitled to require a further payment. The deduction of rewards and supports comes into effect as soon as LENOVO notifies Your Company. As for the amount of penalty and compensation that exceed the deduction, Your Company shall give a reasonable explanation within seven days after receiving LENOVO's written notification. Without a reasonable explanation from Your Company within the time limit, the amount of money in the notification shall be Your Company's due payment. 17.1.4 The above stipulation does not affect other remedial measures that may be taken by the non-breaching party under agreements or laws. 17.1.5 The two parties may stipulate other breaching liabilities in any related agreements. 17.1.6 In particular, "Your Company" shall include the associations and Lower Channels of Your Company in this article. 17.2 Should Your Company breaches article 4 of the Agreement and causes confusion to customers regarding Your Company's identity, LENOVO may charge you a RMB3,000 penalty each time, according to its reasonable judgment. 17.3 Should Your Company does not comply with the payment obligation as stipulated in article 6 of the Agreement, you shall pay the higher of the penalties agreed by both parties. Penalty for default payment is stipulated in the Articles of Product Policy or the order forms. 17.4 Should Your Company breach article 7 (article 7.7 excluded) and/or rules of sales relating to that article, Your Company shall bear a penalty ranging from RMB5,000 to RMB20,000, subject to the following: 17.4.1 Products outflow under pricing support: Should the Products with Your Company's applied pricing support outflows, whether handled by other Channels or not, Your Company shall bear a penalty to LENOVO ranging from RMB10,000 to RMB100,000. Meanwhile LENOVO shall reduce the sales reward for Your Company according to all the discounts at this round of pricing support and may terminate the authorized credits and pricing support to Your Company. 17.4.2 Products outflow under sales price support: Should Your Company spreads the Products that are under sales price support without registering in LENOVO, Your Company shall bear a penalty to LENOVO ranging from RMB5,000 to RMB20,000 RMB. 17.4.3 Supplying to companies that are enjoined from acquiring LENOVO's Products: should Your Company supply LENOVO's Products to companies that are enjoined from acquiring LENOVO's Products, Your Company shall bear a penalty to LENOVO ranging from RMB10,000 to RMB20,000. 17.4.4 Regional Sales: 1) Should Your Company sell or transfer Products across the Authorized Region, whether handled by other Channels or not, Your Company shall bear a penalty to LENOVO of RMB1,000 per computer amounting to RMB20,000 in total. 2) Should Your Company sell computers marked by non-authorized region signs without registering to LENOVO, Your Company shall bear a penalty to LENOVO ranging from RMB5,000 to RMB20,000. 17.4.5 Sales at low price: should Your Company sell Products in low price or low quotation, or supply Products to sales companies in low price or low quotation, Your Company shall bear a penalty to LENOVO ranging from RMB5,000 to RMB20,000. 17.4.6 Sales across the Authorized Region at low price: should Your Company sell or transfer Products across the Authorized Region in the price or quotation lower than LENOVO's lowest retail price, whether handled by other Channels or not, Your Company shall bear a penalty to LENOVO of RMB10,000. Should Your Company sell Products across the Authorized Region in low price over three times within three months, or sell Products across the Authorized Region which causes order loss to other Channels, or supply LENOVO's Products to companies that are enjoined from acquiring LENOVO's Products, or sell over ten computers across the Authorized Region in low price at once, or cause other fundamental damages, Your Company shall bear a penalty to LENOVO of RMB20,000. 17.4.7 Low quotation prices on the media: should Your Company publish a price on the media (including the pamphlets and quotation forms made by Your Company) which is lower than LENOVO advertising price, Your Company shall bear a penalty to LENOVO ranging from RMB2,000 to RMB20,000. 17.4.8 Leaking the purchasing price: should Your Company leak the purchasing prices of LENOVO's Products, Your Company shall bear a penalty to LENOVO of RMB5,000. 17.4.9 Customers' complaints: should any customers complain Your Company for deceiving or threatening, Your Company shall bear a penalty to LENOVO ranging from RMB2,000 to RMB20,000. 17.5 Should Your Company submit to LENOVO the sales statistics and sales information which are not in accord with LENOVO's criteria, such sales statistics and sales information shall be invalid and shall not be calculated in the sales reward. Should Your Company submit fake sales statistics and sales information to LENOVO, Your Company shall bear a penalty to LENOVO of 50% of the sales reward in that round, in addition to deleting the fake statistics and information from sales reward. 17.6 Should Your Company breaches article 8 and/or the service rules cited by that article, Your Company shall bear a penal of RMB500. But you shall stick to additional stipulations, if there are any. 17.6.1 Should Your Company breach article 8.1 in the Agreement and take unfair measure or provide no services, Your Company shall bear a penalty ranging from RMB2,000 to RMB20,000 each time. 17.6.2 Should Your Company breach article 7.7 and 8.7, and change the Products or dishonor Your Company's extra undertakings to customers without authorization, Your Company shall bear a penalty ranging from RMB1,000 to RMB3,000. 17.7 Should Your Company fail to perform the Agreement or its cited rules which result in customers' complaints or claims for compensation, once confirmed by LENOVO that it should be Your Company's responsibilities, Your Company shall bear the expenses caused by those complaints or claims for compensation, including but not limited to the costs to comfort customers and the depreciation due to the Products' reimbursement or replacement, (2.5ie of the product's terminal selling price per day). In addition, Your Company shall bear a penalty ranging from RMB500 to RMB2000 for every usual complaint and a penalty ranging from RMB2,000 to RMB5,000 for every serious complaint, or a penalty of RMB10,000 for every vicious compliant. In this article, "usual complaint" refers to customers' complaints or claims for compensation caused or partly caused by Your Company's fault, while Your Company settles the disputes actively without going depravation; "serious complaint" means that Your Company does not settle the above-mentioned complaints or claims for compensation until LENOVO urges you to do so, or Your Company does not take effective measures and result in customer's complaints in a third organization such as LENOVO's central management department, the association for consumers, the Industry and Commerce Administration Bureau, etc. Usual complaints risen over twice shall be regarded as serious complaints; "Vicious complaint" means that Your Company has not take effective measures on customers' complaints or claims for compensation and leads to exposure on the media, lawsuits or propaganda via the internet, etc. Serious complaints risen over twice shall be regarded as vicious complaints. 17.8 Should Your Company incurs customers' complaints or claims for compensation due to breach of the channel agreement or any stipulations cited therein, and such event is exposed to the public in the ways including but not limited to media reports, notifications released by the government or other authorities, Your Company is deemed to cause severe damages to LENOVO's public image and reputation. Hence Your Company shall bear a penalty according to the Agreement and shall make further compensations if the penalty cannot cover LENOVO's loss. The amount of loss arisen from the damages to LENOVO's image and reputation is calculated according to the total amount of market promotion and advertising expenses (including costs specially invested for the Authorized Region and the whole sum shared by Channels nationwide) invested by LENOVO into Your Company's Authorized Region in the past three years since the breach of contract. 17.9 Should Your Company breach the contract in other forms, Your Company shall compensate RMB500~RMB10,000 per time. 17.10 Should Your Company breach the channel agreement and its cited rules not stipulated in the Agreement, LENOVO shall take the following measures accordingly, which would not affect LENOVO rights to seek other legitimate remedies: a) reduce, or even cancel Your Company's authorized credits; b) stop all types of supports to Your Company; c) stop supplying LENOVO Products to Your Company, or even stop other Channels to do so, until LENOVO considers it all right to restart the supply; d) LENOVO shall terminate the channel agreement and/or any other relevant agreements (including but not limited to any articles or product policies) without bearing any liabilities; and/or e) investigate Your Company's administrative and criminal liabilities. 18 Force Majeure 18.1 Force majeure refers to the objective events that are unforeseeable, and its occurrence and consequences are insurmountable and unavoidable. 18.2 Should there be any failure to perform the Agreement or perform it fully due to force majeure, liabilities of the affected party shall be partly or wholly exempted. But the affected party shall notify the other party immediately after the occurrence of the force majeure and provide proofs issued by governmental departments, chamber of commerce or notarization authorities or reports given by authoritative local media for evidence of the force majeure. 18.3 After the removal of the force majeure, the affected party shall inform the other party without delay if it could continue to fulfill its obligations. With approval of the other party, the affected party shall continue to perform the Agreement. 18.4 Should the occurrence of force majeure is attributable to the late performance of the Agreement by one party, its liabilities shall not be exempted due to force majeure. 19 Applicable Law 19.1 The Agreement is governed by laws of the mainland, People's Republic of China (excluding Hong Kong and Macao). 20 Dispute Settlements 20.1 Both parties shall make reasonable efforts and friendly consultations to settle any disputes arisen from or relating to the performance and interpretation of the channel agreement. Either party shall seek for legal remedies if a dispute cannot be solved within a reasonable period. Both parties agree that disputes shall be submitted to the courts where LENOVO is located. 20.2 The above stipulations shall not affect the rights of either party to seek for injunctions, property reserving, pre-litigation reserving and other temporary remedy order. 21 Period and termination 21.1 The Agreement shall be valid from April 1st, 2005 to March 31st, 2006 unless the Agreement is terminated in advance. The Agreement shall be performed continuously until either party terminates it. It shall also take in effect if after the expiration of the term if both parties agree to extend the cooperation relations. If Your Company fails to sign the Commercial Articles and any Articles of Product Policy according to LENOVO's requirements, the Agreement shall be suspended. 21.2 Either party shall terminate the channel agreement by informing the other party by a notice two months in advance, but the executing order forms and stipulations relating to the order forms shall not be terminated for the same reason. 21.3 The Agreement shall be terminate under such circumstances: 21.3.1One party applies for bankruptcy or is sued by others for bankruptcy, or enters analogous legal procedures; 21.3.2 The sales of one party are seriously deteriorating. 21.3.3One party engages in transferring properties, withdrawing capital or escaping debts. 21.3.4 Termination according to prescriptions in the Agreement and other agreements involved. 21.4Consequence of Termination: 21.4.1 Should the Agreement be terminated due to any reason, the rights and obligations of both parties prescribed in the Agreement and its Affiliated Agreements shall be terminated immediately. But articles in the Agreement and its Affiliated Agreements concerning statements and warranties, supporting services, liabilities for breach of contract, intellectual property rights, confidentiality, defending, applicable laws, jurisdictions and other articles whose validation shall be extended by its nature shall continue to be valid. 21.4.2 Termination of the Agreement shall not affect Your Company's liabilities for the product quality and post-sale service. Your Company shall continue to provide your Lower Channels and/or customers with repairing guarantees and maintenance services outside the guarantee scope. Termination of the Agreement shall not affect the claim for compensation of either party for the breach of contract or tort by the other party. 21.4.3 With the termination of the Agreement or the channel agreement, Your Company shall return all the materials and Products provided by LENOVO under the terminated agreement back to LENOVO fifteen days from the termination. 21.5 Should there be any changes to the controlling right or ownership of Your Company or the associations of Your Company, or other fundamental alterations with respect to bankruptcy, liquidation, etc., LENOVO is entitled to take the following measures: 1) stop supplying Products; 2) deliver Products after the remittance arrives; 3) ask for guarantees from Your Company; 4) terminate the channel agreement. 22 Notice and Contacts 22.1 All the notices issued according to or relating to the Agreement and the agreements involved shall be in written form. Addresses for receiving notices of both parties shall be the ones stipulated in the Agreement or additionally informed by both parties. If not additionally informed, the addresses of both parties shall refer to the ones written on the first page of the Agreement. Should there be any changes of the address of either party, the changing party shall inform the other party without delay. 22.2 The service of all the notices issued under the channel agreement shall be delivered by: 1) delivered to the addressee 2) fax or email that is confirmed or registered; 3) post with the address written clearly and the expense paid; 4) formal express services. The notice is valid since the date of delivery if by delivered to the addressee, or three working days from the delivery if sent in other qualified ways. 22.3 LENOVO shall send the written notices and bulletins issued under the Agreement to Your Company directly (including mail, fax or email), or publish them on LENOVO's websites. Such notices and bulletins come into effect on the day they reach Your Company or are published. Your Company shall consult the website regularly. 23 General articles 23.1 Any amendments or supplements to the Agreement shall be made in written form and confirmed and signed by both parties in effective manner. Such documents would form a valid part of the relevant channel agreements after confirmation. 23.2 The channel agreement and other related agreements shall be negotiated and signed by both parties, and be accepted and confirmed after sufficient consideration in the commercial conditions of the other party. Both parties have noticed and understood thoroughly the articles that limit or exclude the rights or obligations of either party unilaterally and do not see any unfairness contained in the channel agreement and other agreements involved. All the articles shall be interpreted literally and reasonably, but shall not be strictly interpreted towards the advantage or disadvantage of either party. 23.3 LENOVO shall publish on its website or provide Your Company with kinds of rules and regulations. LENOVO shall amend such documents at times. Such documents and their amended version would come into effect as soon as offered or published by LENOVO. 23.4 Neither party shall sub-contract the channel agreement or part of it, nor shall it transfer it to a third party. With LENOVO's written approval, Your Company shall sub-contract or transfer the channel agreement or part of it, and Your Company's obligations shall not be reduced. In the convenience of the service, LENOVO shall assign all or part of the services under the channel service to its to associations or appointed factories, including confirming the order forms, delivery Products and offering services, etc. Conditions and articles in the relevant channel agreements shall be applied to such services. 23.5 Your Company shall not provide any money, gifts or other tangible or intangible interests to LENOVO's staffs and/or their family members who have actual or potential service relations with Your Company. Such dealings, once detected, shall be treated as business bribery that has caused material damages to LENOVO. LENOVO shall ask for a penalty of RMB100,000 in addition to terminating the Agreement. But advertising presents under business customs shall be excluded. 23.6 Should there be any articles in the channel agreement that are judged by authorities with qualified jurisdictions as invalid or unenforceable, while such articles do not affect the rights of both parties substantially, the Agreement shall continue to be valid. Any articles judged as partly invalid or unenforceable shall have complete force within the part that is not judged as invalid or unenforceable. 23.7 Valid waivers of the channel agreement need subscriptions of both parties. One party's negligence or delay of certain rights regardless of the reason, or its negligence or delay of the investigation to the breaching or tort of the other party, shall not be regarded that it has waived its right to do so, nor it waives the investigation to such matters in the future. 23.8 The channel agreement shall also be made for the interests of both parties and their own legitimate successors or assignees and bind both parties and their own legitimate successors or assignees equally. 23.9 Title of the channel agreement is made for reading convenience, rather than an integral part of the contract, nor an interpretation of the Agreement. 23.10 The Agreement shall include but not confine to the following parts: 23.10.1 Commercial Articles. 23.10.2 Articles of Product Policy. 23.10.3 Order forms, sales contracts that are involved. 23.10.4 Amendments and supplements to the Agreement and its annex. 23.10.5 All the regulations and documents cited in his agreement. 23.11 The original of the Agreement shall be held in two copies of the same form. Each party shall preserve one copy with equal legal effect. This form shall come into force after signed by two parties and from the valid date indicated on the first page. Should there be no valid date on the first page, the later date on which the party signs the contract shall be the valid date. End of Main Context. Cooperation Agreement of Service Channel with LENOVO Commercial Articles The Commercial Articles of this Cooperation Agreement of Service Channel with LENOVO ("the Commercial Articles"/ "Commercial Articles") is signed by the two parties indicated on the first page: LENOVO Corporation (hereinafter referred to as "LENOVO") and its Service Channel partner (hereinafter referred to as "Your Company"). According to the Commercial Articles, LENOVO supplies its product to Your Company and Your Company purchases the contract Products from LENOVO. 1 Definition Terms of this commercial has the same meaning as those defined in the Master Agreement, unless there are other explanations as the following: 1.1 Product refers to that is defined in the Master Agreement. Product shall include its accessories, spare parts, documents and materials going with the product, unless defined otherwise. 1.2 Appointed Websites refer to the e-commerce websites defined in the Master Agreement. 1.3 Electronic Order Form refers to the order form with digital signatures of both parties exchanged via the Appointed Websites. 2 Ordering 2.1 Your Company's ordering for LENOVO's Products shall under the conditions set forth when LENOVO accepts your ordering. 3 Order form The order for Products shall be started when Your Company issues an order. The order form shall be written in the format approved by LENOVO with contents of quantity, product, applicable price (including unit price and total price), transportation guidance and date of delivery on it. If the order form does not state clearly, LENOVO's judgment shall prevail. 3.2 All the orders issued by Your Company shall be bound by the Commercial Articles. Should there be any conflicts between the Commercial Articles and the order forms, Your Company's confirmations or other written information, the Commercial Articles shall be applied in preference. The applicable price and ordering quantity mentioned by Your Company shall be in accordance with LENOVO's temporal pricing policies and its lowest requirement for ordering quantities. 3.3 Your Company shall fax the order forms with official stamps to LENOVO, unless you can submit and confirm the order forms via the electronic way as stipulated below. 3.4 With the agreement of both parties, both parties may adopt the electronic exchange based on the agreement of e-commerce system service signed by both parties. Electronic orders shall be confirmed in digital signatures via digital certificates. Both parties shall observe the specific stipulations in the agreement of e-commerce system service. 3.5 Order forms issued by Your Company become valid orders ("valid order") after LENOVO confirms and it thereafter constitute LENOVO's undertaking to Your Company. LENOVO would audit Your Company's credits and the feasibility of your orders according to its inside risk control process and decides whether to confirm or reject Your Company's orders. 3.6 Your Company's revoking or alteration to the valid orders shall be approved by LENOVO, otherwise Your Company shall pay a penalty to LENOVO according to the Master Agreement and any related agreements, as well as the cited regulations, policies and documents released or notified by LENOVO. Your Company's default to perform the valid orders (including but not limited to the delay of payment), which causes LENOVO holds that the valid orders shall not be continuously performed, is regarded as Your Company's withdrawal. LENOVO is entitled to cancel Your Company's valid orders or reserve them according to your written application. In addition, Your Company shall pay a penalty to LENOVO according to the Master Agreement and any related agreements, as well as the cited regulations, policies and documents released or notified by LENOVO. 4 Price 4.1 Product prices shall be in compliance with the channel prices released by LENOVO should there be no other stipulations. Other service fees, transportation fees and taxes out of the standard services are excluded in the product prices. LENOVO would release price notices at times according to its marketing policies and fixed channel prices, suggested retail prices and discount prices which are applicable at that time. 4.2 Except for extra stipulations, LENOVO would release notices, administrative, technical and proceeding information, manifesto, promotion activities, project proposals, product and price notifications and other notices ("documents of notices"). Such documents of notices can make amendments to the articles in the Agreement within the stipulated scope and shall come into force on LENOVO's appointed date, unless Your Company notifies LENOVO in written form within fifteen days from receiving the documents of notices. 4.3 After receiving Your Company's notification, LENOVO shall reserve the amended contents and clarify or confirm them to Your Company, or cancel the accepted but not yet delivered orders which are affected by the documents of notices, or cancel all the ordering rights. 4.4 LENOVO may make lowest requirements for the ordering quantities of every order form and release them through the documents of notices and documents of relevant business policies. 4.5 According to the authorized Products sold by Your Company and the identity of Your Company, you may have a price protection or sales discount, which would be implemented under the Articles of Product Policy specifically. 5 Payment 5.1 Unless agreed otherwise, the payment shall be made prior to the product delivery. LENOVO shall audit and evaluate Your Company's qualifications and decide to authorize a certain degree of credit to Your Company based on its unilateral judgments. LENOVO may make account sales to Your Company within that degree of credit. LENOVO shall reduce or cancel Your Company's relevant rewards (including but not limited to sales discounts) during the account sales, in order to compensate for LENOVO's increased selling costs due to account sales. The highest amount of account sales and methods and proportions to reduce or cancel Your Company's relevant rewards are fixed by LENOVO. 5.2 Your Company shall pay to LENOVO within the contracted paying period, which shall be in compliance with the Commercial Articles and LENOVO's relevant regulations for payments. If the paying period is not stipulated or contracted clearly, Your Company shall made the payment before product delivery; If the Products have been delivered, Your Company shall pay the money all within one business day from the date of delivery. 5.3 Should Your Company fail to pay as required, LENOVO shall: 1) ask Your Company to pay a penalty of 0.4ie of the unpaid amount per day from the due date to the date of payment; if the payment is overdue three days, Your Company shall pay LENOVO extra penalty, which shall be 0.4ie of the unpaid amount per day from LENOVO selling date (refer to LENOVO delivery and sales confirmation date) to the due date; 2) ask Your Company to bear certain expenses and re-possess any unpaid Products that are possessed, kept or controlled by Your Company, regardless of wherever they are; 3) stop supplying Products to Your Company without bearing any liabilities; and/or 4) take measures under the Commercial Articles or applicable laws. 5.4 Your Company shall inform LENOVO after your payment with relevant payment information in written forms such as applicable order numbers for LENOVO's audit on Your Company's payment. If LENOVO cannot audit the payment due to Your Company's fault, Your Company's payment shall be regarded as delayed. 5.5 LENOVO may issue an invoice at the delivery. Possessing LENOVO's invoice does not mean that Your Company has paid the amount written on the invoice. Unless agreed otherwise, LENOVO is not obligated to change the issued invoice which cannot offset taxes if not due to its fault. But if it is caused by LENOVO's fault, Your Company shall notify LENOVO within ten days from receiving the invoice and send the invoice back. Overdue invoices shall not be changed. If Your Company's requirement for changing invoice is caused by your own fault, Your Company shall, with LENOVO's permission for the change, bear the expenses to re-issue an invoice according to any relevant stipulations in the LENOVO-released regulations, policies or documents, or notifications to Your Company. 5.6 LENOVO shall audit Your Company's cash flows and invoices regularly or randomly. Your Company shall give a confirmation within fifteen days from receiving LENOVO's documents of account verification. If Your Company approves LENOVO's documents of account verification, you shall add an official or financial stamp on them and fax them to LENOVO's commercial department or send them in a LENOVO-granted manner. Should Your Company have any objections to the documents of account verification, you shall notify LENOVO in written form within the period mentioned above with detailed reasons and sufficient evidences. Your Company is regarded to have approved LENOVO's documents of account verification if Your Company does not make any written reply within the contracted period. Should the two parties have any disputes concerning the documents of account verification, LENOVO shall suspend the performance of the successive orders. 5.7 If LENOVO publishes the payment and check-out rules, payment and check-outs for Products shall comply with such rules. 6 Transportation and Delivery 6.1 Delivery information: Your Company shall guarantee to LENOVO the veracity and completeness of the delivery information, which shall include, but not limited to, date of delivery, address, consignee (company or natural person) and special delivery methods. Expenses and losses caused by Your Company's failure to offer verified and complete delivery information shall be born by Your Company. 6.2 Delivery plan: Your Company shall point out the date of delivery under a certain order form. If Your Company requires delivery the Products urgently, or an urgent delivery is indicated in the date of delivery in the order form, Your Company shall pay the urgent fees according to the standards released or notified by LENOVO. The delivery date pointed out by Your Company in the order form shall comply with LENOVO's relevant transportation and delivery rules. If Your Company points out no date of delivery in the order form, LENOVO may select a date of delivery according to its service arrangements. 6.3 Delivery methods: 6.3.1 Unless otherwise stated in other contracts (including but not limited to special contracts of delivery methods), LENOVO shall choose to deliver Products by means of door-to-door, door-to-station, etc. according to the delivery addresses, or choose to consign and deliver by LENOVO itself or other entrusted consigners. 6.3.2 LENOVO provides a single free delivery service to one place for each order form. If Your Company requires delivery Products to several places, or to one place in many times, or in other special ways, you shall pay extra fees according to the standards released or notified by LENOVO. Such fees shall be taken directly from Your Company's prepaid money to LENOVO or deducted from Your Company's sales rewards. Your Company shall make extra payments if required by LENOVO. 6.3.3 Door-to-door delivery: LENOVO shall be responsible to transport the Products to the delivery addresses and fulfill the take-over procedures with Your Company's appointed consignee. The appointed consignee of Your Company shall inspect and sign for the Products with LENOVO or its entrusted consigner in front of the truck. 6.3.4 Door-to-station delivery: LENOVO may transport the Products to the airport or station closest to the delivery address according to the plane or train schedules and fax the pick-up warrant to the consignee pointed out in the order form. Your Company or the appointed consignee shall pick up the Products at the station or airport in person. 6.3.5 Your Company's delay to receive the Products shall be approved by LENOVO and Your Company shall bear the costs arisen from the delay according to the standards published or notified by LENOVO. 6.4 Inspection: 6.4.1 Your Company or the appointed consignee shall inspect the quantity, type and shape of the Products together with the consigner at the delivery locale and fulfill the take-over and signing procedure. 6.4.2 Should Your Company or the appointed consignee discover the following problems during inspection: 1) discrepancy of product name, type or assemblies; 2) discrepancy in quantities; 3) damages in package. Your Company or the appointed consignee shall make further inspections and detailed written records which would be signed/stamped by Your Company or the appointed consignee and the consigner for confirmation. Proofs issued by the bureau of railway or aviation are also needed if transported by train or plane. 6.4.3 Should the events mentioned in 6.4.2 occur, Your Company shall notify LENOVO in written form within two business days from the delivery, otherwise the delivery is regarded as qualified. LENOVO shall change the Products that are not qualified during inspection. Your Company shall not deny receiving LENOVO's Products that are qualified during inspection. Should Your Company deny or delay to receive the qualified Products, LENOVO shall withdraw the delivery while Your Company shall bear such expenses and costs. LENOVO may stop supplying Products to Your Company. The above mentioned expenses and costs can be taken from Your Company's prepaid money or deducted from the rewards. 6.5 Risks of product's extinguishment or damages shall be transferred to Your Company at the delivery. If the product is or contains software, the ownership shall still be possessed by LENOVO or its licensed party. 6.6 LENOVO may make reasonable business efforts to implement Your Company's orders, but it shall be limited by the credit verification, product provision and the manufacturing cycle. LENOVO shall not be responsible for any losses in service, revenue or profit and their incidental or consequential losses due to Your Company's default at the product delivery. Should the consigning of the affected Products be delayed for over two months, Your Company may revoke the accepted order form or certain Products contained in it. 6.7 The limited product guarantees and the service responsibilities of both LENOVO and Your Company shall be performed under the Master Agreement and its related agreements. 7 Projection 7.1 Your Company shall provide a market projection via LENOVO e-commerce system and order the contract product by issuing order forms. Your Company's market prediction may be amended. 8 Report 8.1 Your Company shall make report to LENOVO on sales or other relevant aspects according to LENOVO's required time limit, format, standard and contents, and such reports would be used in LENOVO's marketing analysis and its support and evaluation on Your Company's operation. Your Company shall make such reports in honesty. 9 Liabilities for breach of contract 9.1 Liabilities for breach of contract shall follow the Master Agreement unless agreed otherwise. 10 Others 10.1 The Commercial Articles forms are an integral part of the Master Agreement with equal legal force. Text ends Record with stamp To guarantee a smooth cooperation between both parties, LENOVO make a record for Your Company's official stamp put as the following: Financial stamp: The Stamp of Shenzhen Hengtaifeng Technology Co., Ltd. is affixed. Contract stamp: The Stamp specially for sealing contract of Shenzhen Hengtaifeng Technology Co., Ltd. is affixed. LENOVO shall perform the agreement, confirm the order form, etc. according to the stamps put above. All the legal effects arisen from that shall be born by Your Company. Should there be any changes in the above recorded stamps, Your Company shall notify LENOVO within three days from the changing day. Your Company: (signature/stamp) The Stamp of Shenzhen Hengtaifeng Technology Co., Ltd. is affixed. Date: March 31, 2005 Remark: Your Company shall add an official stamp or contract stamp on your signature. EX-10.4 4 v017947_ex10-4.txt Exhibit 10.4 Co-development Agreement In order to provide an uniform IT-based working platform to the domestic professional guarantor organizations, Shenzhen Small & Medium Sized Enterprises Credit Guarantee Center (hereinafter referred to as "Party A") and Shenzhen Hengtaifeng Technology Co., Ltd. (hereinafter referred to as "Party B") will cooperate to jointly develop a set of computer software named Information System for Credit Guarantee Management of Small & Medium Sized Enterprises (hereinafter referred to as "the Software"). This agreement is signed to standardize the cooperative project and ensure it is implemented successfully. Article One: General Rules Party A is chosen by the State Economic and Trade Commission to carry out the nation-wide Small & Medium Sized Enterprises Credit Guarantee Experiment. It has accumulated relatively rich practical experience in professional guarantee field and built an integrated management architecture. Relatively speaking, it is influential in the industry. Party B has relatively rich experience in professional software development. It has built a professional development team and is influential in Shenzhen. Based on the principle of mutual rewarding and through amicable negotiation, Party A and Party B decide to cooperate to develop the Software. Part A is not only the developer, but also the first one to try with the Software. After the Software passes the trial process, Party A will be entitled to own a copy of the official version of the Software, and can recommend it to the State Economic & Trade Commission for an appraisal. Party A and Party B will jointly commit themselves to the promotion and application of the Software. Article Two: Development Period The development period of this project will be six months since this agreement takes effect. Detailed development plan will be discussed later. Article Three: Party A's Responsibilities 1. Party A has the responsibility to provide demand information, business process for the development, and the whole guarantee business contents required for the development. 2. When the Software goes into testing stage, Party A is responsible for providing required computer system environment (include hardware, network and system software) to ensure the Software is tested and used in normal condition. 3. When the Software is promoted and implemented, Party A has the responsibility to assist Party B and jointly carry out the marketing activities. 4. Party A may have access to Party B's technical information, trade secrets 1 and other information that Party B deems not appropriate to disclose to the public. Party A shall keep all the information strictly confidential. Article Four: Party B's Responsibilities 1. Party B is the implementing party of the technology, and is responsible for system analysis, system design, software programming, system test and other related works. 2. During the testing stage of the Software, Party B is responsible for providing the technical guidelines for building the computer system environment required when Party A tests the Software. 3. Within one year of the Party A's formal start of using the Software, Party B is responsible for providing technical support with no charge. 4. Based on the fact that the Software is developed by both Parties, Party B is responsible to disclose to Party A all the technical documents (include the topology architecture and the source codes, etc.) produced in the development. But Party A must not make available these documents to any third party. 5. Party B may have access to Party A's business data and other information that Party A deems not appropriate to disclose to the public. Party B shall keep all the information strictly confidential. Article Five: Development Cost During the Software development process, Party A and Party B shall undertake the project development cost of their own parts. Party A and Party B will apply for "Ke San" Shenzhen Government Funds for Technology Development with this cooperation project, and the entire fund obtained will be invested in this project. Before the said governmental funds are obtained, as Party B will have to make substantial investment at the early stage, Party A will provide to Party B RMB 50,000.00 as the development subsidy, which will be paid in two times - the first 40% to be paid upon confirmation of the development requirements, the rest 60% to be paid upon successful completion of testing. After the said governmental funds are obtained, Party B agrees to firstly use it to return the RMB 50,000.00 to Party A. Article Six: Rights and Interests 1. Copyright o The copyright is jointly owned by Party A and Party B. When the Software is successfully developed, it is Party B's responsibility to register the copyright of the Software. The owner of the copyright should be registered as both Party A and Party B. o If any party needs to license, transfer or pledge the copyright, written approval from both parties must be obtained, otherwise such action should be deemed invalid. o Each Party holds one copy of the application form for software copyright registration, the software appraisal documents and the related certification documents, which are needed when applying for the software copyright registration. The original copy of the Certificate of Computer Software Copyright Registration will be kept by Party B, and Party A will 2 keep its copy and scanned pictures. When necessary, Party A may borrow the original copy from Party B. o Each party will take on 50 percents of the cost for software copyright registration and of other related cost. o Both Parties should commit themselves to intelligence copyright protection. 2. Party A has the right to use the Software for free (including the upgraded version and modified version of the Software), but this right is limited only to Party A and its subsidiaries. 3. The income obtained by sales of the Software should be distributed after deducting the taxes from the actual transaction amount. Party A owns 20 percents and Party B owns 80 percents. The income will be distributed semiannually until the protection period of the software copyright expires. Article Seven: This Agreement enters into effect instantly after it is signed. Other issues not included in the Agreement will be discussed separately. Article Eight: This Agreement is made in two duplicate copies, and each party holds one copy. Party A: Shenzhen Small & Medium Sized Enterprises Credit Guarantee Center (Sealed with stamp) Legal Representative (or authorized representative): Dated: November 12, 2002 Party B: Shenzhen Hengtaifeng Technology Co., Ltd. (Sealed with stamp) Legal Representative (or authorized representative): Dated: 3 EX-10.5 5 v017947_ex10-5.htm v017947_ex10-5 -- Converted by SECPublisher 2.1.1.8, created by BCL Technologies Inc., for SEC Filing













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