S-1/A 1 v115419_s1a.htm Unassociated Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
FORME CAPITAL, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

445110
(Primary Standard Industrial Classification Code Number)

75-2180652
(IRS Employer Identification No.)

Jing Qi Street
Dongfeng Xincun
Sa’er Tu District
163311 Daqing, P.R. China
(011) 86-459-460-7825
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)

Paracorp Incorporated
40 E. Division Street, Suite A
Dover, DE, 19901
302-730-1320
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:
Darren Ofsink, Esq.
GUZOV OFSINK LLC
600 Madison Avenue, 14th Floor
New York, NY 10022

Approximate date of commencement of proposed sale to the public: From time to time after the Registration Statement has been declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: x 
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please 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 a 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 a 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. ¨
 
 


 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer (Do not check if a smaller reporting company) ¨
Smaller reporting company x
 
CALCULATION OF REGISTRATION FEE

Title of each class of
securities to be registered
 
Amount to be
registered (1)
 
Proposed maximum
offering price per unit
(2)
 
Proposed maximum
aggregate offering price
(2)
 
Amount of
registration fee
 
Common stock, par value $.001 per share (3)
   
1,701,011
 
$
3.10
 
$
5,273,134
 
$
207
 
Common stock, par value $.001 per share, underlying Series A Preferred Stock (4)
   
4,558,824
 
$
3.10
 
$
14,132,354
 
$
555
 
Common stock, par value $.001 per share, underlying Series A Warrants (5)
   
5,980,955
 
$
3.10
 
$
18,540,960
 
$
729
 
Total
   
12,240,790
 
$
3.10
 
$
37,946,448
 
$
1,491*
 
 
* Previously paid.
 
 
(1)
Pursuant to Rule 416 promulgated under the Securities Act of 1933, as amended, there are also registered hereunder such indeterminate number of additional shares as may be issued to the selling stockholders to prevent dilution resulting from stock splits, stock dividends or similar transactions.
 
 
(2)
Estimated solely for purposes of calculating the registration fee. The registration fee is calculated pursuant to Rule 457(c). Our common stock is quoted under the symbol "FOCP.OB" on the Over-the-Counter Bulletin Board (“OTCBB”) administered by FINRA. As of May 6, 2008, the last reported bid price was $3 per share and the last reported asked price was $3.20 per share. The average of the bid and asked price was $3.10 per share. Accordingly, the registration fee is $1,491 based on $3.10 per share.
 
 
(3)
Consists of 1,401,012 shares of our common stock held by selling stockholders prior to the completion of the private placement of securities and reverse merger that closed on March 28, 2008 and 299,999 shares issued for consulting services rendered in connection with the reverse merger and private placement.
 
 
(4)
Consists of 4,558,824 shares of common stock issuable to the selling stockholders upon conversion of the Series A Preferred Stock that they purchased in the private placement.
 
 
(5)
Consists of 5,698,529 shares of common stock issuable to the selling stockholders upon exercise of Series A Warrants to purchase common stock that they purchased in the private placement, 191,250 shares underlying Series A Warrants issued to the placement agent and 91,176 shares underlying Series A Warrants issued for consulting services rendered in connection with the reverse merger and private placement.

The Registrant 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 hereafter 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 Section 8(a), may determine.


 
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
 
SUBJECT TO COMPLETION, DATED MAY 22, 2008
 
PRELIMINARY PROSPECTUS
 
FORME CAPITAL, INC.
 
12,240,790 Shares of Common Stock
 
Offered by Selling Stockholders
 
·
1,701,011 shares of common stock held by selling stockholders;
·
4,558,824 shares of common stock that the selling stockholders may acquire on conversion of Series A Preferred Stock; and
·
5,980,955 shares of common stock issuable to the selling stockholders upon exercise of Series A Warrants.
Of the 1,701,011 shares of common stock being registered, 1,410,012 were acquired by the selling stockholders prior to completion of the private placement and the reverse merger described in this prospectus and 299,999 were acquired by consultants for services rendered in connection with the reverse merger and private placement. The Series A Preferred Stock was purchased by the selling stockholders in a private placement completed on March 28, 2008. Of the shares underlying the Series A Warrants being registered, 5,698,529 were purchased in the private placement, 191,250 were issued to the placement agent for services rendered in connection with the private placement, and 91,176 were issued for consulting services rendered in connection with the reverse merger and private placement. We are required by the terms of a registration rights agreement and a separate agreement to register the shares listed above. The Series A Preferred Stock is convertible into common stock at the rate of one share of common stock for each share of Series A Preferred Stock (subject to adjustment). The Series A Warrants are exercisable for common stock at the rate of 0.625 shares of common stock for each Series A Warrant, have an exercise price of $3.40 per share (subject to adjustment) and expire on March 27, 2013.

The selling stockholders may sell all or any portion of their shares of common stock in one or more transactions on the over-the-counter market or in private negotiated transactions. Each selling stockholder will determine the prices at which it sells its shares. Although we will incur expenses in connection with the registration of the common stock (estimated to be approximately $112,000), we will not receive any of the proceeds from the sale of the shares of common stock by the selling stockholders. To the extent the warrants are exercised for cash, if at all, we will receive the exercise price for those warrants. Under the terms of the warrants cashless exercise is permitted but not until after September 28, 2009 and then only if the resale of the warrant shares by the holder is not covered by an effective registration statement. We cannot assure you that the warrants will be exercised for cash or at all.
 
Our common stock is quoted on the Over-the-Counter Bulletin Board overseen by FINRA (the “OTCBB”) under the symbol “FOCP.OB.” On May 5, 2008, the last reported sale price of our common stock quoted on the OTCBB was $3 per share.

There is no established trading market for our common stock. We cannot give you any assurance that an established trading market in our common stock will develop, or if such a market does develop, that it will continue.
 
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 3 for a discussion of certain risk factors that you should consider. You should read the entire prospectus before making an investment decision.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 

 
The date of this prospectus is ______, 2008



TABLE OF CONTENTS
 
Prospectus Summary
 
1
Risk Factors
 
3
About This Prospectus
 
15
Cautionary Note Regarding Forward Looking Statements and Other Information Contained in this Prospectus
 
16
Currency, exchange rate, and “China” and other references
 
16
Explanatory Note
 
 17
Selling Stockholders
 
 18
Plan of Distribution
 
 23
Use of Proceeds
 
 24
Reverse Merger and Private Placement
 
 24
Business
 
 32
Properties
 
 43
Legal Proceedings
 
 46
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 47
Market Price of and Dividends of our Common Equity and Related Stockholder Matters
 
 61
Security Ownership of Certain Beneficial Owners and Management
 
63
Directors and Executive Officers
 
 64
Executive Compensation
 
 67
Certain Relationships and Related Transactions
 
 69
Description of Securities to be Registered
 
 70
Legal Matters
 
 71
Experts
 
 71
Interests of Named Experts and Counsel
 
 71
Changes in and Disagreements with Accountants
 
 71
Financial Statements
 
 71
Where You Can Find More Information
 
 72
Disclosure of Commission Position on Indemnification For Securities Act Liabilities
 
72
i

 

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.

The Company

Business Overview

Forme Capital is the holding company of Daqing Qing Ke Long Chain Commerce & Trade Co., Ltd. (“QKL”), a regional supermarket chain that operates 19 supermarkets, one convenience store and one department store in northeastern China’s Heilongjiang Province. QKL’s supermarkets sell a broad selection of merchandise including groceries, fresh food and non-food items. QKL is known for its excellent selection of fine meats and fresh produce. QKL has two distribution centers servicing its supermarkets.

Under our plan we plan to open additional supermarkets in 2008 and 2009 having estimated additional retail space of 125,000 square meters. Our expansion strategy targets small and medium-sized cities in the three provinces of northeastern China and the northern region of Inner Mongolia, where we believe local populations can support profitable supermarket operations but where large foreign and national supermarket chains, which generally have resources far greater than ours, tend not to compete. For more information about our business you should read the section entitled “BUSINESS.”
 
Our net revenue for 2007 was approximately $93.1 million, an increase of $18.2 million, or 24.3%, compared to net revenue of $74.9 million for 2006. All of our net revenue for 2007 was derived from sales made to customers in the PRC.

Recent Developments

On March 28, 2008, Forme Capital acquired control of QKL through a “reverse merger” transaction. Through the reverse merger we ceased to be a shell company as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”) and are now in the business of operating supermarkets in northeastern China. At the same time as the closing of the reverse merger we sold to certain accredited investors, for gross proceeds to us of $15.5 million, 9,117,647 units at a purchase price of $1.70 per unit, each unit consisting of one share of Series A Preferred Stock (each of which is convertible into one share of our common stock), one Series A Warrant and one Series B Warrant, each of which is exercisable to purchase 0.625 of a share of common stock (and which together are exercisable to purchase up to a total of 11,397,058 shares of our common stock). The Series A Warrants have an exercise price of $3.40 per share (subject to adjustment), the Series B Warrants have an exercise price of $4.25 per share (subject to adjustment). We received $13,523,530 as net proceeds from this financing. In order to induce the investors in the private placement to purchase our securities, we agreed to register their stock for resale with the SEC. We have filed the registration statement of which this prospectus forms a part in order to meet our obligations under that agreement. For more information about the reverse merger and the private placement you should read the section entitled “REVERSE MERGER and PRIVATE PLACEMENT.”

Employees

As of May 5, 2008, we had 1,930 employees, all of whom are full-time employees. 1,701 of our employees work in operations and 229 employees work in management. We have signed employment contracts with all employees. We have an employee manual setting forth relevant policies.
 
Executive Offices

Our executive offices are located at Jing Qi Street, Dongfeng Xincun, Sa’er Tu District 163311 Daqing, P.R. China and our telephone number is (011) 86-459-460-7825.

1


The Offering
Offering by Selling Stockholders

This prospectus relates to the resale by the selling stockholders identified in this prospectus of up to 12,240,790 shares of our common stock including:
·
1,410,012 shares of common stock held by selling stockholders who had purchased shares prior to the completion of the reverse merger and private placement described in this prospectus and 299,999 shares issued to consultants for services rendered in connection with the private placement;
·
4,558,824 shares of common stock that the selling stockholders may acquire on conversion of our Series A Preferred Stock; and
·
5,980,955 shares of common stock issuable to the selling stockholders upon exercise of Series A Warrants.
 
The shares being registered may be offered for sale by the selling stockholders from time to time. No shares are being offered for sale by the Company.

Common stock outstanding prior to Offering
 
20,882,533
 
 
 
Common stock offered by the Company
 
0
 
 
 
Total shares of common stock offered by selling stockholders
 
12,240,790
 
 
 
Common stock to be outstanding after the offering (assuming conversion of all of the Series A Preferred Stock being offered and exercise of all of the Series A Warrants being offered).
 
31,422,312.
 
 
 
Total dollar value of common stock being registered 
 
The closing market price for the common stock on March 28, 2008, the date of closing of the sale of the shares of common stock in the private placement, was $1.25. Using this value the dollar value of the 12,240,790 shares of common stock (including the shares underlying the Series A Preferred Stock and warrants) being registered was $15,300,987. The closing market price for the common stock on May 5, 2008 was $3. Using this value the total dollar value of the 12,240,790 shares of common stock (including shares underlying the Series A Preferred Stock and warrants) being registered is $36,722,370.
 
 
 
Use of Proceeds
 
We will not receive any of the proceeds from the sales of the shares by the selling stockholders. To the extent the warrants are exercised for cash we will receive the exercise price for those warrants. Under the terms of the warrants, cashless exercise is permitted but only after September 28, 2009 and then only if the underlying shares have not been registered. We intend to use any cash proceeds received from the exercise of the warrants for working capital and other general corporate purposes. We cannot assure you that any of those warrants will ever be exercised for cash or at all.
Our OTC Bulletin Board Trading Symbol
 
FOCP.OB
 
 
 
Risk Factors
 
See "Risk Factors" beginning on page 3 and other information included in this prospectus for a discussion of factors you should consider before deciding to invest in shares of our common stock.

2


RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this prospectus before deciding to invest in our common stock.

Risks related to doing business in the People’s Republic of China

Our business operations are conducted entirely in the PRC. Because China’s economy and its laws, regulations and policies are different from those typically found in the west and are continually changing, we will face risks including those summarized below.

The PRC is a developing nation governed by a one-party government and may be more susceptible to political, economic, and social upheaval than other nations.

China is a developing country governed by a one-party government that imposes restrictions on individual liberties that are significantly stricter than those typically found in the West. China is also a country with an extremely large population, significant levels of poverty, widening income gaps between rich and poor and between urban and rural residents, large minority ethnic and religious populations, and growing access to information about the different social, economic, and political systems to be found in other countries. China has also experienced extremely rapid economic growth over the last decade, and its legal and regulatory systems have changed rapidly to accommodate this growth. These conditions make China unique and may make it susceptible to major structural changes. Such changes could include a reversal of China’s movement to encourage private economic activity, labor disruptions or other organized protests, nationalization of private businesses, internal conflicts between the police or military and the citizenry, and international political or military conflict. If any of these events were to occur, it could shut down China’s economy and cause us to temporarily or permanently cease operations.

The PRC’s laws, regulations and policies, and changes to them, may limit our ability to operate profitably or prevent us from operating at all.

Our stores and distribution centers, as well as our suppliers and the agricultural producers on whom they depend, are located in the PRC. The PRC government has exercised and continues to exercise substantial control over virtually every sector of the PRC economy, including the production, distribution and sale of our merchandise. In particular, we are subject to regulation by local and national branches of the Ministries of Agriculture, Commerce, and Health, as well as the General Administration of Quality Supervision, the State Administration of Foreign Exchange, and other regulatory bodies. In order to operate under PRC law, we require valid licenses, certificates and permits, which must be renewed from time to time. If we were to fail to obtain the necessary renewals for any reason, including sudden or unexplained changes in local regulatory practice, we could be required to shut down all or part of our operations temporarily or permanently.
Our ability to operate in the PRC may be harmed by changes in its laws and regulations, including those relating to agriculture, retail operations, taxation, land use rights and other matters. Such changes could be made at the national or local level, and could affect licensing requirements for retailers of food, alcohol, tobacco, or information media; farm subsidies; corporate tax rates; employee benefits; leaseholder or land-use rights; enforceability of contracts; liabilities of retailers; intellectual property; or retail pricing. The effects of such changes on our business cannot be predicted but could be significant.

Anti-inflation measures may be ineffective or harm our ability to do business in the PRC.
 
In recent years, the PRC government has instituted anti-inflationary measures to curb the risk of an overheated economy characterized by debilitating inflation. These measures have included devaluations of the renminbi, restrictions on the availability of domestic credit, and limited re-centralization of the approval process for some international transactions. These austerity measures may not succeed in slowing down the economy's excessive expansion or control inflation, or they may slow the economy below a healthy growth rate and lead to economic stagnation or recession; in the worst-case scenario, the measures could slow the economy without curbing inflation. The PRC government could adopt additional measures to further combat inflation, including the establishment of price freezes or moratoriums certain projects or transactions. Such measures could harm the economy generally and hurt our business by limiting the income of our customers available to purchase our merchandise, by forcing us to lower our profit margins, and by limiting our ability to obtain credit or other financing to pursue our expansion plans or maintain our business.

3


Governmental control of currency conversions may affect the value of your investment.

All of our revenue is earned in renminbi, and current and future restrictions on currency conversions may limit our ability to use revenue generated in renminbi to make dividend or other payments in U.S. dollars. Although the PRC government introduced regulations in 1996 to allow greater convertibility of the renminbi for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises like us may buy, sell or remit foreign currencies only after providing valid commercial documents at a PRC banks specifically authorized to conduct foreign-exchange business.

In addition, conversion of renminbi for capital account items, including direct investment and loans, is subject to governmental approval in the PRC, and companies are required to open and maintain separate foreign-exchange accounts for capital account items. There is no guarantee that PRC regulatory authorities will not impose additional restrictions on the convertibility of the renminbi. Such restrictions could prevent us from distributing dividends and thereby reduce the value of our stock.

The fluctuation of the exchange rate of the renminbi against the dollar could reduce the value of your investment.

The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and renminbi. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into renminbi for our operations, appreciation of the renminbi against the U.S. dollar could reduce the value in renminbi of our funds. Conversely, if we decide to convert our renminbi into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against the renminbi, the U.S. dollar equivalent of our earnings from QKL, our PRC-based operating subsidiary, would be reduced. 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.


We receive all of our revenues in renminbi. 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. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency denominated 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 (“SAFE”) by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where renminbi are to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies.

The PRC government could also 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 expenses as they come due.
 
Recent SAFE regulations may restrict our ability to remit profits out of the PRC as dividends.

SAFE Regulations regarding offshore financing activities by PRC residents have recently undergone a number of changes which may increase the administrative burdens we face. The failure of our stockholders who are PRC residents to make any required applications and filings pursuant to these regulations may prevent us from being able to distribute profits and could expose us and our PRC-resident stockholders to liability under PRC law.
SAFE issued a public notice (the "October Notice"), effective as of November 1, 2005, and implementation rules in May 2007, which require registration with SAFE by the PRC-resident stockholders of any foreign holding company of a PRC entity. These regulations apply to our stockholders who are PRC residents. In the absence of such registration, the PRC entity (in our case both Speedy Brilliant (Daqing) and QKL) cannot remit any of its profits out of the PRC as dividends or otherwise.

In the event that our PRC-resident stockholders do not follow the procedures required under the October Notice and its implementation rules, we could lose the ability to remit monies outside of the PRC and would therefore be unable to pay dividends or make other distributions, and we could face liability for evasion of foreign-exchange regulations. Such consequences could affect our good standing under PRC regulations and our ability to operate in the PRC, and could therefore diminish the value of your investment.
 
4

 
The PRC’s legal and judicial system may not adequately protect our business and operations and the rights of foreign investors.

The PRC legal and judicial system may negatively impact foreign investors. In 1982, the National People's Congress amended the Constitution of China to authorize foreign investment and guarantee the “lawful rights and interests” of foreign investors in the PRC. However, the PRC's system of laws is not yet comprehensive. The legal and judicial systems in the PRC are still rudimentary, and enforcement of existing laws is inconsistent. Many judges in the PRC lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the PRC judiciary is relatively inexperienced in enforcing the laws that do exist, anticipation of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The PRC’s legal system is based on civil law, or written statutes; a decision by one judge does not set a legal precedent that must be followed by judges in other cases. In addition, the interpretation of Chinese laws may vary to reflect domestic political changes.

As a matter of substantive law, the foreign-invested enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate articles and contracts to foreign-invested enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are qualitatively different from the general corporation laws of the United States. Similarly, the PRC accounting laws mandate accounting practices that are not consistent with U.S. generally accepted accounting principles. PRC accounting laws require that an annual “statutory audit” be performed in accordance with PRC accounting standards and that the books of account of foreign-invested enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the PRC Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities, at the risk of business license revocation. Our subsidiary, Speedy Brilliant (Daqing), is a wholly foreign-owned enterprise and is subject to these regulations.

As a matter of enforcement, although the enforcement of substantive rights may appear less clear than in the U.S., foreign-invested enterprises and wholly foreign-owned enterprises are PRC-registered companies, which enjoy the same status as other PRC-registered companies in business-to-business dispute resolution. Because the Articles of Association of QKL do not specify a method for the resolution of business disputes, QKL and other parties involved in any business dispute are free to proceed either in the Chinese courts or, if they are in agreement, through arbitration. Under PRC law, any award rendered by an arbitration tribunal is enforceable in accordance with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Therefore, PRC laws relating to business-to-business dispute resolution should not work to the disadvantage of foreign-invested enterprises such as Speedy Brilliant (Daqing) and QKL.
 
However, the PRC laws and regulations governing our current business operations are sometimes vague and uncertain. 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 and the enforcement and performance of our arrangements with suppliers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We and any future subsidiaries are considered foreign persons or foreign-invested enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial 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. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.

In addition, some of our present and future executive officers and directors, most notably Mr. Zhuangyi Wang, may be residents of the PRC and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to effect service of process in the United States, or to enforce a judgment obtained in the United States against us or any of these persons.

5


Risks related to our business

Our limited operating history makes it difficult to evaluate our future prospects and results of operations.

We have a limited operating history, having commenced operations in 1998 with the opening of a single supermarket. In 2003, we were operating five stores, and in 2004 we were operating ten. In 2006 we opened our department store, our second distribution center, and our eighteenth supermarket. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early-stage companies in evolving markets such as that of supermarkets in the PRC. Some of these risks and uncertainties relate to our ability to:

raise sufficient capital to sustain and execute our expansion plan;

offer new products to attract and retain a larger customer base;
 
attract additional customers and increased spending per customer;

increase awareness of our brand and continue to develop customer loyalty;

respond to competitive market conditions;

respond to changes in our regulatory environment;

manage risks associated with intellectual property rights;

maintain effective control of our costs and expenses; and

attract, retain and motivate qualified personnel

Because we are a relatively new company, we may not be experienced enough to address all the risks in our business or in our expansion including a planned doubling in size over the next two years. If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.

As a retail company, we generate profits by selling merchandise supplied to us by others. Any difficulties we have in receiving prompt delivery of all of the merchandise we order, in good condition, and at the prices we expect, could have a severe impact on our ability to generate profits.

Our ability to keep our shelves stocked with a wide variety of high-quality, low-price merchandise is essential to our success, and depends on the smooth functioning of our supply chain. Significant disruptions to that chain could cause us to reduce the variety or overall amount of goods we sell; to seek alternative sources for affected supplies; to increase our prices, decrease our profit margins, or both; and in the case of a quality control failure on our part, to offer for sale merchandise that does not meet our quality standards. Any of these consequences could lead to our customers buying less, shopping elsewhere, and spreading negative word of mouth. As a result, our income, profitability, reputation and competitive position would all suffer.

Supply chain disruptions could be triggered by many kinds of events. The most important of these are listed below; each is described in detail in the subsections immediately following the list.

Disruptions of railways and other infrastructure in and around northeastern China

Severe weather and poor agricultural yields

Quality control problems and operational difficulties among our suppliers

Economic conditions in and around northeastern China
Our supply chain could be disrupted by problems with transportation infrastructure in and around northeastern China.

Delivery of our supplies depends on the smooth passage of commercial cargo through the railways, highways and waterways in and around northeastern China. Transportation delays are especially problematic for us because a large portion of the goods we sell (between 30% and 40% of sales in 2006) is perishable fresh food, which may lose all or part of its value in a few hours or days. Spoilage of any significant portion of the market supply of a fresh food item would lead suppliers to raise prices for that item, forcing us to choose between raising the price we charge for the item, thereby risking loss of customers, and reducing our profit margin for the item, thereby hurting our results of operations. Any increase in shipping costs would also cause our suppliers to raise their fees.
 
6

 
Transportation infrastructure in and around northeastern China may suffer more frequent breakdowns, and offer fewer alternative routes, than systems in many western countries. Transportation of people and cargo throughout China has experienced significant delays in early 2008 due to severe winter storms. Although most of the delays occurred in central and southern China and we did not experience any material disruption in our supply chain, there is no guarantee that other storms, mechanical failure, system overloads or similar problems will not delay shipments of our supplies in the future and cause spoilage of perishables, or that transportation-rate increases will not increase the prices we must pay for our supplies.

Our supply chain could be disrupted by bad harvests and by severe weather, which could harm the agricultural production on which we depend, prevent customers from reaching our stores, and disrupt our power supply.  

Severe storms could also reduce supplies of fresh foods by destroying crops and livestock, and in extreme cases could reduce supplies of processed foods by reducing overall availability of the agricultural raw materials from which they are made, causing shortages of and price increases for the affected supplies. Snow, ice and wind could also damage local roads, preventing our customers and employees from reaching our stores, and damage power lines and generation plants. Extended or repeated power outages could cause us to rely on our backup electricity generators for power to light and heat our stores and run our refrigerators and freezers and food-heating equipment. Our backup generators could fail if they are taxed beyond their capacity to perform, causing spoilage of perishables and preventing one or more of our stores from functioning.

Such eventualities would reduce our income for the duration of the storms and, to the extent that infrastructure is damaged and harvests are reduced, into the future.

The risks of severe storms are not merely hypothetical. As of early February, 2008, China was experiencing its harshest winter in 50 years, which was especially severe in southern and western parts of the country. Heavy snow and sleet had reduced power-generating capacity by an estimated 5.6% nationwide by affecting power plants and by delaying shipments of coal, causing some manufacturers in southwestern China to slow or halt production. Passengers were stranded, cargo shipments stalled, and decreases in fresh food supplies caused prices to rise, prompting the government to announce price freezes on certain agricultural products. By the end of January, the damage to the national economy was estimated by the Ministry of Civil Affairs to be approximately $7.5 billion. Although we have not been significantly affected by these storms, there is no guarantee that we will not be affected by new or continuing storms in the future. (See The Economist, China’s Bleak Mid-winter: A Cold Coming , February 2, 2008, pages 48-49; Chris Buckley, Harsh Winter In China Heightens Economic Fears , Reuters, January 28, 2008; and ShanghaiDaily.com, Chinese Passengers Warned Not to Swarm Recovering Railways , February 3, 2008.)

Poor yields of crops and livestock, whether due to bad weather, disease, errors in agricultural planning or other causes, could reduce the market supplies of fresh foods as well as processed foods that depend on agricultural products as raw materials. Such reductions could raise the cost of our supplies and cause the supply problems discussed above. Such a shortage occurred in 2007 in the market for pork and pork products, due largely to farmers raising fewer pigs in 2007 as a result of low prices in 2006 and to an outbreak of blue ear disease. As a result, pork prices rose more than 50% in 2007. In April 2007, for example, prices for pigs were 71% higher than in April 2006, according to the PRC’s Ministry of Agriculture. (See Ed Flanagan, China Anxiously Looks Back and Forward at Year of the Pig, February 11, 2008, published at http://worldblog.msnbc.msn.com/archive/2008/02/11/655302.aspx .) Although we have not been significantly affected by the recent rise in pork prices, there is no guarantee that a continued rise in prices of pork or our other supplies will not cause serious interruptions to our supply chain and our operating results in the future.

Our supply chain could be disrupted by quality control problems and operational difficulties among a small number of suppliers.

We rely on a small number of suppliers to provide merchandise that meets our needs, including providing sufficient amounts of merchandise and meeting our quality standards and government health and consumer-protection standards. A significant portion of our supplies (approximately 11% in 2006 and 9% in 2007) comes from our top 10 suppliers, which are primarily large wholesalers and meat processors. If one or more of these suppliers experiences quality control failures or is unable to secure its own supplies of merchandise, whether self-produced or purchased from others, the merchandise that it delivers to us could fail to meet our quality standards or arrive in insufficient amounts to meet our needs. We have attempted to mitigate these risks by entering into long-term contracts with our suppliers, which typically have a term of one year and provide for payment at market prices. However, if such risks do materialize, there is no guarantee we would succeed in securing replacement supplies meeting our standards from other suppliers quickly and at reasonable prices, or at all, and we could suffer the consequences of supply chain disruptions described.

Under our supply contracts, our suppliers are responsible for damage that occurs during shipping, and under the PRC’s consumer protection laws, our suppliers must reimburse us for the cost of spoiled goods returned to us by customers for a refund. Nevertheless, significant spoilage could reduce the amount of fresh food we are able to offer, which could reduce our income.
 
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Economic conditions in China generally and in northeastern China in particular affect the price and availability of our supplies. Inflation in prices of agricultural products and in general has become significant as of 2007, with overall inflation at 6.9% in November as compared with November 2006 and inflation in agricultural products at 18.2% over the same period, as measured by China’s Consumer Price Index. (See “China’s Consumer Price Index Keeps Growing,” China Retail News, published at http://www.ccfa.org.cn/english/news_show_2005.jsp?id=44110 .) Although we have seen prices rise for our fresh food and other merchandise, we do not believe inflation has harmed our operating results as we have been able to pass on these increased costs to our customers. However, there is no guarantee that we will be able to continue to do so without it having an adverse effect on our business.

In addition, the geographic concentration of our operations creates a heavy exposure to the risks of the local economy. We operate in Heilongjiang Province in northeastern China, with stores clustered around the cities of Daqing and Harbin, and our near-term plans call for expansion only within the three provinces of northeast China. Our headquarters, warehouse and distribution facilities and all of our stores are located within a relatively limited geographic area. As a result, our business is more susceptible to regional conditions, including conditions affecting infrastructure, agriculture, inflation and employment, than our more geographically diversified competitors.

Economic conditions that affect consumer spending could limit our sales and increase our costs.

Our results of operations are sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending. Inflation and adverse changes to economic conditions such as employment levels, business conditions, interest rates, energy and fuel costs and tax rates can, in addition to causing the supply-chain disruptions described above, reduce consumer spending and change consumer purchasing habits. Although the PRC economy has grown significantly in recent years, we cannot assure you that such growth will continue. We do not know how sensitive we are to a slowdown in economic growth or other adverse changes in the PRC economy. A general reduction in the level of consumer spending or a shift toward purchases of lower-margin items would be likely to reduce our income.

A widespread health problem in the PRC could negatively affect our operations.

A renewed outbreak of SARS or another widespread public health problem in the PRC, such as bird flu, could have an adverse effect on our ability to receive and distribute merchandise, the ability of our employees and customers to reach our stores, and other aspects of our operations. Public-safety measures such as quarantines or closures of some stores could disrupt our operations. Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our business.


From time to time, local events or projects take place in the vicinity of our stores that may have a negative impact on our sales and profitability.  Major road construction or building construction could limit customer access to our stores and reduce our sales.

Much of our income comes from sales of perishable merchandise, which can lose its value quickly.

In addition to spoilage due to risks described above, we could also suffer significant spoilage if our refrigerators and freezers malfunction or if we suffer lapses of quality control inspection and supervision. If our inspections fail to discover spoilage in a shipment of fresh food, or if we fail to perform our routine inspections of perishable merchandise on our shelves, we could inadvertently offer spoiled food for sale, which could harm our reputation and competitive position.

Consumer concerns regarding the safety and quality of food products or health concerns could adversely affect sales of our products.
 
Our sales performance could be adversely affected if consumers lose confidence in the safety and quality of our fresh food products. Consumers in the PRC are increasingly conscious of food safety and nutrition. Consumer concerns about, for example, the safety of meat, fish, or dairy products, or about the safety of food additives used in processed food products, could discourage them from buying these relatively high-margin products and cause our profit margins to fall and our results of operations to suffer.

We rely on the performance of our individual stores, and individual store managers, for our sales, and should any or all of them perform poorly for any reason, our sales performance, reputation and competitive position would suffer.
 
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We sell all of our products through our individual stores. Each supermarket is managed by a store manager who reports directly to our CEO, Mr. Wang, at least four times a week. Although all purchasing decisions are made by Company management and not the store manager, the store manager is responsible for the daily operation of the store. If factors either in or out of a store manager’s control reduce a store’s business—for example disruption of customer traffic by nearby construction, or customer dissatisfaction with store employees—our income could fall.

We may fail to identify or anticipate trends in consumer preferences, which may result in decreased demand for our merchandise.

Our continued success in the retail market depends on our ability to anticipate the changing tastes, dietary habits and lifestyle preferences of customers. If we are not able to anticipate and identify new consumer trends and stock our shelves accordingly, our sales may decline and our operating results may be adversely affected. For example, we believe meat and dairy products have strong growth potential in northeastern China and, accordingly, we have increased our focus on sales of these products, which tend to have higher-than-average profit margins. If the market for these products in the PRC does not grow as we expect, our income may not grow as we expect and our operating results may suffer.


A relatively new shopping phenomenon in China is “group buying” ( tuán gòu ), in which a group of ten or 20 or more consumers get together and bargain for a discount from retailers by offering to make bulk purchases. (See Matthew Liu, “China’s Newest Shopping Craze: ‘Team Buying’,” Christian Science Monitor, May 11, 2006.) In our case, the typical discount is less than 2%. Although we do not keep data on the portion of our revenue generated by group sales, we believe it is a non-trivial portion. If group buyers were to begin avoiding or not completing sales with our stores for any reason, our income and profitability could be affected.

Our profit margins could narrow.

Profit margins in the grocery retail industry are narrow. In order to increase or maintain our profit margins, we develop strategies to reduce costs, such as purchasing strategies and distribution center efficiencies, and to increase sales of higher-margin items such as private-label merchandise and prepared-in-store foods. There is no guarantee that we will implement these strategies successfully, and if we are not successful, our profitability could suffer.

We rely heavily on information technology systems, which could fail.

We have a large and complex information technology system that we rely on to keep track of inventory and sales, determine our ordering of supplies, and communicate among stores, distribution centers and our corporate headquarters. Like any electronic data management system, ours is subject to malfunction. In such a case, our operations could be significantly disrupted as we work to fix the problem, upgrade our system or adopt a new system.
 
In addition, despite the Company’s considerable efforts and technology to secure our computer network, security could be compromised, confidential information could be misappropriated, and other system disruptions could occur. This could lead to loss of sales and diversion of corporate resources from operations and planning.

The supermarket and retail industries in the PRC may face increasing competition from both domestic and foreign companies.

The supermarket and retail industries in the PRC are highly and increasingly competitive. Since China’s entry into the World Trade Organization (“WTO”) in late 2001, the high barriers to entry that discouraged many foreign potential competitors from entering China’s retail markets. Tariffs have been reduced and restrictive import licensing and distribution practices have been modified. Giant international retailers such as Wal Mart and Carrefour have entered the market, national retailers such as Bailian and Lianhua have expanded, and local and regional competition has grown. (See Fred Gale and Thomas Reardon, “China’s Modernizing Supermarket Sector Presents Major Opportunities for U.S. Agricultural Exporters,” AgExporter November 2004, pages 4-8.) Some of these companies have substantially greater financial, marketing, personnel and other resources than ours.  

Our competitors could adapt more quickly than we do to evolving consumer preferences or market trends, have more success than we do in their marketing efforts, control supply costs and operating expenses more effectively than we do, or do a better job than we do in formulating and executing expansion plans. They may merge or form alliances to achieve a scale of operations or a number of stores in northeastern China which would make it difficult for us to compete. Increased competition may also lead to price wars, counterfeit products or negative brand advertising, all of which may adversely affect our market share and profit margins. Expansion of large retailers into new locations may limit the locations into which we may profitably expand. To the extent to which our competitors are able to take advantage of any of these factors, our competitive position and operating results may suffer.

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In addition, our large competitors may benefit more than we can from coming improvements in infrastructure in northeastern China and throughout the country and from the relaxing of restrictions on nationwide distribution. The PRC has announced major infrastructure improvements and construction throughout China and in northeastern China in particular as a focus of its Eleventh Five-Year Plan (See “Plan of Revitalizing Northeast China,” published by the PRC’s National Development and Reform Commission on December 19, 2007, and available in English translation at http://news.xinhuanet.com/english/2007-12/19/content_7279455.htm.) Construction of new roads and rail lines, and improvements of existing ones, could disproportionately benefit large retailers that have the resources to set up nationwide distribution networks and retail locations to benefit from the resulting economies of scale.

Because we face intense competition, we must anticipate and quickly respond to changing consumer demands more effectively than our competitors. In order to succeed in implementing our business plan, we must achieve and maintain favorable recognition of our private-label brands, effectively market our products to consumers, competitively price our products, and maintain and enhance a perception of value for consumers. We must also source and distribute our merchandise efficiently. Failure to accomplish these objectives could impair our ability to compete successfully and adversely affect our growth and profitability.

We also face heightened competition from restaurants and fast food chains due to the increasing portion of household food expenditures directed to the purchase of food prepared outside the home.

If we have difficulties finding and leasing new retail space for new stores or retaining existing retail space, our operations could be disrupted and we will be unable to grow as planned.

We currently lease the majority of our store locations. Typically, our supermarket leases have initial 15- to 20-year lease terms and may include options for up to an additional 15 or 20 years.  Our revenues and profitability would be negatively impacted if we are unable to renew these leases at reasonable rates.


Difficulties with hiring, employee training and other labor issues could disrupt our operations.

We may not be able to successfully hire and train new team members or integrate those team members into the programs and policies of the Company. Any such difficulties would reduce our operating efficiency and increase our costs of operations.

We could be subject to substantial liability should the consumption of any of our products cause personal injury or illness and we do not maintain product liability insurance to cover our potential liabilities.

The sale of food products for human consumption involves an inherent risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties or product contamination or degeneration, including the presence of foreign contaminants, chemical substances or other agents or residues during the various stages of the production and procurement process. Although we and our suppliers are subject to governmental inspections and regulations, consumption of our products could still cause a health-related illness in the future, and we could be subject to claims or lawsuits relating to such matters.
Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertions that merchandise we carry caused personal injury or illness could adversely affect our reputation and competitive position. Unlike most supermarket companies in the United States, but in line with industry practice in the PRC, we do not maintain product liability insurance. Furthermore, our products could potentially suffer from product tampering, contamination or degeneration or be mislabeled or otherwise damaged. Under certain circumstances, we could be required to recall products. Even if a situation does not necessitate a product recall, we cannot assure you that product liability claims will not be asserted against us as a result. A product liability judgment against us or a product recall could have a material adverse effect on our revenues, profitability and business reputation.

Our company name and private-label merchandise may be subject to counterfeiting or imitation, which could have an adverse impact upon our reputation and brand image, as well as lead to higher administrative costs.
 
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We regard brand positioning as an important element of our competitive strategy, and intend to position our Qingkelong brand and our private-label brands to be associated with low prices, high quality, convenience and a positive shopping experience. There have been frequent occurrences of counterfeiting and imitation of products in the PRC in the past. Imitation of our company name or logo could occur in the future and there is no guarantee that we will be able to detect it and deal with it effectively. Any occurrence of counterfeiting or imitation could impact negatively upon our corporate and brand image.

In addition, another company could bring a claim against us for trademark infringement, which could be costly and time-consuming to defend.

Our expansion efforts could fail.

There is no guarantee that our expansion plans will be successfully implemented. We need additional funding to implement these plans. In addition, these plans are subject to, among other things, feasibility and our ability to meet the challenges they present, including our ability to hire qualified and capable employees to carry out the expansion plans.

We may have difficulty establishing adequate management, legal and financial controls in the PRC.

The PRC historically has not adopted a western style of management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC. As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.

Our Continued Growth and implementation of our Expansion Plan depends on our ability to raise additional financing.

Our net sales revenue has increased from $45.6 million in 2004 to $93.1 million for 2007. Our continued growth and execution on our expansion plan will depend on our ability to raise capital from outside sources. We anticipate that we would need an additional $45 million to fully implement our expansion plan. Our ability to obtain financing will depend upon a number of factors, including:

 
 
our financial condition and results of operations;
 
 
 
 
 
the condition of the PRC economy;
 
 
 
 
 
conditions in relevant financial markets;
 
 
 
 
 
relevant PRC laws regulating the same; and
 
 
 
 
 
the success of our expansion plans

If we are unable to obtain financing, as needed, on a timely basis and on acceptable terms, we will not be able to implement our expansion plan and our financial position, competitive condition, growth and profitability may be adversely affected.

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. We may not have the requisite experience to manage and operate a larger network of stores and distribution centers. In addition, we may face challenges in integrating acquired businesses with our own. These events would increase demands on our existing management, workforce and facilities. Failure to satisfy these increased demands could interrupt or adversely affect our operations and cause production backlogs, longer product development time frames and administrative inefficiencies.

Potential environmental liability could have a material adverse effect on our operations and financial condition.

To the knowledge of management, neither the distribution nor the sale of our merchandise constitutes an activity that requires us to comply with PRC environmental laws. Although it has not been alleged by PRC government officials that we have violated any current environmental regulations, we cannot assure you that the PRC government will not amend the current PRC environmental protection laws and regulations. Our business and operating results may be materially and adversely affected if we were to be held liable for violating existing environmental regulations or if we were to increase expenditures to comply with environmental regulations affecting our operations.

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We rely on Mr. Zhuangyi Wang, our Chief Executive Officer and President, for the management of our business, and the loss of his services could significantly harm our business and prospects.

We depend, to a large extent, on the abilities and participation of our current management team, but have a particular reliance upon Mr. Zhuangyi Wang, our Chief Executive Officer and President, for the direction of our business. The loss of the services of Mr. Wang for any reason could have a material adverse effect on our business and prospects. We cannot assure you that the services of Mr. Wang will continue to be available to us, or that we will be able to find a suitable replacement for Mr. Wang. We have entered into an employment contract with Mr. Wang, but that agreement does not guarantee Mr. Wang’s continuing to manage the Company. We do not have key man insurance on Mr. Wang, and if he were to die and we were unable to replace him for a prolonged period of time, we could be unable to carry out our long-term business plan, and our future prospects for growth, and our business, could be harmed.
 
We may not be able to hire and retain qualified personnel to support our growth and if we are unable to retain or hire such personnel in the future, our ability to implement our business objectives could be adversely affected.

Our future success depends heavily upon the continuing services of the members of our senior management team, in particular our Chief Executive Officer, Mr. Zhuangyi Wang. If one or more of our senior executives or other key personnel are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, and our business may be disrupted and our financial condition and results of operations may be materially and adversely affected. Competition for senior management and personnel is intense, the pool of qualified candidates is very limited, and we may not be able to retain the services of our senior executives or senior personnel, or attract and retain high-quality senior executives or senior personnel in the future. This failure could materially and adversely affect our future growth and financial condition.

We may not have adequate internal accounting controls. While we have certain internal procedures in our budgeting, forecasting, and management and allocation of funds, our internal controls may not be adequate.

We are constantly striving to improve our internal accounting controls. We hope to develop an adequate internal accounting control to budget, forecast, manage and allocate our funds and account for them. There is no guarantee that such improvements will be adequate or successful or that such improvements will be carried out on a timely basis. If we do not have adequate internal accounting controls, we may not be able to appropriately budget, forecast and manage our funds, we may also be unable to prepare accurate accounts on a timely basis to meet our continuing financial reporting obligations and we may not be able to satisfy our obligations under U.S. securities laws.
Standards for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain, and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.
 
Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of this assessment by our company's independent registered public accountants. The SEC extended the compliance dates for non-accelerated filers, as defined by the SEC. Accordingly, non accelerated filers like us are required to provide an annual assessment of internal controls in their annual report for the 2007 fiscal year and the attestation requirement of management's assessment by independent registered public accountants will first apply to annual reports for the 2008 fiscal year. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. In addition, the attestation process by our independent registered public accountants is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accountants. If we cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.

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We have inadequate insurance coverage.
 
We do not presently maintain product liability insurance, and our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us. Except for property and automobile insurance, we do not have other insurance such as business liability or disruption insurance coverage for our operations in the PRC.

We do not maintain a reserve fund for warranty or defective products claims. Our costs could substantially increase if we experience a significant number of warranty claims. We have not established any reserve funds for potential warranty claims since historically we have experienced few warranty claims for our products so that the costs associated with our warranty claims have been low. If we experience an increase in warranty claims or if our repair and replacement costs associated with warranty claims increase significantly, it would have a material adverse effect on our financial condition and results of operations.
 
We could be required to pay liquidated damages to our investors if our registration statement is not promptly filed and declared effective by the SEC.

We may not be able to register for resale all of the shares of common stock underlying the Series A Preferred Stock, Series A Warrant and Series B Warrants acquired by the investors in our private placement completed on March 28, 2008 and the other shares required to be registered under the terms of the registration rights agreement entered in connection with the private placement, in which case we would accrue liquidated damages described in the registration rights agreement and be held in default under the transaction agreements. In that case, we could be required to either raise additional outside funds through financing or curtail or cease operations. For a detailed description of our obligation to register our stock and the circumstances in which we could be required to pay liquidated damages, see the discussion in this prospectus under “REVERSE MERGER AND PRIVATE PLACEMENT under the subheading “Registration Rights Agreement.”

Risks related to an investment in our common stock

Our Chief Executive Officer controls us through his position and stock ownership and his interests may differ from other stockholders.

Our Chief Executive Officer, Mr. Wang, has a call option to acquire all of the shares of Winning State (BVI). Winning State is the owner of 19,082,299 (approximately 91%) shares of our common stock. Assuming conversion of all of the outstanding Series A Preferred Stock and all of the Series A Warrants an Series B Warrants , Winning State will own 45.5% of the our shares of common stock outstanding. As a result, Mr. Wang will be able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions such as business combinations. Mr. Wang’s interests may differ from that of other stockholders.
 
We do not intend to pay cash dividends in the foreseeable future.

We currently intend to retain all future earnings for use in the operation and expansion of our business. We do not intend to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiary based in the PRC, QKL. Our operating subsidiary, from time to time, may be subject to restrictions on its ability to make distributions to us, including as a result of restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. See “Risks related to doing business in the People’s Republic of China” above. In addition, under the terms of the securities purchase agreement entered into in connection with the private placement as long as any Series A Preferred Stock remain outstanding, the Company cannot declare or pay any dividends on the common stock unless such dividends or distributions are also simultaneously paid or made to the holders of the Series A Preferred Stock.

There is currently a very limited trading market for our common stock.

Our common stock has been quoted on the over-the-counter Bulletin Board since 2005. Because we were formerly a shell company, our bid and ask quotations have not regularly appeared on the OTC Bulletin Board for any extended period of time. There is a limited trading market for our common stock and our common stock may never be included for trading on any stock exchange or through any other quotation system, including the NASDAQ Stock Market. You may not be able to sell your shares due to the absence of an established trading market.

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Our common stock is subject to the Penny Stock Regulations.
 
Our common stock is, and will continue to be subject to the SEC's "penny stock" rules to the extent that the price remains less than $5.00. Those rules, which require delivery of a schedule explaining the penny stock market and the associated risks before any sale, may further limit your ability to sell your shares.  
 

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 Commission 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 their common stock in the secondary market.

Our common stock is illiquid and 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 market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, 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.

The resale in the public market of the shares underlying the Series A Preferred Stock and Warrants acquired in the March 2008 financing and the resale in the public market of the common stock acquired prior to March 2008 private placement may have an adverse impact on the market value of our common stock.
 
There is no established trading market for our common stock. Future sales of substantial amounts of our common stock in the trading market could adversely affect market prices.

This is an offering of 12,240,790 shares of our common stock by the selling stockholders. As of April 25, 2008, there were issued and outstanding (i) 20,882,533 shares of common stock, (ii) 9,117,647 shares of Series A Preferred Stock (convertible into 9,117,647 shares of common stock); (iii) Series A Warrants to purchase 5,980,955 shares of common stock; (iv) Series B Warrants to purchase 5,924,471 shares of common stock. Assuming conversion of all of the Series A Preferred Stock and exercise of all of the Series A Warrants and Series B Warrants, there will be 41,905,607 shares of common stock outstanding. 12,240,790 of these shares are being registered for resale in this prospectus. None of our shares are currently eligible for resale under Rule 144.
Also as a result of the offering, there will be a significant number of new shares of common stock on the market in addition to the current public float. Sales of substantial amounts of common stock, or the perception that such sales could occur, and the existence of warrants to purchase shares of common stock at prices that may be below the then current market price of the common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities.

Enforcement against us or our directors and officers may be difficult.
 
Because our principal assets are located outside of the U.S. and some or all our directors and officers, both present and future, reside outside of the U.S., it may be difficult for you to enforce your rights based on U.S. federal securities laws against us and our officers and some directors or to enforce a U.S. court judgment against us or them in the PRC.

In addition, our operating company, QKL, is located in the PRC and substantially all of its assets are located outside of the U.S. It may therefore be difficult for investors in the U.S. 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 U.S. 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.

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ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with 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.

The selling stockholders are offering to sell and seeking offers to buy shares of our common stock, including shares they acquire on exercise of their warrants, only in jurisdictions where offers and sales are permitted. 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.

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. 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. The prospectus will be updated and updated prospectuses made available for delivery to the extent required by the federal securities laws.
 
15


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS PROSPECTUS

This prospectus contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words "may," "will," "should," "anticipate," "estimate," "plan," "potential," "projects," "continuing," "ongoing," "expects," "management believes," "we believe," "we intend" or the negative of these words or other variations on these words or comparable terminology. These statements may be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as in this prospectus generally. In particular, these include statements relating to future actions, future performance, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.
 
Any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this prospectus generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur and you should not place undue reliance on these forward-looking statements.

Currency, exchange rate, and “China” and other references

Unless otherwise noted, all currency figures in this filing are in U.S. dollars. References to "yuan" or "RMB" are to the Chinese yuan, which is also known as the renminbi. According to the currency exchange website www.xe.com, on May 8, 2008, $1.00 was equivalent to 7.00570 yuan.

References in this prospectus to the “PRC” or “China” are to the People’s Republic of China.

References to “QKL” are to Daqing Qing Ke Long Chain Commerce & Trade Co., Ltd., a PRC retail company that we control. Unless otherwise specified or required by context, references to “we,” “our” and “us” refer collectively to (i) Forme Capital, Inc., (ii) the subsidiaries of Forme Capital, Inc., Speedy Brilliant (BVI) and Speedy Brilliant (Daqing), and (iii) QKL.

References to “IGA” are to the Independent Grocers Alliance, an international trade group and network of supermarkets that offers its members access to industry information, bargaining advantages with suppliers, and other benefits of affiliation with a large trade group. IGA reports that its member companies operate in 40 countries worldwide and have total sales of $21 billion per year. Its website is www.IGA.com.
 
16


In keeping with standard practice and the practice of the National Bureau of Statistics of China (see http://www.stats.gov.cn/tjsj/ndsj/2006/indexeh.htm ), references to “northeastern China” are to the three northeastern provinces of Heilongjiang, Jilin and Liaoning, visible in the upper right-hand corner of the map of China and surrounding areas below.
 
Source: Society for Anglo-Chinese Understanding, http://www.sacu.org/provmap.html
 
References to QKL’s “registered capital” are to the equity of QKL, which under PRC law is measured not in terms of shares owned but in terms of the amount of capital that has been contributed to a company by a particular shareholder or all shareholders. The portion of a limited liability company’s total capital contributed by a particular shareholder represents that shareholder’s ownership of the company, and the total amount of capital contributed by all shareholders is the company’s total equity. Capital contributions are made to a company by deposits into a dedicated account in the company’s name, which the company may access in order to meet its financial needs. When a company’s accountant certifies to PRC authorities that a capital contribution has been made and the company has received the necessary government permission to increase its contributed capital, the capital contribution is registered with regulatory authorities and becomes a part of the company’s “registered capital.”

Explanatory Note

The registration statement on Form S-1 of which this prospectus forms a part is being filed by Forme Capital, Inc. in order to register shares of our common stock so that they may be sold to the public by (i) investors who recently purchased them from us in connection with a private placement completed on March 28, 2008 and (ii) stockholders who acquired their shares prior to the private placement. In the private placement we sold to certain accredited investors, for gross proceeds to us of $15.5 million, 9,117,647 units at a purchase price of $1.70 per unit, each unit consisting of one share of Series A Preferred Stock (each of which is convertible into one share of our common stock), one Series A Warrant and one Series B Warrant, each of which is exercisable to purchase 0.625 of a share of common stock (and which together are exercisable to purchase up to a total of 11,397,058 shares of our common stock). The Series A Warrants have an exercise price of $3.40 per share (subject to adjustment) and the Series B Warrants have an exercise price of $4.25 per share (subject to adjustment). We received $13,523,530 as net proceeds from this financing. In order to induce the investors in the private placement to purchase our securities, we agreed to register their stock for resale with the SEC. We have filed the registration statement of which this prospectus forms a part with the SEC in order to meet our obligations under that agreement. At the same time as the closing of private placement closed, we acquired control of an operating company in China. We refer to the transactions through which we acquired control of the operating company as the “reverse merger.” Through the reverse merger we ceased to be a shell company as that term is defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”) and are now in the business of operating supermarkets in northeastern China.
 
17

 
SELLING STOCKHOLDERS

This prospectus relates to the offer and sale of our common stock by the selling stockholders identified in the table below.

Except for Kuhns Brothers, Inc., none of the selling stockholders is a broker dealer or an affiliate of a broker dealer.
 
Except as set forth below none of the selling stockholders has been an officer or director of the Company or any of its predecessors or affiliates within the last three years, nor has any selling stockholder had a material relationship with the Company.

Stallion Ventures, LLC, a selling stockholder, is a Delaware limited liability company owned by Lomond International, Inc. Prior to our private placement on March 28, 2008, Stallion Ventures owned approximately 23.33% of our outstanding common stock, or 350,000 shares. Therefore, Stallion Ventures could be deemed to have been our affiliate at that time. Martin Sumichrast has sole voting and dispositive power over the shares held by Stallion Ventures.

Castle Bison, Inc., a selling stockholder, is a California corporation owned and controlled by Raul Silvestre. Mr. Silvestre was counsel to the Company from September 17, 2007 to March 28, 2008. Prior to March 28, 2008, Castle Bison owned approximately 9.19% of our outstanding common stock, or 137,790 shares. Therefore, Castle Bison could be deemed to have been our affiliate at that time.

Windermere Insurance Company, a selling stockholder, is a British Virgin Islands business development company. John Scardino has sole voting and dispositive power over the shares held by Windermere.  Prior to March 28, 2008, Windermere owned approximately 7.75% of our outstanding common stock, or 116,234 shares. Therefore, Castle Bison could be deemed to have been our affiliate at that time.

Castle Bison, Stallion Ventures and Windermere Insurance Company acquired their shares of common stock being registered in a private sale pursuant to a stock purchase agreement dated September 17, 2007 by and among Synergy Business Consulting, LLC, as seller, and Stallion Ventures, Castle Bison, Menlo Venture Partners and Windermere Insurance Company as purchasers (the “September 2007 stock purchase agreement”). Menlo Ventures’ shares were subsequently purchased by Castle Bison.

Vision Opportunity China, LP, a selling stockholder, purchased 600,000 shares of our common stock from Stallion Ventures, Castle Bison and other affiliates on February 7, 2008, becoming the holder of approximately 42% of Forme Capital’s then outstanding stock. Therefore, Vision could be deemed to have been our affiliate at that time. The remainder of Vision’s shares being registered in the registration statement of which this prospectus forms a part were acquired in a private placement completed on March 28, 2008.

The four selling stockholders named above, namely Vision, Stallion, Castle Bison, and Windermere, collectively held approximately 85.2% of our common stock, or 1,204,024 shares, prior to March 28, 2008.

Vincent Finnegan, a selling stockholder, served as a director of Forme Capital from September 19, 2007 until March 28, 2008. In December 2007, Mr. Finnegan received the 7,000 shares of common stock being registered as compensation for his services.

John Vogel, a selling stockholder, served as our CEO and a director of Forme Capital form September 19, 2007 until March 28, 2008.  In December 2007, Mr. Vogel received the 7,000 shares of common stock being registered as compensation for his services.

Robert Scherne, a selling stockholder, served as a director and Chief Financial Officer of Forme Capital from September 19, 2007 until March 28, 2008. In December 2007, Mr. Scherne received the 21,000 shares of common stock being registered as compensation for his services

Sichenzia Ross Friedman & Ference LLP, a selling stockholder, was special counsel to Forme Capital prior to the reverse merger and the private placement and received the 15,000 shares being registered for services rendered to Forme Capital.

Kuhns Brothers, Inc., a selling stockholder and a corporation controlled by John Kuhns, entered into a placement agent agreement with the Company dated January 17, 2007 and a settlement agreement with QKL dated January 22, 2008. Under the terms of the placement agreement and settlement agreement Kuhns Brothers received a placement agent fee of $1,300,500 at the closing of the private placement and reverse merger and Series A Warrants to purchase 191,250 shares of common stock and Series B Warrants to purchase 153,000 shares of common stock. Kuhns Brothers transferred fifty percent those warrants to Sam Shoen, Paul Kuhns, John Kuhns, Mary Fellows, Jeff Triana and Jennifer Vuong, each of whom is listed as a selling stockholder. Kuhns Brothers, Inc. is a licensed broker dealer. John Kuhns, Mary Fellows, Jeff Triana and Jennifer Vuong are affiliated with Kuhns Brothers.
 
18

 
Yang Miao, Ying Zhang and Fang Chen, each of whom is a selling stockholder, are the principals of Mass Harmony Asset Management (“Mass Harmony”). On March 13, 2007, QKL entered into a Financial Consulting Agreement (the “Mass Harmony Agreement”) with Mass Harmony under which Mass Harmony agreed to perform certain financial services for the Company. QKL paid Mass Harmony an aggregate of RMB 500,000 (approximately $70,000) and Mass Harmony also received 299,999 shares of common stock, Series A Warrants to purchase 91,176 shares of common stock, and Series B Warrants to purchase 72,941 shares of common stock. All of these shares are being registered in the prospectus.

The table set forth below lists the names of the selling stockholders as well as (1) the number of shares of common stock acquired by each of the selling stockholders that are being registered; (2) the number of shares underlying the Series A Preferred Stock acquired by each of the selling stockholders in the private placement that are being registered and (3) the number of shares underlying the Series A Warrants acquired by each of the selling stockholders, the placement agent and the consultant in the private placement that are being registered.
 
Each selling stockholder may offer for sale all or part of the shares from time to time. The table below assumes that the selling stockholders will sell all of the shares offered for sale. A selling stockholder is under no obligation, however, to sell any shares pursuant to this prospectus.
 
After due inquiry and investigation and based on information provided by the selling stockholders, none of the selling stockholders has an existing short position in our stock.

Other than as described in this prospectus, we have not in the past three years engaged in any securities transaction with any of the selling stockholders, any affiliates of the selling stockholders, or, after due inquiry and investigation, to the knowledge of the management of the Company, any person with whom any selling stockholder has a contractual relationship regarding the transaction (or any predecessors of those persons).

In addition, other than in connection with the contractual obligations set forth in (i) share exchange agreement entered into between the Company, the Speedy Brilliant shareholders and certain of selling stockholders, (ii ) the securities purchase agreement (and the related registration rights agreement) entered into between the Company and each of the selling stockholders who invested in the private placement, (iii) the registration rights letter agreement dated March 29, 2008 with the holders of the common stock who acquired their shares prior to the private placement, (iv) the placement agent agreement between the Company and Kuhns Brothers, Inc. entered into on January 17, 2008, (v) the settlement agreement dated January 22, 2008 between QKL and Kuhns Brothers, Inc., and (vi) the Mass Harmony Agreement described above, we do not have any agreement or arrangement with any selling stockholder with respect to the performance of any current or future obligations.

19

 
Names of Selling
Stockholder
 
Number of
shares of
common
stock
owned
prior to
the
offering
 
Number of
shares of
common
stock
underlying
Series A
Preferred
Stock
owned
prior to
the
offering
 
Number of
shares of
common
stock
underlying
Series A
Warrants
owned
prior to
the
offering
 
Number
(and
Percent) of
shares of
Common
Stock
beneficially
owned
prior to
offering (1)
(2)
 
Number of
shares of
Common
Stock to be
sold in
offering (3)
 
Number of
shares of
Common
Stock
underlying
Series A
Preferred
Stock to be
sold in
offering
 
Number of
shares of
Common
Stock
underlying
Series A
Warrants
to be sold
in offering
 
Number
(and
Percent) of
shares of
Common
Stock
beneficially
owned after
the
offering (1)
(2)
 
Stockholders who Acquired their shares prior to Reverse Merger and Private Placement
 
 
 
 
 
  
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
Castle Bison, Inc. (3)
 
 
137,790
 
 
0
 
 
0
 
 
137,790
(*)
 
137,790
 
 
0
 
 
0
 
 
0
 
Stallion Ventures, LLC (4)
 
 
350,000
 
 
0
 
 
0
 
 
350,000
 
 
350,000
 
 
0
 
 
0
 
 
0
 
Windermere Insurance Company Ltd. (5)
 
 
116,234
 
 
0
 
 
0
 
 
116,234
(*)
 
116,234
 
 
0
 
 
0
 
 
0
 
Benjamin Hill
 
 
12,915
 
 
0
 
 
0
 
 
12,915
(*)
 
12,915
 
 
0
 
 
0
 
 
0
 
Fink Family Trust
 
 
19,372
 
 
0
 
 
0
 
 
19,372
(*)
 
19,372
 
 
0
 
 
0
 
 
0
 
Brandon Hill
 
 
7,749
  
 
0
 
 
0
 
 
7,749
(*)
 
7,749
 
 
0
 
 
0
 
 
0
 
Ronitt Sucoff
 
 
11,623
 
 
0
 
 
0
 
 
11,623
(*)
 
11,623
 
 
0
 
 
0
 
 
0
 
Helen Kohen
 
 
11,623
 
 
0
 
 
0
 
 
11,623
(*)
 
11,623
 
 
0
 
 
0
 
 
0
 
Mark Bell M.D. Inc. Retirement Trust
 
 
9,687
 
 
0
 
 
0
 
 
9,687
(*)
 
9,687
 
 
0
 
 
0
 
 
0
 
Larry Chimerine
 
 
19,372
 
 
0
 
 
0
 
 
19,372
(*)
 
19,372
 
 
0
 
 
0
 
 
0
 
Irv Edwards M.D., Inc. Employee Retirement Trust
 
 
9,687
 
 
0
 
 
0
 
 
9,687
(*)
 
9,687
 
 
0
 
 
0
 
 
0
 
Marie Tillman
 
 
7,749
 
 
0
 
 
0
 
 
7,749
(*)
 
7,749
 
 
0
 
 
0
 
 
0
 
Vincent Finnegan
 
 
7,000
 
 
0
 
 
0
 
 
7,000
(*)
 
7,000
 
 
0
 
 
0
 
 
0
 
John Vogel
 
 
7,000
 
 
0
 
 
0
 
 
7,000
(*)
 
7,000
 
 
0
 
 
0
 
 
0
 
Robert Scherne
 
 
21,000
 
 
0
 
 
0
 
 
21,000
(*)
 
21,000
 
 
0
 
 
0
 
 
0
 
Menlo Venture Partners, LLC (6)
 
 
37,211
 
 
0
 
 
0
 
 
37,211
(*)
 
37,211
 
 
0
 
 
0
 
 
0
 
Sichenzia Ross Friedman & Ference LLP (7)
 
 
15,000
 
 
0
 
 
0
 
 
15,000
(*)
 
15,000
 
 
0
 
 
0
 
 
0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
Investors in Private Placement
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
Vision Opportunity China, L.P. (8)
 
 
600,000
 
 
5,882,353
 
 
3,676,471
 
 
1,065,254,
(4.99
)%
 
600,000
 
 
2,941,177
 
 
3,676,471
 
 
1,065,254
(4.99
)%
Guerrilla Partners, LP (9)
 
 
0
 
 
647,059
 
 
404,412
 
 
1,042,038
(4.99
)%
 
0
 
 
323,529
 
 
404,412
 
 
1,042,038
(4.99
)%
Hua-Mei 21st Century Partners, LP (9)
 
 
0
 
 
1,352,941
 
 
845,588
 
 
1,042,038
(4.99
)%
 
0
 
 
676,470
 
 
845,588
 
 
1,042,038
(4.99
)%
Straus Partners, L.P. (9)
 
 
0
 
 
352,941
 
 
220,588
 
 
794,117
(3.7
)%
 
0
 
 
176,471
 
 
220,588
 
 
397,059
(1.87
)%
Straus-GEPT Partners, L.P. (10)
 
 
0
 
 
235,294
 
 
147,059
 
 
529,412
(2.47
)%
 
0
 
 
117,647
 
 
147,059
 
 
264,706
(1.25
)%
GB Global Private Balanced Fund I (11)
 
 
0
 
 
294,118
 
 
183,823
 
 
661,764
(3.07
)%
 
0
 
 
147,059
 
 
183,823
 
 
330,882
(1.55
)%
China Private Equity Partners Co., Limited (11)
 
 
0
 
 
235,294
 
 
147,059
 
 
529,412
(2.47
)%
 
0
 
 
117,647
 
 
147,059
 
 
264,706
(1.25
)%
James Fuld, Jr.
 
 
0
 
 
117,647
 
 
73,529
 
 
264,705
(1.3
)%
 
0
 
 
58,824
 
 
73,529
 
 
132,353
(*)
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
Placement Agent and its designees
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sam Shoen (12) (13)
 
 
0
 
 
0
 
 
19,125
 
 
34,425
(*)
 
0
 
 
0
 
 
19,125
 
 
15,300
(*)
Paul Kuhns (12) (13)
 
 
0
 
 
0
 
 
3,825
 
 
6,885
(*)
 
0
 
 
0
 
 
3,825
 
 
3,060
(*)
Kuhns Brothers, Inc, (12) (13)
 
 
0
 
 
0
 
 
84,100
 
 
151,420
(*)
 
0
 
 
0
 
 
84,100
 
 
67,320
(*)
John Kuhns (12) (13)
 
 
0
 
 
0
 
 
37,100
 
 
65,220
(*)
 
0
 
 
0
 
 
37,100
 
 
28,120
(*)
Mary Fellows (12) (13)
 
 
0
 
 
0
 
 
37,100
 
 
65,220
(*)
 
0
 
 
0
 
 
37,100
 
 
28,120
(*)
Jeff Triana (12) (13)
 
 
0
 
 
0
 
 
5,000
 
 
10,540
(*)
 
0
 
 
0
 
 
5,000
 
 
5,540
(*)
Jennifer Vuong (12)(13) 
 
 
0
 
 
0
 
 
5,000
 
 
10,540
(*)
 
0
 
 
0
 
 
5,000
 
 
5,540
(*)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consultants
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Yang Miao (14)
 
 
100,000
 
 
0
 
 
30,392
 
 
130,392
(*)
 
100,000
 
 
0
 
 
 30,392
 
 
0
 
Ying Zhang (14)
 
 
99,999
 
 
0
 
 
30,392
 
 
130,391
(*)
 
99,999
 
 
0
 
 
30,392
 
 
0
 
Fang Chen (14)
 
 
100,000
 
 
0
 
 
30,392
 
 
130,392
(*)
 
100,000
 
 
0
 
 
30,392
 
 
0
 
        
 
20

 

 
* Less than 1%.

(1)
Under applicable SEC rules, a person is deemed to beneficially own securities which the person as the right to acquire within 60 days through the exercise of any option or warrant or through the conversion of a convertible security. Also under applicable SEC rules, a person is deemed to be the “beneficial owner” of a security with regard to which the person directly or indirectly, has or shares (a) voting power, which includes the power to vote or direct the voting of the security, or (b) investment power, which includes the power to dispose, or direct the disposition, of the security, in each case, irrespective of the person’s economic interest in the security. Each listed selling stockholder has the sole investment and voting power with respect to all shares of common stock shown as beneficially owned by such selling stockholder, except as otherwise indicated in the footnotes to the table. 

(2)
As of April 28, 2008 there were 20,882,533 shares of our common stock issued and outstanding. In determining the percent of common stock beneficially owned by a selling stockholder on April 28, 2008, (a) the numerator is the number of shares of common stock beneficially owned by such selling stockholder (including shares that he has the right to acquire within 60 days of April 28, 2008 ), and (b) the denominator is the sum of (i) the 20,882,533 shares outstanding on April 28, 2008 and (ii) the number of shares of common stock which such selling stockholders has the right to acquire within 60 days of April 28, 2008.

(3)
Raul Silvestre, the President of Castle Bison, Inc. has sole voting and dispositive power over the shares. Mr. Silvestre acted as our legal counsel from September 19, 2007 to March 27, 2008.

(4)
Martin Sumichrast has sole voting and dispositive power over the shares held by Stallion.

(5) 
John Scardino has sole voting and dispositive power over the shares held by Windermere. 

(6)
Mr. Ariel Coro has sole voting and dispositive power of the shares.
 
21

 
(7)
Gregory Sichenzia, Marc Ross, Richard Friedman, Michael Ference, Thomas Rose, Darrin Ocasio, and Jeffrey Fessler have shared voting and dispositive power over the shares.

(8)
Vision acquired 600,000 shares of our common stock in February 2008 in a private sale of stock by its prior holders. In addition Vision acquired in the March 28, 2008 private placement; (i) Series A Preferred Stock currently convertible into 5,882,353 shares of common stock, (ii) Series A Warrants currently exercisable for 3,676,471 shares of common stock and (iii) Series B Warrants currently exercisable for 3,676,471 shares of common stock. Under the securities purchase agreement at no time may a purchaser of Series A Preferred Stock convert such purchaser’s shares into shares of our common stock if the conversion would result in such purchaser beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of our then issued and outstanding shares of common stock; provided, however, that upon a purchaser providing us with sixty-one days’ notice that such purchaser wishes to waive the cap, then the cap will be of no force or effect with regard to all or a portion of the preferred shares referenced in the waiver notice. Similarly under the terms of the Series A Warrants and the Series B Warrants , at no time may a holder exercise such holder’ warrant if the exercise would result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of our then issued and outstanding shares of common stock; provided, however, that upon a purchaser providing us with sixty-one days’ notice that such purchaser wishes to waive the cap, then the cap will be of no force or effect with regard to all or a portion of the shares referenced in the waiver notice. In the absence of the 4.99% beneficial ownership limitation Vision would be deemed to the beneficial owner of 13,835,295 shares of common stock (40.6%). The 4.99% beneficial ownership limitation does not prevent a stockholder from selling some of its holdings and then receiving additional shares. Accordingly, each stockholder could exercise and sell more than 4.99% of our common stock without ever at any one time holding more than this limit. Adam Benowitz has sole voting power and sole dispositive power over the shares.

(9)
Guerrilla acquired in the March 28, 2008 private placement; (i) Series A Preferred Stock currently convertible into 647,059 shares of common stock, (ii) Series A Warrants currently exercisable for 404,412 shares of common stock and (iii) Series B Warrants currently exercisable for 404,412 shares of common stock. Hua Mei, Guerrilla’s affiliate, acquired in the March 28, 2008 private placement; (i) Series A Preferred Stock currently convertible into 1,352,941 shares of common stock, (ii) Series A Warrants currently exercisable for 845,588 shares of common stock and (iii) Series B Warrants currently exercisable for 845,588 shares of common stock. Under the securities purchase agreement at no time may a purchaser of Series A Preferred Stock convert such purchaser’s shares into shares of our common stock if the conversion would result in such purchaser beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of our then issued and outstanding shares of common stock; provided, however, that upon a purchaser providing us with sixty-one days’ notice that such purchaser wishes to waive the cap, then the cap will be of no force or effect with regard to all or a portion of the preferred shares referenced in the waiver notice. Similarly under the terms of the Series A Warrants and the Series B Warrants , at no time may a holder exercise such holder’ warrant if the exercise would result in such holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act and the rules thereunder) more than 4.99% of our then issued and outstanding shares of common stock; provided, however, that upon a purchaser providing us with sixty-one days’ notice that such purchaser wishes to waive the cap, then the cap will be of no force or effect with regard to all or a portion of the shares referenced in the waiver notice. In the absence of the 4.99% beneficial ownership limitation Guerrilla would be deemed to the beneficial owner of 1,455,883 shares of common stock (6.5%). In the absence of the 4.99% beneficial ownership limitation Hua Mei would be deemed to the beneficial owner of 3,044,117 shares of common stock (12.7%). The 4.99% beneficial ownership limitation does not prevent a stockholder from selling some of its holdings and then receiving additional shares. Accordingly, each stockholder could exercise and sell more than 4.99% of our common stock without ever at any one time holding more than this limit. Peter Siris and Leigh S. Curry have shared voting power and dispositive power with respect to the shares held by Guerrilla and Hua-Mei.
 
(10) 
Strauss Partners L.P. acquired in the March 28, 2008 private placement; (i) Series A Preferred Stock currently convertible into 352,941 shares of common stock, (ii) Series A Warrants currently exercisable for 220,588 shares of common stock and (iii) Series B Warrants currently exercisable for 220,588 shares of common stock. Strauss - GEPT Partners LP, its affiliate, acquired in the March 28, 2008 private placement; (i) Series A Preferred Stock currently convertible into 235,294 shares of common stock, (ii) Series A Warrants currently exercisable for 147,059 shares of common stock and (iii) Series B Warrants currently exercisable for 147,059 shares of common stock. Melville Straus, the principal of Straus Partners LP and Strauss-GEPT Partners LP, has the sole voting and dispositive power over the shares beneficially owned by Straus Partners LP and Strauss-GEPT Partners LP.

(11) 
GB Global Private Balanced Fund 1 acquired in the March 28, 2008 private placement; (i) Series A Preferred Stock currently convertible into 294,118 shares of common stock, (ii) Series A Warrants currently exercisable for 183,823 shares of common stock and (iii) Series B Warrants currently exercisable for 183,823 shares of common stock. China Private Equity Partners, Co., Limited, its affiliate, acquired in the March 28, 2008 private placement; (i) Series A Preferred Stock currently convertible into 235,294 shares of common stock, (ii) Series A Warrants currently exercisable for 147,059 shares of common stock and (iii) Series B Warrants currently exercisable for 147,059 shares of common stock. Edward James Hahn has the sole voting and dispositive power over the shares beneficially owned by each of these funds.
 
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(12)
Kuhns Brothers, Inc. is a licensed broker dealer. John Kuhns has sole voting and dispositive power over the shares held by Kuhns Brothers, Inc. John Kuhns, Mary Fellows, Jeff Triana and Jennifer Vuong are affiliated with Kuhns Brothers.

(13)
Kuhns Brothers, Inc., a selling stockholder and a corporation controlled by John Kuhns, entered into a placement agent agreement with the Company dated January 17, 2007 and a settlement agreement with QKL dated January 22, 2008. Under the terms of the placement agreement and settlement agreement Kuhns Brothers received a placement agent fee of $1,300,500 at the closing of the private placement and reverse merger and Series A Warrants to purchase 191,250 shares of common stock and Series B Warrants to purchase 153,000 shares of common stock. Kuhns Brothers transferred fifty percent those warrants to Sam Shoen, Paul Kuhns, John Kuhns, Mary Fellows, Jeff Triana and Jennifer Vuong, each of whom is listed as a selling stockholder.

(14)
Yang Miao, Ying Zhang and Fang Chen, each of whom is a selling stockholder, are the principals of Mass Harmony Asset Management (“Mass Harmony”). On March 13, 2007, QKL entered into a Financial Consulting Agreement (the “Mass Harmony Agreement”) with Mass Harmony under which Mass Harmony agreed to perform certain financial services for the Company. QKL paid Mass Harmony an aggregate of RMB 500,000 (approximately $70,000) and Mass Harmony also received 299,999 shares of common stock, Series A Warrants to purchase 91,176 shares of common stock, and Series B Warrants to purchase 72,941 shares of common stock.
 
Plan of Distribution
 
The selling security holders and any of their pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock being offered under this prospectus on any stock exchange, market or trading facility on which shares of our common stock are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling security holders may use any one or more of the following methods when disposing of shares:
 
· ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
 
· block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
 
· purchases by a broker-dealer as principal and resales by the broker-dealer for its account;
 
· an exchange distribution in accordance with the rules of the applicable exchange;
 
· privately negotiated transactions;
 
· to cover short sales made after the date that the registration statement of which this prospectus is a part is declared effective by the Commission;
 
· broker-dealers may agree with the selling security holders to sell a specified number of such shares at a stipulated price per share;
 
· a combination of any of these methods of sale; and
 
· any other method permitted pursuant to applicable law.
 
The shares may also be sold under Rule 144 under the Securities Act of 1933, if available, rather than under this prospectus, however the shares may not be currently be sold under Rule 144. The selling security holders have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.
 
The selling security holders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling security holder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.
 
Broker-dealers engaged by the selling security holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling security holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law.
 
If sales of shares offered under this prospectus are made to broker-dealers as principals, we would be required to file a post-effective amendment to the registration statement of which this prospectus is a part. In the post-effective amendment, we would be required to disclose the names of any participating broker-dealers and the compensation arrangements relating to such sales.
 
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The selling security holders and any broker-dealers or agents that are involved in selling the shares offered under this prospectus may be deemed to be “underwriters” within the meaning of the Securities Act in connection with these sales. Commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Any broker-dealers or agents that are deemed to be underwriters may not sell shares offered under this prospectus unless and until we set forth the names of the underwriters and the material details of their underwriting arrangements in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part.
 
The selling security holders and any other persons participating in the sale or distribution of the shares offered under this prospectus will be subject to applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares by, the selling security holders or any other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares.
 
If any of the shares of common stock offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such holders. We offer no assurance as to whether any of the selling security holders will sell all or any portion of the shares offered under this prospectus.
 
We have agreed to pay all fees and expenses we incur incident to the registration of the shares being offered under this prospectus (estimated to be approximately $112,000). However, each selling security holder and purchaser is responsible for paying any discounts, commissions and similar selling expenses they incur.
 
We and the selling security holders have agreed to indemnify one another against certain losses, damages and liabilities arising in connection with this prospectus, including liabilities under the Securities Act.


We will not receive any of the proceeds from any sale of shares by the selling stockholders. To the extent the warrants are exercised for cash, we will receive the exercise price for those warrants. Under the terms of the warrants cashless exercise is permitted but only after September 28, 2009 and then only if the underlying shares have not been registered.  We intend to use any cash proceeds received from the exercise of the warrants for working capital and other general corporate purposes. We cannot assure you that any of the warrants will ever be exercised for cash or at all.

REVERSE MERGER AND PRIVATE PLACEMENT

On March 28, 2008, Forme Capital completed a number of related transactions through which it acquired control of Daqing Qing Ke Long Chain Commerce & Trade Co., Ltd. (“QKL”) a PRC-based retail company. QKL owns and operates 19 supermarkets, one convenience store and one department store in Heilongjiang Province in northeastern China. Forme Capital acquired control through two separate transactions: (i) a restructuring transaction which granted control of QKL to another PRC entity, Speedy Brilliant (Daqing) Commercial Consultancy Co., Ltd. (“Speedy Brilliant (Daqing)”), and (ii) a share exchange transaction transferring control of Speedy Brilliant (Daqing) to Forme Capital.

We refer to the restructuring transaction and the share exchange transaction together as the “reverse merger.” The purpose of the reverse merger was to acquire control of QKL. Forme Capital did not acquire QKL directly by either issuing its own stock or paying cash for QKL (or for Speedy Brilliant (Daqing)) because under PRC law it is uncertain whether a share exchange would be legal, and the terms of a cash purchase would not have been favorable. Speedy Brilliant (Daqing) did not acquire QKL directly, by either issuing its own stock or paying cash for QKL because under PRC law it is uncertain whether such a share exchange would be legal, and the terms of a cash purchase would not have been favorable to Speedy Brilliant (Daqing).

Restructuring Transaction: In the restructuring transaction, QKL signed a series of agreements that granted control of its business and finances to another PRC entity, Speedy Brilliant (Daqing) Commercial Consultancy Co., Ltd. (“Speedy Brilliant (Daqing)”), as if QKL were a wholly-owned subsidiary of Speedy Brilliant (Daqing).
 
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Share Exchange: In the share exchange transaction, Forme Capital acquired control of Speedy Brilliant Group Limited (“Speedy Brilliant (BVI)”), a British Virgin Islands holding company and the parent company of Speedy Brilliant (Daqing), by issuing to the stockholders of Speedy Brilliant (BVI) shares of common stock in exchange for all of the outstanding capital stock of Speedy Brilliant (BVI). The stockholders of Speedy Brilliant (BVI) with whom we did the share exchange were (i) the majority holder, Winning State International Limited, a British Virgin Islands holding company (“Winning State (BVI)”) all of whose stock may be acquired in the future by our Chief Executive Officer, Mr. Zhuangyi Wang, pursuant to a call option held by Mr. Wang and (ii) three minority stockholders, Ms. Fang Chen, Mr. Yang Miao, and Ms. Ying Zhang.

Our current structure, after the reverse merger, is set forth in the diagram below:
 

PRC Restructuring

The PRC restructuring transaction was effected by the execution of five agreements between Speedy Brilliant (Daqing), on the one hand, and QKL (and in some cases the shareholders of QKL), on the other hand. Those five agreements and their consequences are described below.

Why the PRC Restructuring Was Chosen as the Method of Acquiring Control of QKL

Speedy Brilliant (Daqing) chose to acquire control of QKL through the contractual arrangements of the PRC restructuring described below because alternative methods of acquisition—specifically, acquisition of QKL outright either by share exchange or by cash payment—were not available or advisable. Acquisition of QKL by share exchange was not available to Speedy Brilliant (Daqing) because (i) Speedy Brilliant (Daqing) is wholly owned by Speedy Brilliant (BVI), a British Virgin Islands company, and is therefore a wholly foreign-owned entity under PRC law, (ii) wholly foreign-owned entities are, under PRC law, treated as foreign entities for relevant regulatory purposes, and (iii) under PRC laws that became effective on September 8, 2006, it is uncertain both what procedures must be used in order for a foreign entity to acquire a PRC entity by share exchange and whether such an acquisition would have binding legal effect in the PRC. Acquisition of QKL for cash was not advisable for Speedy Brilliant (Daqing) because the terms of such a cash acquisition, including (i) a purchase price for QKL determined under PRC law and (ii) the terms of a financing transaction in which we would raise the funds to pay the purchase price, would not have been favorable to Speedy Brilliant (Daqing).

PRC Restructuring Agreements

The following is a summary of the material terms of each of the Restructuring Agreements.


The Consigned Management Agreement among Speedy Brilliant (Daqing), QKL and all of the shareholders of QKL, provides that Speedy Brilliant (Daqing) will provide financial, technical and human resources management services to QKL that will enable Speedy Brilliant (Daqing) to control QKL’s operations, assets and cash flow, and in exchange, QKL will pay a management fee to Speedy Brilliant (Daqing) equal to 4.5% of QKL’s annual revenue. The management fee for each year is due by January 31 of the following year. The term of the agreement is until Speedy Brilliant (Daqing) acquires all of the equity or assets of QKL; therefore, the agreement essentially provides for Speedy Brilliant (Daqing) to control QKL indefinitely.
 
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Technology Service Agreement

The Technology Service Agreement among Speedy Brilliant (Daqing), QKL and all of the shareholders of QKL, provides that Speedy Brilliant (Daqing) will provide technology services, including the selection and maintenance of QKL’s computer hardware and software systems and training of QKL employees in the use of those systems, and in exchange QKL will pay a technology service fee to Speedy Brilliant (Daqing) equal to 1.5% of QKL’s annual revenue. The technology service fee for each year is due by January 31 of the following year. The term of the agreement is until Speedy Brilliant (Daqing) acquires all of the equity or assets of QKL.

Loan Agreement 

The Loan Agreement among Speedy Brilliant (Daqing) and all of the shareholders of QKL, provides that Speedy Brilliant (Daqing) will make a loan in the aggregate principal amount of RMB 77 million ($10.8 million) to the shareholders of QKL, each shareholder receiving a share of the loan proceeds proportional to its shareholding in QKL, and in exchange each shareholder agreed (i) to contribute all of its proceeds from the loan to the registered capital of QKL in order to increase the registered capital of QKL, (ii) to cause QKL to complete the process of registering the increase in its registered capital with PRC regulatory authorities within 30 days after receiving the loan, and (iii) to pledge their equity to Speedy Brilliant (Daqing) under the Equity Pledge Agreement described below.

The loan is repayable at the option of Speedy Brilliant (Daqing) either in cash or by transfer of QKL’s equity or all of its assets to Speedy Brilliant (Daqing). The loan does not bear interest, except that if (x) Speedy Brilliant (Daqing) is able to purchase the equity or assets of QKL, and (y) the lowest allowable purchase price for that equity or those assets under PRC law is greater than the principal amount of the loan, then, insofar as it is allowable under PRC law, interest will be deemed to have accrued on the loan in an amount equal to the difference between the lowest allowable purchase price for QKL and the principal amount of the loan. The effect of this interest provision is that, if and when permitted under PRC law, Speedy Brilliant (Daqing) may acquire all of the equity or assets of QKL by forgiving the loan, without making any further payment.


The Loan Agreement also contains promises from the shareholders of QKL that during the term of the agreement, they will elect as directors of QKL only candidates nominated by Speedy Brilliant (Daqing), and they will use their best efforts to ensure that QKL does not take certain actions without the prior written consent of Speedy Brilliant (Daqing), including (i) supplementing or amending its articles of association or bylaws, (ii) changing its registered capital or shareholding structure, (iii) transferring, mortgaging or disposing of any interests in its assets or income, or encumbering its assets or income in a way that would affect Speedy Brilliant (Daqing)’s security interest, (iv) incurring or guaranteeing any debts not incurred in its normal business operations, (v) entering into any material contract (exceeding RMB 5,000,000, or approximately $700,000, in value), unless it is necessary for the company’s normal business operations; (vi) providing any loan or guarantee to any third party; (vii) acquiring or consolidating with any third party, or investing in any third party; and (viii) distributing any dividends to the shareholders in any manner. In addition, the Loan Agreement provides that at Speedy Brilliant (Daqing)’s request, QKL will promptly distribute all distributable dividends to the shareholders of QKL.

The funds that Speedy Brilliant (Daqing) used to make the loan came from the proceeds received by us, its indirect parent company, in the private placement transaction described in Item 1.01 of this prospectus.

Exclusive Purchase Option Agreement   

The Exclusive Purchase Option Agreement, among Speedy Brilliant (Daqing), QKL, and all of the shareholders of QKL, provides that QKL will grant Speedy Brilliant (Daqing) an irrevocable and exclusive right to purchase all or part of QKL’s assets, and the shareholders of QKL will grant Speedy Brilliant (Daqing) an irrevocable and exclusive right to purchase all or part of their equity interests in QKL. Either right may be exercised by Speedy Brilliant (Daqing) in its sole discretion at any time that the exercise would be permissible under PRC law, and the purchase price for Speedy Brilliant (Daqing)’s acquisition of equity or assets will be the lowest price permissible under PRC law. QKL and its shareholders are required to execute purchase agreements and related documentation within 30 days of receiving notice from Speedy Brilliant (Daqing) that it intends to exercise its right to purchase.

 
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The agreement will remain effective until Speedy Brilliant (Daqing) or its designees have acquired 100% of the equity interests of QKL or substantially all of the assets of QKL. The exclusive purchase options were granted under the agreement on the closing date.

Equity Pledge Agreement

The Equity Pledge Agreement, among Speedy Brilliant (Daqing), QKL, and all of the shareholders of QKL, provides that the shareholders of QKL will pledge all of their equity interests in QKL to Speedy Brilliant (Daqing) as a guarantee of the performance of the shareholders’ obligations and QKL’s obligations under each of the other PRC Restructuring Agreements. Under the Equity Pledge Agreement, the shareholders of QKL have also agreed (i) to cause QKL to have the pledge recorded at the appropriate office of the PRC Bureau of Industry and Commerce, (ii) to deliver any dividends received from QKL during the term of the agreement into an escrow account under the supervision of Speedy Brilliant (Daqing), and (iii) to deliver QKL’s official shareholder registry and certificate of equity contribution to Speedy Brilliant (Daqing).

The Equity Pledge Agreement contains promises from QKL and its shareholders that they will refrain from taking actions, such as voting to dissolve or declaring dividends, that could impair Speedy Brilliant (Daqing)’s security interest in the equity of QKL or reduce its value. These promises are substantially the same as those contained in the Loan Agreement described above.

Completion of the PRC Restructuring

The PRC restructuring transaction closed on March 28, 2008. However, Speedy Brilliant (Daqing) is required under the agreements to complete additional post-closing steps required in order to maintain its good standing under PRC law. These steps include Speedy Brilliant (Daqing) making required regulatory filings and giving proof to regulatory authorities that it has received the required portion of its registered capital as of the deadline required under PRC law. Specifically, Speedy Brilliant (Daqing) was required to receive 15% of its total registered capital of USD 1,300,000 million by April 15, 2008 in order to maintain the validity of its business license and its certificate of approval to exist as a wholly foreign-owned entity in the PRC issued by the Heilongjiang Provincial Government. The post-closing steps required to have been completed prior to the date of this prospectus have been completed on a timely basis, including the payment and verification of the first installment of Speedy Brilliant (Daqing)’s registered capital. 
 

Share Exchange Agreement

On March 28, 2008 Forme Capital entered into and completed a share exchange agreement with (i) Speedy Brilliant (BVI); (ii) Speedy Brilliant (Daqing); (iii) the owners of all of the outstanding voting stock of Speedy Brilliant (BVI), namely (a) Winning State (BVI) (a company that is wholly-owned and controlled by Mr. Chin Yoke Yap (all of whose stock may be acquired in the future by our CEO, Mr. Zhuangyi Wang, pursuant to a call option held by Mr. Wang)), which owned approximately 98.5% of the Speedy Brilliant (BVI) stock, and (b) three individuals, Ms. Fang Chen, Mr. Yang Miao and Ms. Ying Zhang, who collectively owned approximately 1.5% of the Speedy Brilliant (BVI) stock; and (iv) Forme Capital’s then controlling stockholders, Vision Capital Advisors, LLC, Stallion Ventures, LLC, and Castle Bison, Inc. Under the terms of the share exchange agreement, the Speedy Brilliant (BVI) stockholders exchanged all of the outstanding shares of Speedy Brilliant (BVI) for a total of 19,382,298 newly issued shares of Forme Capital common stock. As a result of the share exchange, Forme Capital acquired Speedy Brilliant (BVI) as a wholly-owned subsidiary, and the Speedy Brilliant (BVI) stockholders became holders of 92.8% of our common stock on a non-diluted basis (64.6% of our common stock assuming conversion of our newly-issued Series A Preferred Stock and 46.3% of our common stock assuming conversion of our newly-issued Series A Preferred Stock and exercise of all of the Series A Warrants and Series B Warrants.)

In the PRC restructuring transaction described in this prospectus, which occurred at the same time as the share exchange, Speedy Brilliant (BVI) gained control of an operating company, QKL. Therefore, when we acquired control of Speedy Brilliant (BVI) in the share exchange, we acquired indirect control of QKL. As a result, at the time of the share exchange, (i) we ceased to be a shell company as that term is defined in Rule 12b-2 under the Exchange Act, (ii) Speedy Brilliant (BVI) became our wholly-owned subsidiary, and (iii) through our newly-acquired indirect subsidiary Speedy Brilliant (Daqing) we now control, through a series of contractual arrangements, QKL, a PRC based retail company.

Private Placement

The other transaction we completed on March 28, 2008 was a private placement in which we raised funds through a private sale of securities that was exempt from the registration requirements of the Securities Act of 1933 (the “Act”), under Section 4(2) of the Act as a result of our compliance with Rule 506 of Regulation D promulgated under the Act. In the private placement we sold to certain accredited investors, for gross proceeds to us of $15.5 million, 9,117,647 units, each unit consisting of one share of Series A Preferred Stock (each of which is convertible into one share of our common stock or 9,117,647 in the aggregate) and one Series A Warrant and one Series B Warrant. Each warrant is exercisable to purchase 0.625 of a share of common stock (or a total of 11,397,058 shares of common stock).

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The agreements through which the private placement were carried out are described in detail below.

Securities Purchase Agreement

Also on March 28, 2008 we entered into and closed on a securities purchase agreement with Vision Opportunity China LP (“Vision”) and certain other investors listed in Exhibit A thereto for the sale of an aggregate of 9,117,647 units, each unit consisting of one share of Series A Preferred Stock, one Series A Warrant and one Series B Warrant. Each share of Series A Preferred Stock is convertible into one share of common stock subject to adjustment as described below. Accordingly, the Series A Preferred Stock is currently convertible into a total of 9,117,647 shares of common stock. Each warrant is exercisable for 0.625 shares of common stock or an aggregate or up to 11,397,058 shares of common stock. The Series A Warrants are exercisable for up to 5,698,529 shares of common stock and have an exercise price of $3.40 per share, subject to adjustment. The Series B Warrants are exercisable for up to 5,698,529 shares of common stock and have an exercise price of $4.25 per share, subject to adjustment. The warrants expire five years from the closing date.

Representations; Warranties; Indemnification: The securities purchase agreement contains representations and warranties by us and the investors which are customary for transactions of this type. The securities purchase agreement also obligates us to indemnify the investors for any losses arising out of any breach of the agreement or failure by us to perform with respect to the representations, warranties or covenants in the agreement.
 
Covenants/Investor Rights: The securities purchase agreement contains certain covenants on our part and grant the investors certain rights, including the following:

·
Listing: We are required to have our common stock listed on NASDAQ or the American Stock Exchange prior to March 28, 2010. If we do not meet that deadline, our controlling stockholder, Winning State (BVI), is required to deliver 1,000,000 shares of our common stock pro rata to the investors in the private placement.

·
Subsequent financing participation. For two years after the date on which the registration statement of which prospectus is a part is declared effective by the SEC, investors who continue to hold Series A Preferred Stock have the right to participate in any subsequent sale of securities by the Company. Specifically, each such investor has the right to purchase a percentage of the total amount of securities sold in the subsequent sale equal to the percentage of the total amount of securities in the private placement purchased by such investor.
·
Consent for asset sale. The Company may not sell all or a substantial portion of its assets without the consent of the holders of a majority of the then-outstanding Series A Preferred Stock.
 
·
Investor relations fund. The Company must fund an escrow account with $300,000 in connection with investor and public relations. The escrow account was established through the Investor and Public Relations Escrow Agreement described below and was funded at the closing.
 
·
U.S. visitation. For as long as Vision holds at least 5% of the capital stock of the Company on a fully-diluted basis, company management is required to visit the United States at least four times each year to meet with potential investors.
 
·
Right of Inspection. Each investor has the right for so long as they a certain percentage of our shares to examine, for purposes related to its interests as a shareholder, the books, properties and operations of the Company.
Terms of Series A Preferred Stock
 
The terms of our Series A Preferred Stock are set forth in a Certificate of Designations, which we filed with the Secretary of State of the State of Delaware on March 13, 2008. Set for below are the material terms of our Series A Preferred Stock:
 
Conversion and Anti-Dilution:  Each share of Series A Preferred Stock is convertible at any time into one share of our common stock. A holder of Series A Preferred Stock may not convert those shares if as a result of the conversion, that holder would beneficially own more than 4.99% of our common stock outstanding at that time. A holder may, however, waive this provision by providing the Company with sixty-one days’ notice that such holder wishes to waive this restriction with regard to any or all shares of common stock issuable upon conversion of such holder’s Series A Preferred Stock.
 
Voting: Holders of the Series A Preferred Stock vote on an “as converted” basis together with the common stock, as a single class, in connection with any proposal submitted to stockholders to: (i) increase the number of authorized shares, (ii) approve the sale of any capital stock of the Company, (iii) adopt an employee stock option plan, and (iv) effect any merger, consolidation, sale of all or substantially all of the assets of the Company, or related consolidation or combination transaction. Holders of the Series A Preferred Stock have a separate class vote on all matters that impact the rights, value, or ranking of the Series A Preferred Stock.    
 
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Liquidation Preference: In the event of a liquidation, dissolution or winding up, voluntary or involuntary, of the Company, the holders of Series A Preferred Stock then outstanding will be entitled to receive, out of our assets available for distribution to our stockholders, an amount equal to $1.70 per share before any payment is made or any assets distributed to the holders of the common stock or any other stock that ranks junior to the Series A Preferred Stock. The holders rank (a) senior to the common stock and to any other class or series of stock issued by the Company not designated as ranking senior to or pari passu with the Series A Preferred Stock in respect of the right to participate in distributions or payments on a liquidation event and (b) pari passu with any other class or series of stock of the Company, the terms of which specifically provide that such class or series will rank pari passu with the Series A Preferred Stock in respect of the right to participate in distributions or payments on a liquidation event.

Dividends: The shares of Series A Preferred Stock are not entitled to dividends unless the Company pays dividends, in cash or other property, to holders of outstanding shares of common stock. If the Company does pay dividends, each outstanding share of Series A Preferred Stock will entitle its holder to receive dividends, out of available funds, equal to the dividends to which the common stock into which such share was convertible on the record date would have been entitled, had such common stock been issued.


As of March 28, 2008, we entered into a securities escrow agreement with Vision, as representative of the purchasers under the securities purchase agreement, Winning State (BVI), and Loeb & Loeb LLP, as escrow agent wherein, as an inducement to the purchasers to enter into the securities purchase agreement, Winning State (BVI) agreed to deliver up to 18,235,294 shares of our common stock belonging to it as escrow shares to the escrow agent for the benefit of the purchasers, and to deliver some or all of those shares to the purchasers (up to 9,117,647 for 2008 and up to 9,117,647 for 2009) in the event the Company fails to achieve certain financial performance thresholds for the 12-month periods ending December 31, 2008 (“2008”) and December 31, 2009 (“2009”).

The earnings threshold for 2008 will be satisfied if the Company achieves (i) both net income and cash from operations greater than $9.4 million and (ii) fully diluted earnings per share equal to or greater than $0.23.

Earnings per share is calculated by (x) dividing the lesser of net income and cash from operations, as reported in the 2008 financial statements plus any amounts that may have been recorded as charges or liabilities on the 2008 financial statements due to the application of EITF No. 00-19 that are associated with (1) any outstanding warrants issued in connection with the Securities Purchase Agreement or (2) any liabilities created as a result of the escrow shares being released to any of our officers or directors by (y) the aggregate number of shares of our then outstanding common stock on a fully-diluted basis which number includes, without limitation, the number of shares of common stock issuable upon conversion of the then outstanding shares of Series A Preferred Stock and the number of shares of common stock issuable upon the exercise of any then outstanding preferred stock, warrants or options of the Company.

The earnings threshold for 2009 will be satisfied if we achieve, without additional financing, (i) both net income and cash from operations greater than $11.15 million and (ii) fully diluted earnings per share equal to or greater than $0.27.

 
If we achieve at least 50%, but less than 95%, of the 2008 performance threshold, then the escrow agent will deliver to the purchasers a percentage of the escrow shares determined by doubling the percentage by which the 2008 performance threshold was not achieved. In that case, within five days after the delivery, Winning State (BVI) will be required to deliver to the escrow agent the same number of shares of our common stock so that the total number of escrow shares is again 9,117,647.

If we achieve 95% or more of the 2008 performance threshold, the 9,117,647 escrow shares will continue to be held in escrow.

If we achieve less than 50% of the 2009 performance threshold, then all of the escrow shares will be delivered to the purchasers and distributed to them ratably according to the number of Series A Preferred Stock that each of them holds at that time.
 
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If we achieve at least 50%, but less than 95%, of the 2009 performance threshold, then the escrow agent will deliver to the purchasers a percentage of the escrow shares determined by doubling the percentage by which the 2009 performance threshold was not achieved. The remaining escrow shares, if any, will then be returned to Winning State (BVI) .

If we achieve at least 95% of the 2009 performance thresholds, all of the 2009 escrow shares will be returned to Winning State (BVI).

Also under the securities escrow agreement, if we fail to list our common stock on the NASDAQ Capital Market, NASDAQ Global Select Market or NASDAQ Global Market or the New York Stock Exchange prior to March 28, 2010, 1,000,000 shares of common stock owned by Winning State (BVI) will be distributed to the purchasers on a pro rata basis.

Investor and Public Relations Escrow Agreement
 
Also on March 28 2008, we entered into an investor and public relations agreement with Vision China Fund, as representative of the purchasers under the securities purchase agreement, and Loeb & Loeb LLP, as escrow agent. Under the agreement, $300,000 of the proceeds of the private placement was deposited into an escrow account with Loeb & Loeb LLP for use in investor and public relations.


In connection with the private placement we entered into a registration rights agreement with the investors under which we agreed to prepare and file with the SEC and maintain the effectiveness of a “resale” registration statement providing for the resale pursuant to Rule 415 under the Securities Act of the following securities (collectively, the “registrable securities”).

·
the 9,117,647 shares of common stock issuable on conversion of the Series A Preferred Stock;
·
the 11,397,058 shares of common stock issuable upon exercise of the Series A Warrants and Series B Warrants purchased by the selling stockholders in the private placement;
·
the 1,410,012 shares of common acquired by the Company’s stockholders before the reverse merger and private placement;
·
up to 18,235,294 shares of common stock underlying the Series A Preferred Stock held in escrow to be released to the investors in the event we fail to achieve certain performance targets for 2008 and 2009;
·
the 1,000,000 shares of common stock that Winning State (BVI), our majority stockholder, will be required to deliver to the investors if we fail to meet our obligation to have our common stock listed or quoted on an appropriate listing or quotation system prior to March 28, 2010.

On May 7, 2008, the registration rights agreement was amended such that all of the registrable securities are no longer required to be included in the registration statement of which this prospectus forms a part. Instead we have agreed to include in this registration statement the following:

·
1,410,012 shares of common acquired by the Company’s stockholders before the reverse merger and private placement as well as 299,999 shares issued to affiliates of Mass Harmony;
·
4,558,824 shares of common stock issuable on conversion of the Series A Preferred Stock; and
·
5,980,955 shares of common stock issuable upon exercise of the Series A Warrants.

The agreement calls for us to maintain the effectiveness of the registration statement until either all shares registered under it have been sold or all shares registered under it may be sold without restriction under Rule 144 under the Securities Act.

The deadline for filing the registration statement is forty-five days after the closing date, or May 12, 2008 (the “initial filing deadline”). The deadline for obtaining the effectiveness of the registration statement is either (i) 150 days after the closing date, or August 25, 2008, or (ii) if the SEC performs a full review of the registration statement, 180 days after the closing date or September 24, 2008.

In the event we are unable to register for resale under Rule 415 all of the registrable securities in the registration statement due to limits imposed by the SEC’s interpretation of Rule 415, we are required to file a registration statement covering the resale of such lesser amount of registrable securities as we are able to register pursuant to the SEC’s interpretation of Rule 415 and use our reasonable best efforts to have that registration statement become effective as promptly as possible and, when permitted to do so by the SEC, we will file subsequent registration statement(s) covering the resale of any registrable securities that were omitted from previous registration statement and use our reasonable best efforts to have such registration declared effective as promptly as possible.
 
The deadline for filing subsequent registration statements will be 30 days after we receive a written notice from any holder of Series A Preferred Stock, provided that the notice is delivered to us after the later of (i) a date six months after the effectiveness date of the most recently filed registration statement, or (ii) the date on which all registrable securities registered on all of the prior registration statements are sold.
 
30

 
If we fail to meet these deadlines or certain events of default occur under the registration rights agreement, we will be obligated to pay liquidated damages to each investor in an amount equal to one percent of the investor’s initial investment in the Series A Preferred Stock for each month until the default is cured, subject to a cap of ten percent of the amount of the initial investment.

In addition to the registration rights described above, if at any time after the initial registrable securities have been registered for resale as described above, (i) holders owning 50% or more in interest of the registrable securities (other than the initial registrable securities) may request that the Company file a registration statement providing for the resale of all such registrable securities then held by such holders by giving written notice of such demand to the Company.
 
In addition to the foregoing registration rights, the registration rights agreement grants holders of registrable securities customary piggy back rights during any time when there is not an effective registration statement providing for the resale of the registrable securities.

Our failure to meet this schedule and other timetables provided in the registration rights agreement will result in the imposition of liquidated damages. No liquidated damages will accrue on any registrable securities which the SEC has requested (due to the application of Rule 415) us to remove from the registration statement and the required effectiveness date for such securities will be tolled until such time as we are able to effect the registration of those securities in accordance with any SEC restrictions.

We entered into a letter agreement with the selling stockholders who had acquired their shares prior to the reverse merger and private placement wherein we agreed to grant them the same rights as we granted to the investors under the registration right agreement.

Under the terms of our settlement agreement with the placement agent entered into on January 22, 2008, we agreed that 191,250 shares underlying the Series A Warrants and 153,000 shares underlying the Series B Warrants issued to the placement agent have the same rights as the Series A Warrants and Series B Warrants issued to the investors.
  
Lock-Up Agreement

Also on March 28, 2008, we entered into an agreement with Winning State (BVI) under which, in order to induce Forme Capital to enter into the share exchange agreement, certain stockholders including Mr. Wang Zhuang Yi, our CEO and Mr. Wang Xudong, our CFO, agreed that (i) they will not sell or transfer any shares of our common stock until at least 12 months after the effective date of this registration statement of which this prospectus forms a part and (ii) for an additional 24 months after the end of that 12 month period, it will not sell or transfer more than one-twelfth of its total shares of that common stock during any one month.
Our Corporate Structure

Our current corporate structure is set forth in the diagram below. Solid lines indicate equity ownership; dashed lines indicate contractual relationships.
 
31

 
BUSINESS

Overview

QKL is a regional supermarket chain that operates 21 retail stores in northeast China’s Heilongjiang Province, including 19 supermarkets, one convenience store and one department store.

We have two distribution centers servicing our supermarkets. We are known for our excellent selection of fine meats and fresh produce, and our meat department generates significant profits.

We are the only supermarket company in northeastern China that is a licensee of the Independent Grocers Alliance, or IGA, a U.S.-based global grocery network with aggregate retail sales of more than $19.1 billion per year. As a licensee of IGA, we are able to engage in group bargaining with suppliers and have access to more than 2,000 private IGA brands, including many that are exclusive IGA brands.

Our business strategy includes buy-side initiatives to reduce supply costs; focusing on merchandise with higher margins, such as foods we prepare ourselves and private-label merchandise; and increased reliance on the benefits of membership in the international trade group IGA.


Business History

We commenced operations in 1998 with a single supermarket in Daqing Municipality. We opened our second supermarket in 2000, our fifth supermarket in 2003, our tenth supermarket in 2004 and our nineteenth supermarket in 2008. We opened our convenience store in 2003, our department store in 2006, and our distribution centers in 1999 and 2006. We currently lease 18 of our retail stores. We own three of our supermarket buildings, including the building containing our flagship store and corporate headquarters in Daqing’s Sartu district.

Recent Developments

On March 24, 2008, we opened a new supermarket store in Zhaoyuan City, which is in Heilongjiang Province near Daqing City. The new supermarket is our nineteenth supermarket and our twenty-first retail location. The new store occupies approximately 5,600 square meters on three floors of leased space. The lease has a term of ten years and annual rent of RMB 840,000 for the first three years, RMB 893,750 for the next three years, and RMB 947,500 for the last 4 years. Our total investment in the store as of its opening day, including pre-opening expenses for construction, training and salaries, and administrative and related fees and other costs such as furnishings, decorations and equipment, was approximately RMB 7.2 million.

Zhaoyuan City has a population of over 400,000 people but, prior to the opening of our store, no large supermarkets. Based on our own independent research, we believe that our most significant competitor in our new location is a Yuan Ke Long store, a local retail store with an area of approximately 800 square meters and daily revenue of approximately RMB 20,000. Our new store is located in the largest shopping mall in Zhaoyuan City, Songjiang Pearl Shopping Mall, which occupies a total of 28,000 square meters.

Because our Zhaoyuan City supermarket opened only recently, there is no significant operating data available for it, and we have omitted it from the discussions of our business in this prospectus except where otherwise specified.


Our stores are spread throughout northeast China with a concentration near two of the biggest cities in Heilongjiang Province, Daqing, which has a population of approximately 2.6 million, and Harbin, which is the provincial capital and has a population of approximately 9.3 million. The map below shows the location within Heilongjiang province of all of our current locations. The right side of the map depicts Heilongjiang Province; the left side depicts Daqing Municipality and its surrounding areas. Each retail location is indicated by a “QKL” mark; each distribution center is indicated by a red truck icon.
 
32

 
Map of locations—Heilongjiang Province and Municipality of Daqing
 

Our Supermarkets

Our supermarkets generated approximately 98.5% of our revenue in 2007. These stores have a total area of approximately 45,000 square meters and an average area of 2,500 square meters. The supermarkets share the same general format and sell from the same inventory, with larger stores carrying a greater diversity of items than smaller ones. The convenience store carries a smaller selection from the same general inventory. Because the convenience store does not contribute significantly to our revenue, this discussion focuses on the supermarkets.

Our supermarkets are designed to provide our customers with quality merchandise at a low price, broad selections of grocery, meat, produce, liquor and tobacco, clothing, household items, small electronics, jewelry and general merchandise, in a lively, warm, and distinctly “local” environment in which they feel comfortable. Our supermarkets are known for their broad selection of produce, full-service freshly-stocked meat departments that are tailored to the needs and customs of the local community, fresh seafood departments, full-service bakeries making fresh breads, buns, and local specialties daily, and an extensive selection of clothing, household items and cosmetics.

Our supermarkets carry merchandise divided into three major categories: grocery, fresh food, and non-food. Sales of these categories represented approximately 27%, 57% and 16% of our total sales for 2007.
 
Grocery items include:

 
·
Prepared or packaged foods, including instant foods, canned foods, packaged rice and wheat powder, and crackers and chips
  
 
·
Bulk (unpackaged) grains including rice and ground wheat    
 
 
·
Bottled water and beverages
 
 
·
Cigarettes
 
 
·
Certain non-food items such as cleaning products, cosmetics, and disposable razors
 
Fresh Food items include raw and fresh foods, frozen meat, produce, and all perishables:

 
·
Fresh raw meat, which the Company cuts and packages
 
 
·
Cooked meats
 
 
·
Fresh bakery items, including breads, buns, dumplings, and other self-prepared foods
 
 
·
Fresh noodles and pastas
 
33

 
 
·
Fresh milk, yogurt, and eggs (supplied fresh every day)
 
 
·
Packaged dumplings (supplied fresh every day)
 
Non-food items include all non-food items, except cleaning and cosmetic items included in grocery; specifically:
 
 
·
Clothing and shoes
 
 
·
Books and stationery
 
 
·
Bedding and home furnishings
 
 
·
Small electronics and household use items like irons, electric shavers, hair dryers, massage machines
 
 
·
Office supplies, toys, sporting goods and other items
 
Our target rate for loss due to spoilage and breakage of perishable and breakable items is 0.4% of total revenue. This was also our approximate rate of loss due to spoilage and breakage in both 2006 and 2007.

Private-Label

Some of the merchandise we sell in our supermarkets is made to our specifications by manufacturers, using a brand name used only by us, or “private label” merchandise. With private label merchandise, we entrust the manufacturer to make the product and to select the name and design, and the manufacturer cannot sell the product to any other company. Profit margins from private-label products are typically 20-30%, compared to 12-13% for other grocery items.


The table below sets forth the size in square meters and the average monthly sales per square meter of each of our stores during the first nine months of 2007.
 
Store No.
 
Square Meters
 
Average monthly sales
(in RMB) per square
meter,
Jan. - Sept. 2007
 
1
   
6,812
   
139
 
2
   
1,600
   
329
 
3
   
2,600
   
182
 
4
   
2,098
   
335
 
5
   
1,600
   
303
 
6
   
1,460
   
150
 
7
   
2,620
   
217
 
8
   
1,491
   
279
 
9
   
1,872
   
125
 
10
   
1,907
   
83
 
11
   
3,113
   
176
 
12
   
2,600
   
161
 
13
   
2,500
   
200
 
14
   
2,900
   
182
 
15
   
1,450
   
63
 
16
   
2,700
   
73
 
17
   
2,800
   
43
 
18
   
2,950
   
65
 
19
   
135
   
46
 
Total
   
45,208
   
162
 
 
We generate a small portion of our supermarket revenue by receiving rent or concession fees in return for allowing third-party sellers to use our retail space. In 2007, a total of 0.46% of our supermarket revenue was generated by concession fees and rents.

34


Business Strategy

Our business operating strategy is:

 
·
To reduce cost of goods sold by (i) acquiring more merchandise directly from manufacturers, cutting out middleman and distributors, and otherwise reducing supply costs (e.g., by sending trucks to orange groves in south China) and (ii) relying more on the purchasing power of collective ordering of supplies through IGA.

 
·
To increase our profit margins by (i) offering and selling more self-prepared foods, which have higher profit margins, including baked goods made in our bakery, and cooked meats such as fried chicken legs and roast chicken and (ii) offering and selling more private-label goods, which also have higher profit margins


Our Department Store

Our department store generated approximately 1.5% of our revenue in 2007. As of the date of this prospectus, we operate just one department store through QKL’s subsidiary, QC&T. Our department-store business model is very different from our supermarket business model. The department store operates on a concession and rents basis, with the selling space occupied by retail partners who either sublet their space from, or pay concession fees for use of the space to, QC&T. We do not own any of the merchandise sold in the department store, and we do not directly receive the proceeds of sales of merchandise in the department store; instead, the merchandise is owned and revenue collected by our retail partners. Our department store revenue comes from concession-fee and rent payments that our retail partners make to us under contracts. In 2007, approximately 82.7% of our department store revenue came from rents and approximately 17.3% came from concession fees.

Our department store business model also differs from our supermarkets in that our retail partners conduct their own purchasing operations (in consultation with QC&T employees), and do not use QKL’s purchasing department. Our retail partners receive their merchandise by delivery from distributors, and do not use QKL’s distribution centers, delivery vehicles, or logistics resources. Each of the three above-ground floors of the department store (but not the ground floor, which houses a QKL supermarket) is occupied by a number of stores, each operated by a retail partner. Each floor has one floor manager, who is employed by QC&T and who oversees the smooth working of that floor. The employees charged with all of the detailed daily operations of the store are employees of our retail partners. Compared to our supermarket operations, therefore, our department-store operations are simpler and less demanding of our resources, including time and labor.

Our department store opened in September 2006 and in 2007 generated approximately 1.5% of our revenue. The store is located in Daqing and has a total area of 12,000 square meters, not including approximately 3,000 square meters occupied by our supermarket on the ground floor of the building. The department store is licensed to sell all of the non-food products sold by our supermarkets. However, its format, its merchandise, the shopping experience it provides, and the nature of its business operations, are all different from the supermarkets’. Our department store is designed to provide our customers with a high-end shopping experience and exposure to luxury goods in an atmosphere of relative sophistication. Our department store sells brand-name and luxury clothing and accessories, cosmetics, small electronics, jewelry, books, home furnishings, and bedding, and contains a movie theater and a traditional beauty salon.


We currently distribute grocery products to our supermarkets from two distribution centers located outside of Daqing and Harbin Cities in Heilongjiang Province. Approximately 45% of the merchandise sold in our supermarkets is distributed through these facilities, which are located an average of approximately 60 kilometers from our stores, in the case of the Daqing distribution center, and 200 kilometers from our stores, in the case of our Harbin distribution center.

Our Equipment

The equipment we use in operating our business includes standard equipment for our industry, such as display cases, freezers and ovens, delivery trucks, and the computer hardware and software used in our electronic information, inventory and logistics system. All of our equipment is owned outright and was acquired by cash purchase.

35

 
Advertising and Publicity

We advertise in many ways, including using direct-marketing circulars, newspaper advertisements and coupons, membership cards and member promotions, and general promotions including discounts and prize lotteries. Each store has a staff member solely responsible for large group tuán gòu purchases, which occur when a group of ten or 20 or more consumers get together and bargain for a retail discount by offering to make bulk purchases, and which have recently become a significant retail phenomenon in China. Under contracts we have with our suppliers, our suppliers are responsible for the costs of all discounts and promotions.

Our marketing and advertising activities are conducted by our marketing department, which now includes 9 employees. The department’s responsibility covers a wide range of issues, including QKL’s brand strategy and brand promotion, sales promotion, design of advertising materials, design of décor of stores, and management of QKL’s club membership.  They are also engaged in market and price investigation. We base our advertising on our analysis and observations of the market and our competitors. The head of the marketing department works closely with the purchasing department in determining purchasing and sales patterns.

Customers and Pricing

Our pricing strategy is to offer merchandise of quality comparable to that of our competitors at a competitive price.

In general, all customers pay the same price for our merchandise. However, there are discounts available to some customers as part of our promotional marketing strategy.

·
Big lot tuán gòu group buyers may receive discounts by negotiation. These discounts are sometimes up to 2% of our retail price, and very rarely more than that, depending on what our annual gross margin targets allow.
 
  · Membership card holders may receive discounts on select products during promotional periods. 
 
The rest of our customers, including large customers such as school cafeterias, pay our standard cash price.

Payment methods for customers are cash, bank cards (credit card use is still rare in China), and two kinds of store cards: cash cards, which can be charged in advance and used as cash, and membership cards, which provide discounts.

In recent years, the pricing of our merchandise has changed as the price of our supplies has changed. For example, in 2007, the price of pork rose significantly, and store prices rose correspondingly until they were partially offset by government subsidies. The price of imported products, including primarily wine, beer, and liquor, has changed as the RMB exchange rate has changed. We do not believe any price changes have had a significant effect on our business to date.

Suppliers

Our ten biggest suppliers of merchandise in 2007 were:
 
 
·
Da Qing Kang An Health Products Co., Ltd.
 
 
·
Da Qing Lian Wan Jia Food Sales Co.
 
 
·
Da Qing Jin Yong You Commerce & Trade Co., Ltd.
 
 
·
Ha Mei Shi Jia Meat Products Co.
 
 
·
Da Qing Bei Da Zheng Yuan Science Technology Development Co., Ltd.
 
 
·
Da Qing Jin Luo Meat Products Co., Ltd.
 
 
·
Da Qing Lü Zhi Lian Co., Ltd.
 
 
·
Harbin Sheng Tong Food Sales Co., Ltd.
 
 
·
Sui Hua Da Zhong Meat Group Co., Ltd.
 
 
·
Bei Da Huang Feng Yuan Grain Co., Ltd.
 
Customers have the right under PRC law to return defective or spoiled products to us for a full refund. Pursuant to the same “Rights of the Customer” law, our suppliers are required to fully reimburse us for these returns.
 
36

 
Choosing Suppliers

We typically have two or more suppliers for each product we sell. Even for special brands, including western beverages, we have several distributors from whom we can order. We choose among competing suppliers on the basis of price and the strategic needs of our business.


We receive most of our merchandise from our suppliers, which are often large distribution companies, by suppliers’ delivery trucks sent either to our distribution centers (in the case of grocery and non-food items) or directly to our stores (in the case of fresh food items).

We receive some merchandise direct from the agricultural producer or manufacturer, which arrives by train and ship to a convenient location where we transfer it to our delivery trucks. Our Daqing distribution center also receives train shipments directly into its main warehouse through train tracks on the premises.

Distribution to Our Supermarkets and Department Store

For distribution from our distribution centers to our supermarkets, we use our own trucks and follow a delivery schedule determined by our electronic information, inventory and logistics system.

Distribution to our department store is arranged by our retail partners, as described under “Our department store” above.

Pricing and Terms of Payment to Suppliers

We have three kinds of payment arrangements with our suppliers: cash payment, pre-payment and payment in arrears. The terms of these arrangements are negotiated individually with each supplier and formalized in written contracts.

Employees

As of May 5, 2008, we had 1,930 employees, all of whom are full-time employees. 1,701 of our employees work in operations and 229 employees work in management. We have signed employment contracts with all employees. We have an employee manual setting forth relevant policies.
 
Employee benefits include three state-mandated insurance plans:

 
·
Old-age insurance: We withhold a portion of each employee’s monthly salary determined by the provincial government, generally 8%, and contribute an additional amount determined by law, up to approximately 20% of the employee’s monthly salary.

 
·
Medical insurance: We withhold approximately 2% of each employee’s salary, and contribute an additional amount totaling approximately 6% of total payroll expense.

·
Unemployment Insurance: We withhold approximately 1% of each employee’s salary, and contribute an additional amount totaling approximately 2% of total payroll expense.

In 2007, our average compensation per employee per month was RMB 1,217.62, or approximately $170. We also pay benefits in the form of social security insurance fees for every employee who signs a long-term contract with us.

We have a system of human resource performance review and incentive policies that allows personnel reviews to be carried out monthly, quarterly or annually.

Training

We take very seriously both our obligation to train our employees to perform their jobs well and our opportunity to provide our employees with tools for meaningful professional growth. We have our own business school and training center at our headquarters in Daqing, which includes a large lecture hall where we provide professional advancement and management courses, training in company policies and compliance with regulations, and lectures by outside members of the business community.

There are also meetings of all the store managers, led by our CEO, Mr. Wang, four days each week, which provide constant opportunities not only for sharing experience and improving our business performance in the near term, but also for developing the skills and judgment of our store managers for the long-term future.
 
37

 
Intellectual Property

We have registered the name “Qingkelong” as a trademark in the PRC, details of which are set forth below:
     
Trademark
 
Certificate No.
 
Category
 
Owner
 
Valid Term
 
Qingkelong
 
 
No.1995020
 
 
No. 35: “providing advice, plans, advertising and consultancy services, etc. for the purpose of promoting the goods and services of others, excluding the wholesale and retail of goods (services)”
 
 
Qingkelong
 
 
4/7/03 - 4/6/13
 

Insurance

Vehicle insurance

We have a standard commercial vehicle insurance policy in place for each of our eight delivery trucks. Each policy has a term of one year, at the end of which we renew or secure other insurance for each vehicle.
 
Comprehensive (“all-risk”) Insurance

A number of comprehensive insurance policies are held by QKL, several retail stores, and a distribution center, covering losses to property owned by QKL. Those policies, together with their premiums and insured amounts, are set forth in the table below:
No
 
Insured Entity
 
Insured Amount
(RMB)
 
Insurance
Premium
(RMB)
 
Insurance Term
 
1
 
QKL
 
3,800,454
 
3,800
 
12/22/06 to 12-21/07
 
2
 
QKL
 
4,613,204
 
4,613
 
12/23/06 to 12-22/07
 
3
 
QKL
 
13,431,715
 
13,431
 
9/28/06 to 9/27/07
 
4
 
QKL
 
29,300,936
 
29,300
 
11/29/06 to 11/28/07
 
5
 
Yichun Mengkei Store
 
3,406,370
 
6,513
 
8/14/07 to 8/13/08
 
6
 
A Cheng Jinyuan Store
 
8,599,313
 
17,198
 
8/14/07 to 8/13/08
 
7
 
Donghu Store
 
8,012,020
 
36,024
 
8/14/07 to 8/13/08
 
8
 
Harbin Distribution Center
 
2,368,728
 
4,737
 
8/14/07 to 8/13/08
 
9
 
Wanli Store
 
3,887,066
 
7,714
 
8/14/07 to 8/13/08
 
10
 
Lüce Jiayuan Store
 
1,314,631
 
2,629
 
8/14/07 to 8/13/08
 
11
 
Jixi Lühai Store
 
6,200,228
 
-
 
8/14/07 to 8/13/08
 
12
 
Jixi Dongfeng Store
 
3,362,870
 
6,725
 
8/14/07 to 8/13/08
 
13
 
Xinyuan Store
 
2,254,068
 
4,508
 
8/14/07 to 8/13/08
 
 
Public Liability Insurance

A number of our stores carry public liability insurance policies, covering losses relating to claims of loss or damage due to injuries occurring on our premises. Those policies, together with their premiums, are set forth in the table below:

No
 
Insured Entity
 
Insurance
Premium
(RMB)
 
Insurance Term
 
1
 
Wanli Store
 
7,560.00
 
8/14/07 to 8/13/08
 
2
 
Yichun Mengkei Store
 
7,560.00
 
8/14/07 to 8/13/08
 
3
 
Jixi Lühai Store
 
7,560.00
 
8/14/07 to 8/13/08
 
4
 
Lüce Jiayuan Store
 
7,560.00
 
8/14/07 to 8/13/08
 
5
 
Donghu Store
 
7,560.00
 
8/14/07 to 8/13/08
 
6
 
A Cheng Jinyuan Store
 
7,560.00
 
8/14/07 to 8/13/08
 
 
Research and Development Activities

We are not presently involved or engaged in any research and development activities.
 
38

 
However, for self-prepared products (e.g. baked goods), our fresh foods department and bakery department perform continuing market investigations in order to determine how other companies are making prepared foods and whether we can improve on those methods. Our cooking personnel and head chef work with the Purchasing Department to develop formulas for use in our stores.


We are subject to a wide range of regulation covering every aspect of our business. The most significant of these regulations are set forth below. In each case, we have passed the most recent required inspections and have received appropriate and up-to-date licenses, certificates and authorizations, as set forth in the next subsection of this prospectus.

 
·
Circular of State Administration of Industry and Commerce Concerning the Relevant Issues for the Administration of Registration of Chain Stores in effect on May 30, 1997, which provided the conditions of the establishment for chain stores and branches, and the procedure for application for the business license.
 
 
·
Circular Concerning the Relevant Issues on the Management of Specific Goods by Chain Stores (collectively promulgated by PRC State Economic and Trade Commission, Ministry of Domestic Trade, Ministry of Culture, Ministry of Posts and Telecommunication, General Administration of Press and Publication, State Administration for Industry and Commerce and State Tobacco Monopoly Bureau), which provided that the chain stores shall obtain the license from relevant government authorities for the management of specific goods, such as tobacco, pharmaceutical products, food products and audio-video products.
 
 
·
Relevant Opinions on the Promotion for the Development of Chain Stores promulgated by PRC State Commission for Economic Restructuring and State Economic and Trade Commission, which provided relevant opinions on the promotion for the Development of Chain Stores, such as simplifying the administrative approval procedures
 
Approvals, Licenses and Certificates

We require a number of approvals, licenses and certificates in order to operate our business. We are in compliance in all material respects with all laws relevant to the running of our business.

Background: China’s Economy

China, the world’s most populous country, has one of the world’s largest economies. Its 2007 gross domestic product (“GDP”) is estimated at RMB 18.3 trillion (US$2.55 trillion) (see The US-China Business Council, Forecast 2008, page 2, available at www.uschina.org). GDP, income, and retail spending have all increased rapidly as the economy has grown over the last ten years, and inflation has also risen significantly. The tables below set forth China’s per capita income, retail sales, and rates of inflation for the periods indicated.
 
Per capita income, 1995 - 2007

 
 
1995
 
2000
 
2005
 
2007
 
 
 
RMB
 
$
 
RMB
 
$
 
RMB
 
$
 
RMB
 
$
 
Urban per capita disposable income
 
 
4,283
 
 
609
 
 
6,280
 
 
893
 
 
10,493
 
 
1,492
 
 
13,786
 
 
1,961
 
Rural per capita net income
 
 
1,578
 
 
224
 
 
2,253
 
 
320
 
 
3,255
 
 
463
 
 
4,140
 
 
589
 
 
Source: For 1995 - 2005, National Bureau of Statistics of China, China Statistical Yearbook 2006 , Chapter 2, Section 3, and China Statistical Yearbook 2002 , Chapter 2, Section 3. For 2007, The US-China Business Council, Forecast 2008 , page 2, published at http://uschina.org/public/documents/2008/02/2008-china-economy.pdf . Figures for 2007 are estimates. Figures are rounded to the nearest hundred million. Dollar amounts are translated from RMB using an exchange rate current as of the date of this prospectus.

Domestic retail sales, 1985 - 2005
 
 
1985
 
1990
 
1995
 
2000
 
2005
 
2007
 
figures in billions
 
RMB
 
$
 
RMB
 
$
 
RMB
 
$
 
RMB
 
$
 
RMB
 
$
 
RMB
 
$
 
Total retail sales of consumer goods
 
 
380.1
 
 
54.1
 
 
725.0
 
 
103.1
 
 
2,062.0
 
 
293.2
 
 
3,415.3
 
 
485.7
 
 
6,717.7
 
 
955.3
 
 
8,921.0
 
 
1,268.7
 
 
Source:  China Statistical Yearbook 2006 and 2002, The US-China Business Council, Forecast 2008 , page 2.
 
39

 
Inflation, 1985 - 2005
 
 figures in billions
 
1985
 
1990
 
1995
 
2000
 
2005
 
2007
 
Overall inflation
   
9.3
%
 
3.1
%
 
17.1
%
 
0.4
%
 
1.8
%
 
4.8
%
 
Source:  China Statistical Yearbook 2006 and 2002, The US-China Business Council, Forecast 2008 , page 2.

Overview of the Supermarket Industry in China

Supermarkets have recently come to play an important role in China’s economy. In 1990, China had one supermarket store; by 2003, it had 60,000, with estimated annual sales of $71 billion. (See F. Gale and T. Reardon, “China’s Modernizing Supermarket Sector Presents Major opportunities for U.S. Agricultural Exporters,” AgExporter, November 2004, pages 4-8.) Three major domestic supermarket chains emerged in the early 1990’s (LianHua, Hualian, and Nong Gong Shang), and three western supermarket chains entered the Chinese market in the mid-1990’s (Carrefour, Wal Mart and Metro). The share of grocery sales held by modern retail chains, including hypermarkets (“big box” retailers such as Wal Mart and Carrefour), supermarkets, discounters and convenience stores, grew from 11% of total grocery sales in China in 1999 to 54% in 2006.

Between 1999 and 2002 the number of supermarket stores grew an average of 27% per year overall and sales grew an average of 45 percent per year. (See Jean Kinsey and Min Xue, “Supermarket Development in China,” Preliminary Report to the Sloan Workshop of Worcester Polytechnic Institute, June 2005, pages 1-3.) The total value of retail sales in China grew from $290.3 billion in 1995 to $945.6 billion in 2005 and to $1.26 trillion in 2007. (See The US-China Business Council, Forecast 2008, pages 2-3).

The national government has implemented measures to further develop the supermarket industry. For example, in 2004, China’s Ministry of Commerce announced a five-year plan to develop a network of retail stores in small towns in rural China. These measures are expected to enable broader and more efficient distribution of food and other products around the country and better utilize local agricultural production capacity and force changes in production sanitation and food safety practices and good production and manufacturing practices. (See Jean Kinsey and Min Xue, “Supermarket Development in China,” Preliminary Report to the Sloan Workshop of Worcester Polytechnic Institute, June 2005, pages 1-3.) In addition, the national government announced a major economic-development plan for the three provinces of northeast China in December 2007, the “Plan for Revitalizing Northeast China.” Under the plan, the national government is committed to supporting expansions and renovations of transportation and energy infrastructure, modernization of agriculture, advances in technology, improvements in commercial services and other economic developments in northeast China.

Competition

Competitive Environment

The supermarket industry in China is intensely competitive, with many companies, both local and foreign, competing as retailers of food, groceries and other merchandise, using a variety of business strategies. The main players are local, regional, and national chain supermarkets, and national and foreign chain retailers operating “big box” or hypermarket stores of the kind made famous by Wal Mart and Carrefour. To a lesser extent, we also face competition from traditional street markets and wet markets, convenience stores, tobacco and liquor retailers, restaurants, specialty retailers and large drugstore chains.

We do not believe we currently face significant direct competition from China’s large national supermarket chains because we have decided not to compete in the areas in which they focus their operations, which are China’s biggest cities and surrounding suburbs—Shanghai, Shenzhen, Guangzhou, Beijing, and Chongqing—all areas outside of northeastern China. We have instead decided to focus on China’s less-populated “second tier” cities and surrounding areas in the northeast, which we believe provide ample opportunities for expansion in our market niche.

Among the large foreign supermarket chains currently doing business in China, we believe that Wal-Mart is currently our only significant direct competitor. This is also due primarily to our choice of locations for our stores. Although Carrefour, Metro, Tesco and other foreign companies also operate in China and compete with local supermarkets in their locations, they do not have a significant number of stores in the northeastern locations where our stores are located. In addition, our expansion plans target medium-sized and smaller cities, which we believe are not being targeted by these large international retailers. We believe that these plans will allow us to avoid intense competition from these retailers.


We believe that the eight supermarket companies listed below are our most significant direct competitors based in China:
 
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Dashang Supermarkets is a national supermarket chain consisting of approximately 70 supermarkets located in 30 cities across China. The chain is managed by Dashang Group Co., Ltd., one of China’s largest retailers, which operates more than 60 mid- to large-sized retail outlets, including department stores, shopping malls and specialty stores. We believe that as of the date of this prospectus, Dashang has approximately nine supermarkets located near enough to our own stores to be in competition with them.

Lixin Supermarkets is a regional chain of supermarkets founded in 2004, which sells groceries and telecommunications products, including private-label products. Many of Lixin’s supermarkets are located in and around Dangshan City in Wuhan Province. We believe that as of the date of this prospectus, Lixin has approximately four supermarkets located near enough to our own stores to be in competition with them.

Kunlun Supermarkets is a local supermarket chain founded in 1999 in Liaocheng City, Shangdong Province. As of 2004, Kunlun operated five chain stores and had 600 employees and RMB 70 million ($9.7 million) in total assets with an aggregate sales revenue of almost RMB 100 million ($13.9 million). We believe that as of the date of this prospectus, Kunlun has approximately three supermarkets located near enough to our own stores to be in competition with them.

Mankelong Supermarkets is a local supermarket chain. We believe that as of the date of this prospectus, Mankelong has approximately two supermarkets located near enough to our own stores to be in competition with them.

Zhongyang Shangcheng Supermarkets is a regional supermarket chain operated by Zhongyang Shangchang Co., Ltd., one of the largest supermarket companies in eastern China. In 2002, the latest year for which information was available, Zhongyang had sales revenue of 420 million RMB ($58.5 million). We believe that as of the date of this prospectus, Zhongyang Shangcheng has approximately one supermarket located near enough to our own stores to be in competition with them.

Fengshi Taoyuan Supermarkets is a local supermarket chain. We believe that as of the date of this prospectus, Fengshi Taoyuan has approximately one supermarket located near enough to our own stores to be in competition with them.

Shangsha Supermarkets is a local supermarket chain. We believe that as of the date of this prospectus, Shangsha has approximately one supermarket located near enough to our own stores to be in competition with them.


Our Competitors - Foreign Supermarkets

Wal Mart is the world’s largest public corporation by revenue, according to the 2007 Fortune Global 500. As of the end of 2007, it operated approximately 200 stores in China, including stores in the name of its partially-owned PRC affiliate, Trust-Mart. Wal Mart has more than 1.9 million employees worldwide, and more than 70,000 employees in China. Of its China stores, nearly 100 are in its supercenter or hypermarket format, three are in its Sam’s Club format, two are in its neighborhood market format, and approximately 100 are operated under the Trust-Mart name. (See the Wal Mart China website at http://wal-martchina.com/english/news/stat.htm . We believe that Wal Mart has approximately six retail locations located near enough to our own stores to be in competition with them.

National and foreign retailers have greater resources and a greater geographic range than we do, and their stores are often bigger (hypermarkets often have an area of 14,000 square meters, compared to the 2,500 square-meter average size of our stores), which may enable them to offer a greater diversity of products than we do and give them advantages in pricing, ability to expand, advertising budgets, efficiencies in distribution, bargaining power, and other areas.

Our Competitive Advantages

We compete primarily on the basis of our low prices, the quality and reputation of our meat and produce sections, the breadth of products we carry, which include approximately 23,000 items offered for sale in our stores every day, our local knowledge and sensitivity to local customs, the warm atmosphere and pleasant shopping experience we provide, and our overall product quality and reputation. The location of our stores is also essential to our competitiveness, and our current competitive strategy focuses on locating our stores within the three provinces of northeastern China and the northern region of Inner Mongolia and, within those areas, in small- and medium-sized cities where we expect to face limited competition from large foreign or national supermarket chains whose resources are much greater than ours.

We continuously monitor, respond to and improve based on lessons learned from our competition. In addition to the competitive advantages described above, we believe we have specific and distinct advantages over our domestic competitors and our foreign competitors.

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Compared with local supermarkets, we have advantages due to our:

 
·
strong relationships with local suppliers, especially meat vendors.
 
 
·
membership in the international trade group IGA, which provides access to purchasing discounts for packaged goods and access to IGA’s exclusive brands.
 
 
·
superior management especially in inventory management, information management systems, and sales and marketing programs.
 
·
focus on human-resource management including formal employee training programs.
 
Compared with big foreign supermarkets, we have advantages due to our

 
·
familiarity with Chinese and local circumstances and culture, religion and customs, and a corresponding understanding of local customer needs and consumption patterns, which we believe are especially helpful in the areas of raw food and meat sales;

 
·
market positioning - we benefit from positioning our supermarkets as a store to provide goods and services at low prices, good values and convenience to our communities. By contrast, Wal Mart and other foreign retailers are perceived in Daqing and elsewhere in China as places for higher prices and more extravagant purchases. We prefer to occupy the former niche and believe it has greater promise for growth in our markets;

 
·
strong relationship with local suppliers, especially meat vendors; and

 
·
certain advantages under Chinese law; for example, foreign competitors cannot sell cigarettes in the PRC. Our local knowledge may also make it relatively easier for us to navigate the bureaucracy and obtain needed licenses and permissions.

Our Future Goals and Expansion Plans
 
We are pursuing an ambitious expansion plan, which includes the recently completed transactions described in this prospectus, pursuant to which we intend to open 24 new supermarkets in 2008. In 2009, after additional financing, we intend to open 26 new supermarkets and three distribution centers, make improvements to our logistics and information systems, and establish a new training center for employees. We opened the first of these new stores on March 24, 2008. 

We have begun construction on two of these new stores and have identified or are currently seeking to identify locations for approximately 20 new stores. We have negotiated or are in the process of negotiating the terms of leases and land-use rights for seven of these stores. We have obtained or are in the process of obtaining the government licenses, certificates and permits, including business license, sanitation certificate, and fire protection permit, needed to operate one of these stores. We have interviewed or are in the process of interviewing approximately 577 employees to fill position at these stores.
 
Based on this plan, we are projecting net revenue growth of approximately 40% per year for the next five years. 

Our expansion strategy is to open stores in small and medium-sized cities, where we believe the population can support profitable supermarket operations but where large foreign and national supermarket chains, which generally have resources far greater than ours, tend not to compete.  We believe that the three provinces of northeastern China and the northern province of Inner Mongolia, which have a combined population of approximately 130 million, contain a large number of these cities, and we have therefore targeted these areas for our expansion.
 
Based on our recent experience, we believe that pre-opening costs for new stores in 2008 will be approximately 2,200 RMB per square meter, with a preparation period of between 45 and 77 days needed from the time we take possession of the premises until the opening of the store.  We believe that our 2009 expansion may require us to raise approximately $45 million in additional outside financing.  We may also need to increase our periodic short-term borrowing to fund our continuing operations as we expand.
 
Organizational History of Forme Capital, Inc.

Forme Capital, Inc. (“Forme,” “we,” or the “Company”) was incorporated in Delaware on December 2, 1986, as a wholly owned subsidiary of Danzar Investment Group, Inc., and on April 10, 1987 all of its shares were distributed to the Danzar stockholder.

Prior to 1989, Forme’s only activity was the creation and spinning off to its stockholders of nine blind pool companies, or companies with no specified business plan.

From 1989 to 1998, Forme was a real estate company. From 1999 to 2000, Forme invested in fine art. On April 10, 2000, Forme sold its artwork and associated assets to a company affiliated with its previous President, Daniel Wettreich.
 
42

 
From 2000 to 2007, Forme had no operations or substantial assets. Accordingly, Forme was deemed to be a "blank check" or shell company, that is, a development-stage company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or other acquisition with an unidentified company or companies, or other entity or person.

On March 14, 2007, Forme entered into a common stock purchase agreement with its majority stockholder, director and former President, Daniel Wettreich, and Synergy Business Consulting, LLC, pursuant to which Synergy acquired 11,824,200 shares, or approximately 93%, of Forme’s outstanding common stock from Mr. Wettreich in a private transaction for a purchase price of $550,000.
 
On closing of the purchase, Bartly J. Loethen was appointed director and Chairman, Chief Financial Officer, President, Vice President, Treasurer and Secretary of Forme. Mr. Daniel Wettreich resigned as director effective ten days after the filing of an information statement with the SEC under Rule 14f-1 of the Securities Exchange Act. As a result, Mr. Loethen then constituted Forme’s entire board. Mr. Loethen was not compensated for serving as either an officer or director of Forme.

On September 19, 2007, four investors became the holders of the majority of our common stock by purchasing from Synergy 93% of our then-outstanding common stock, or 11,824,200 shares, for $650,000, or $0.055 per share. Four of the investors were Stallion Ventures, LLC (“Stallion”), Castle Bison, Inc. (“Castle”), Menlo Venture Partners, LLC (“Menlo”), and Windermere Insurance Company (“Windermere” and, together with Stallion, Castle and Menlo, the “Old Majority Holders”). The purchase was accompanied by the resignation of Mr. Loethen and his replacement by John Vogel, Robert Scherne, and Vincent Finnegan as our officers and directors.

On February 7, 2008, Vision purchased 600,000 shares of our common stock from Stallion, Castle, and other affiliates, becoming the holder of approximately 40% of Forme Capital’s then outstanding stock.

 
On November 13, 2007, we filed an Amended and Restated Certificate of Incorporation to change the number of shares of stock that we are authorized to issue to 100,000,000 shares of common stock, par value $.001 per share, and 100,000,000 shares of preferred stock, par value $.01 per share. The change became effective on December 5, 2007.

Forme Capital has no operations or substantial assets other than those of QKL, and prior to the reverse merger and private placement its business plan was to seek out and obtain candidates with which it could merge or whose operations or assets could be acquired through the issuance of common stock and possibly debt.

PROPERTIES

All land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants or allocates landholders a “land use right,” which we sometimes refer to informally as land ownership. There are four methods to acquire land use rights in the PRC:

  ·
grant of the right to use land;
  ·  assignment of the right to use land; 
  · lease of the right to use land; and 
  · allocated land use rights 

In comparison with Western common law concepts, granted land use rights are similar to life estates and allocated land use rights are in some ways similar to leaseholds.
 
Granted land use rights are provided by the government in exchange for a grant fee, and carry the rights to pledge, mortgage, lease, and transfer within the term of the grant. Land is granted for a fixed term, generally 70 years for residential use, 50 years for industrial use, and 40 years for commercial and other use. The term is renewable in theory. Unlike the typical case in Western nations, granted land must be used for the specific purpose for which it was granted.
 
Allocated land use rights are generally provided by the government for an indefinite period (usually to state-owned entities) and cannot be pledged, mortgaged, leased, or transferred by the user. Allocated land can be reclaimed by the government at any time. Allocated land use rights may be converted into granted land use rights upon the payment of a grant fee to the government.
 
43

 
We own our headquarters store and two other stores; we lease our other 17 retail locations and both of our distribution centers. Our lease agreements have a typical term of 15 to 20 years, and approximately 80% of our leased properties have a fixed rent based on a price per square meter, which cannot be raised during the term of the lease.

Our land use rights are set forth below:

Land Use Rights acquired through Grants from Land Management Authority
 
Land No.
 
No. 1
 
No.2
Land Use Right Certificate No.
 
Daqing Guo Yong (2006) No. 001485
 
Daqing Guo Yong Zi (2006) No.001488
 
 
 
 
 
User of the Land
 
Qingkelong
 
Qingkelong
 
 
 
 
 
Location
 
North Building 3-23, East Jing Qi Street, Dongfeng Xincun Village
 
East Jing Qi Street, Dongfeng Xincun Village, Sa District
 
 
 
 
 
Usage
 
Commercial Services
 
Commercial Services
 
 
 
 
 
Area (m 2 )
 
3193.70
 
34.30
 
 
 
 
 
Form of Acquisition
 
From related land authority
 
From related land authority
 
 
 
 
 
Expiration Date
 
2044-6-27
 
2044-6-27
 
 
 
 
 
Encumbrances*
(Expiration Date)
 
Mortgaged
(2009-05-22)
 
Mortgaged
(2008-5-23)
  
Land use rights acquired by Transfer

Land No.
 
No. 1
 
No.2
 
No.3
Land Use Right Certificate No.
 
Daqing Guo Yong Zi (04) No.6234
 
Daqing Guo Yong Zi (04) No.6235