UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
Date
of
Report (Date of Earliest Event Reported): May 9, 2007 (
May
3,
2007
)
MILLENNIUM
QUEST, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
000-51908
|
|
87-0578370
|
|
(State
of Incorporation)
|
|
(Commission
File No.)
|
|
(IRS Employer ID No.)
|
Beihuan
Zhong Road
Junan
County
Shandong,
China 276600
(Address
of Principal Executive Offices)
(86)
539-7318818
Registrant’s
Telephone Number, Including Area Code:
12890
Hilltop Road
Argyle,
Texas 76226
(Former
name or former address, if changed since last report)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
o
Written communications
pursuant to Rule 425 under the Securities Act (17 CFR.425)
o
Soliciting material pursuant to Rule
14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant
to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant
to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
document contains forward-looking statements, which reflect our views with
respect to future events and financial performance. These forward-looking
statements are subject to certain uncertainties and other factors that could
cause actual results to differ materially from such statements. These
forward-looking statements are identified by, among other things, the words
“anticipates”, “believes”, “estimates”, “expects”, “plans”, “projects”,
“targets” and similar expressions. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Important factors that may cause actual results to differ
from those projected include the risk factors specified below.
USE
OF DEFINED TERMS
Except
as
otherwise indicated by the context, references in this report to “Millennium
Quest” or "Company" are references to Millennium Quest, Inc., a Delaware
corporation and references to “Lorain Holding” are references to International
Lorain Holding, Inc., a Cayman Islands corporation that is wholly-owned by
Millennium Quest, and Lorain Holding’s direct and indirect Chinese subsidiaries.
References to “we,” “us” or “our” are references to the combined business of
Millennium Quest, Inc., its wholly-owned subsidiary, Lorain Holding, and the
direct and indirect Chinese subsidiaries of Lorain Holding. The terms “Lorain
Holding,” “we,” “us” or “our” do not include the selling stockholders. Unless
the context otherwise requires, the term “Junan Hongrun” means Junan Hongrun
Foodstuff CO.,LTD. and its Chinese operating subsidiaries. The term
“Luotian
Lorain” means Luotian Green Foodstuff CO.,LTD and its Chinese subsidiaries. The
term “Beijing Lorain” means Beijing Green Foodstuff CO.,LTD. and its Chinese
subsidiaries. The term “Shandong Lorain” means Shandong Green Foodstuff CO.,LTD.
and its Chinese subsidiaries. The term “Securities Act” means the Securities Act
of 1933, as amended, and the term “Exchange Act” means the Securities Exchange
Act of 1934, as amended, the term “RMB” means Renminbi, the legal currency of
China and the terms “U.S. dollar,” “$” and “US$” mean the legal currency of the
United States.
For
all
U.S. dollar amounts reported, the company has calculated the dollar amount
on
the
basis that $1 = RMB 7.8175 for 2006 in its balance sheet, $1 = RMB 8.0734 for
its 2005 balance sheet, and $1 = RMB 8.2865 for its 2004 balance sheet, which
was determined based on the currency conversion rate at the end of each such
year. The conversion rate of $1 = RMB 7.98189 is used for it 2006 income
statement and cash flow items, $1 = RMB 8.20329 for its 2005 income statement
and cash flow items, and $1 = RMB 8.28723 for its 2004 income statement and
cash
flow items, which is based on the average currency conversion rate for each
year. The detailed description of currency conversion is indicated in the audit
report. References to “China” and “PRC” are references to “People’s Republic of
China.” References to “Cayman” or “Cayman Islands” are references to the “Cayman
Islands.”
ITEM
1.01
ENTRY
INTO A MATERIAL DEFINITIVE AGREEMENT.
On
May 3,
2007, we entered into a share exchange agreement with International Lorain
Holding, Inc., a Cayman Islands company, and its sole shareholder, Mr. Hisashi
Akazawa (the “Share Exchange Agreement”). Pursuant to the Share Exchange
Agreement, Mr. Akazawa agreed to transfer all of the shares of the capital
stock
of International Lorain Holding, Inc. held by him, constituting all of the
issued and outstanding stock of International Lorain Holding, Inc., in exchange
for a number of newly issued shares of our Series B Voting Convertible Preferred
Stock that would, in the aggregate, constitute at least 65.43 % of our issued
and outstanding capital stock on a fully-diluted basis as of and immediately
after the consummation of the transactions contemplated by the Share Exchange
Agreement and after giving effect to a financing transaction that resulted
in
gross proceeds to us of approximately $19.8 million. In connection with the
Share Exchange Agreement, Mr. Akazawa agreed not to offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, any of his shares
of our Series B Voting Convertible Preferred Stock for a period of 12 months
from the date of issuance of such stock.
On
May 3,
2007 Mr. Akazawa, granted an option to Mr. Si Chen, Our Chief Executive Officer,
for the purchase of up to 627,897 of his shares of our Series B Voting
Convertible Preferred Stock along with any shares of Common Stock that such
Series B Preferred Stock may be converted into, pursuant to the terms of an
Option Agreement, dated as of May 3, 2007, between Mr. Akazawa and Mr. Chen
(the
“Option Agreement”). Pursuant to the Option Agreement, if Mr. Chen exercises his
option to purchase such shares he will be bound to the lock-up provisions of
the
Share Exchange Agreement mentioned above to the same extent to which Mr. Akazawa
is bound as if the Mr. Chen had been an original party to the Share Exchange
Agreement.
On
May 3,
2007, we entered into a securities purchase agreement with certain accredited
investors (the “Securities Purchase Agreement”), pursuant to which we issued and
sold to these investors 299,055.78 shares of our Series B Voting Convertible
Preferred Stock and warrants for the purchase of up to an aggregate of 1,398,065
shares of our Common Stock for approximately $19.8 million. At the same time,
we
entered into a registration rights agreement (the “Registration Rights
Agreement”), with these investors under which, among other things, we agreed to
register the shares of our common stock issuable upon conversion of our Series
B
Voting Convertible Preferred Stock as well as shares of our common stock
issuable upon exercise of the warrants we issued to the investors within a
pre-defined period. The number of underlying shares and the stated exercise
price reflects the contemplated 1-for-32.84 reverse stock split of our
outstanding common stock.
In
connection with the Securities Purchase Agreement, our controlling stockholder
Hisashi Akazawa and Chief Executive Officer Si Chen entered into a make good
escrow agreement whereby Mr. Akazawa and Mr. Chen pledged a certain number
of
shares of our Series B Voting Convertible Preferred Stock to the investors
in
order to secure the company’s make good obligations. See Item 2.01 of this
report below for more details.
In
connection with the Securities Purchase Agreement, we agreed to issue warrants
to Sterne Agee & Leach, Inc. and its potential designee(s) for the purchase
of up to an aggregate of 16,069,594 shares of our common stock (or 489,330
shares on a post-reverse-split basis), which warrants are for a term of
3 years
and have an exercise price of $0.1294153 per share(or $4.25 per share on
a
post-reverse-split basis), and include piggyback registration rights to
register
such shares (the "Warrants").
In
connection with the above transactions, on May 3, 2007 we entered into a
cancelled and escrow agreement with Halter Financial Investments, L.P. (“HFI”),
Halter Financial Group, L.P. (“HFG”) and Securities Transfer Corporation (the
“Cancellation and Escrow Agreement”), whereby HFI and HFG agreed to deposit into
escrow 229,227 shares of our common stock that they will hold upon conversion
of
their Series A Voting Convertible Preferred Stock into common stock (taking
into
account the contemplated 1-for-32.84 reverse stock split and the conversion
of
Series B Voting Convertible Preferred Stock into common stock) and agreed
that
if we report, on a consolidated basis, in our Annual Report filed with the
U.S.
Securities and Exchange Commission, net income of $12.5 million for fiscal
2008,
HFI and HFG will transfer to us for cancellation such shares in order to
reduce
the ownership of a certain group of stockholders. If this performance threshold
is not met, such shares will be returned to HFI and HFG.
Copies
of
the Share Exchange Agreement and Option Agreement are filed as Exhibits 2.1
and
3.4, respectively, to this report. Forms of the Securities Purchase Agreement
and Registration Rights Agreement are filed as Exhibits 10.1 and 4.4,
respectively, to this report.
ITEM
2.01
COMPLETION
OF ACQUISITION OR DISPOSITION OF ASSETS
On
May 3,
2007, we completed an acquisition of Lorain Holding pursuant to the Share
Exchange Agreement. The acquisition was accounted for as a recapitalization
effected by a share exchange, wherein Lorain Holding is considered the acquirer
for accounting and financial reporting purposes. The assets and liabilities
of
the acquired entity have been brought forward at their book value and no
goodwill has been recognized.
FORM
10 DISCLOSURE
As
disclosed elsewhere in this report, we acquired Lorain Holding in a reverse
acquisition transaction. Item 2.01(f) of Form 8-K states that if the registrant
was a shell company like we were immediately before the reverse acquisition
transaction disclosed under Item 2.01, then the registrant must disclose the
information that would be required if the registrant were filing a general
form
for registration of securities on Form 10.
Accordingly,
we are providing below the information that would be included in a Form 10
if we
were to file a Form 10. Please note that the information provided below relates
to the combined enterprises after the acquisition of Lorain Holding, except
that
information relating to periods prior to the date of the reverse acquisition
only relate to Millennium Quest, Inc. unless otherwise specifically
indicated.
DESCRIPTION
OF BUSINESS
Our
History
Overview
We
are a
Delaware corporation that was incorporated on February 4, 1986 and we are
headquartered in Shandong Province, China. From our inception in 1986 until
May
3, 2007, when we completed a reverse acquisition transaction with Lorain
Holding, we were a blank check company and did not engage in active business
operations other than our search for, and evaluation of, potential business
opportunities for acquisition or participation.
We
develop, manufacture and sell convenience foods (foods like cut fruit and
premixed salads, which are known as lightly processed -- our convenience foods
include ready-to-cook (or RTC) meals, ready-to-eat (or RTE) meals and meals
ready-to-eat (or MREs), chestnut products, and frozen, canned and bulk foods,
in
hundreds of varieties. We operate through our indirect Chinese subsidiaries.
Our
products are sold in 19 provinces and administrative regions in China and 23
foreign countries.
Background
and History of Lorain Holding and its Operating Subsidiaries and
Affiliates
Lorain
Holding was incorporated in the Cayman Islands in August 2006. Lorain Holding
presently has two direct, wholly-owned Chinese operating subsidiaries: Luotian
Lorain and Junan Hongrun, one indirect wholly owned operating subsidiary:
Beijing Lorain, and one majority-owned subsidiary, Shandong Lorain, which is
80.2% owned by us (with Shandong Economic Development Investment Co. Ltd. owning
the remaining 19.8% interest). We sometimes refer to these four Chinese
operating subsidiaries as the Lorain Group Companies.
Shandong
Lorain was formed in 1995; Junan Hongrun was formed in 2002, and Luotian Lorain
and Beijing Lorain were both formed in 2003.
Acquisition
of International Lorain Holding, Inc. and Related Financing
Through
the reverse acquisition of Lorain Holding we acquired all of the issued and
outstanding capital stock of Lorain Holding, which became our wholly-owned
subsidiary, and in exchange for that capital stock we issued to the former
stockholder of Lorain Holding, Mr. Hisashi Akazawa, 697,663 shares of our Series
B Voting Convertible Preferred Stock, which shares of preferred stock will
be
converted into 16,307,872 shares of our common stock, immediately following
the
effectiveness of an amendment and restatement of our charter that will, among
other things, increase the number of our authorized shares of common stock
from
20,000,000 to 200,000,000 shares and effectuate a 1-for-32.84 reverse stock
split.
We
expect
to file this amendment and restatement of our Restated Certificate of
Incorporation within the next forty-five days. Upon the consummation of the
reverse acquisition, the former stockholder of Lorain Holding, Mr. Akazawa,
become our controlling stockholder. In connection with the reverse acquisition,
Mr. Akazawa agreed not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any of his shares of our Series B Voting
Convertible Preferred Stock for a period of 12 months from the date of issuance
of such stock.
On
May 3,
2007 Mr. Akazawa, granted an option to Mr. Si Chen, our Chief Executive
Officer, for the purchase of up to 627,897 of his shares of our Series B Voting
Convertible Preferred Stock along with any shares of Common Stock that such
Series B Preferred Stock may be converted into, pursuant to the terms of an
Option Agreement, dated as of May 3, 2007, between Mr. Akazawa and Mr. Chen.
Pursuant to the Option Agreement, if Mr. Chen exercises his option to purchase
such shares he will be bound to the lock-up provisions of the Share Exchange
Agreement to the same extent to which Mr. Akazawa is bound as if the Mr. Chen
had been an original party to the Share Exchange Agreement.
Upon
the
closing of the reverse acquisition, Timothy P. Halter, our sole director and
officer, submitted his resignation letter pursuant to which he resigned from
all
offices of Millennium Quest that he held effective immediately and from his
position as our director effective on the tenth day following the mailing by
us
of an information statement to our stockholders that complies with the
requirements of Section 14f-1 of the Securities Exchange Act of 1934. We expect
that Mr. Halter’s resignation will become effective on or about May 19, 2007. Si
Chen was appointed as our director and Chairman at the closing of the reverse
acquisition of Lorain Holding.
Contemporaneous
with the reverse acquisition, we also completed a private placement transaction
in which we issued and sold to accredited investors 299,055.78 shares of our
Series B Voting Convertible Preferred Stock and warrants for the purchase of
up
to an aggregate of 1,398,065 shares of our Common Stock for gross proceeds
of
approximately $19.8 million. These shares of Series B Voting Convertible
Preferred Stock will convert into 6,990,401 shares of our common stock at the
effective time of an amendment and restatement of our Restated Certificate
of
Incorporation that will, among other things, increase the number of shares
of
our authorized common stock from 20,000,000 to 200,000,000 shares and effectuate
a 1-for-32.84 reverse stock split. We have to increase our authorized common
stock so that there will be enough shares of authorized common stock available
for issuance upon conversion of our Series B Voting Convertible Preferred
Stock.
In
connection with the private placement mentioned above, our majority stockholder,
Mr.
Hisashi
Akazawa
,
and our
Chief Executive Officer, Mr. Si Chen, entered into an escrow agreement with
the
private placement investors. Pursuant to the escrow agreement, Mr. Akazawa
and
Mr. Si Chen agreed to certain “make good” provisions. In the make good escrow
agreement, we established minimum after tax net income thresholds of $9.266
million for the fiscal year ending December 31, 2007 and $12.956 million for
the
fiscal year ending December 31, 2008. If the minimum after tax net income
thresholds for the fiscal year 2007 or for the fiscal year 2008 are not
achieved, then the investors will be entitled to receive additional shares
of
our common stock based upon a pre-defined formula agreed to between the
investors and Mr. Akazawa. Mr. Akazawa deposited a total of 302,336 shares
of
our Series B Voting Convertible Preferred Stock, which are convertible into
7,067,104 shares of our common stock after reverse stock split, into escrow
with
Securities Transfer Corporation under the escrow agreement.
In
connection with the Securities Purchase Agreement, we agreed to issue warrants
to Sterne Agee & Leach, Inc. and its potential designee(s) for the purchase
of up to an aggregate of 16,069,594 shares of our common stock (or 489,330
shares on a post-reverse-split basis), which warrants are for a term of
3 years
and have an exercise price of $0.1294153 per share(or $4.25 per share on
a
post-reverse-split basis), and include piggyback registration rights to
register
such shares (the "Warrants").
In
connection with the acquisition of Lorain Holding, on May 3, 2007 we entered
into a cancelled and escrow agreement with HFI, HFG and Securities Transfer
Corporation, whereby HFI and HFG agreed to deposit into escrow 229,227 shares
of
our common stock that they will hold upon conversion of their Series A Voting
Convertible Preferred Stock into common stock (taking into account the
contemplated 1-for-32.84 reverse stock split and the conversion of Series B
Voting Convertible Preferred Stock into common stock) and agreed that if we
report, on a consolidated basis, in our Annual Report filed with the U.S.
Securities and Exchange Commission, net income of $12.5 million for fiscal
2008,
HFI and HFG will transfer to us for cancellation such shares in order to reduce
the ownership of a certain group of stockholders. If this performance threshold
is not met, such shares will be returned to HFI and HFG.
Our
Industry
General
According
to the USDA Economic Research Service, global food retail sales exceed $2
trillion annually, with supermarkets and hypermarkets (combination supermarket
and department store) accounting for 53% of sales in 2003. The global food
industry is fragmented with the world’s top 50 food manufacturers’ share of
packaged food retail sales at less than 30% of the total market as of 2003
according to the Euromonitor (2004).
Global
Food Market Trend
As
disposable income of consumers has increased in many countries during the past
few decades, consumers have begun to purchase fewer staples and more high-value
food items, which are products such as meat, dairy, pasta, and frozen vegetables
(as opposed to lower value items like rice or wheat). According to USDA, global
sales of high-value products have been growing, with sales increasing by 25%
since 1998. Food manufactures and suppliers responding to the trend have
increased their investment in processing facilities or purchase of high-value
foods. The decision of whether locally producing or purchasing often depends
on
the nature of products, regulation, environment and transaction cost comparison.
Our products have been developed and are being developed to cater to the growing
high-value food market.
Global
Consumption Trend
According
to the USDA, packaged foods account for a large share of total food expenditures
among customers in high-income countries and the demand for convenience is
growing. The United States, European Union and Japan account for over 50% of
global sales of packaged foods. In developing countries, market retail trends
also indicate strong growth in sales of packaged foods and demand for
convenience. We hope to capitalize on the increasing sales of convenience foods
and other high-value foods by increasing our production as the demand
grows.
China’s
Food Market
As
incomes rise and urbanization increases within China, Chinese consumers are
changing their diets and increasing demand for greater quality, convenience
and
safety in food. China’s food market is becoming segmented and demand for quality
food by high-income households has fueled recent growth in the availability
of
such foods within the Chinese retail market. China’s urban per capita food
expenditure in 2004 was RMB 2,710 (approximately $327), up 12% from that of
2003
(USDA, Economic Research Report No. ERR-32).
Convenience
Food Industry
There
is
an increasing demand for convenience foods in developed countries, as well
as
among wealthy segments in developing countries. According to the USDA, the
changes in food consumption patterns are largely driven by income growth and
demographic factors, particularly lifestyle changes brought about by
urbanization and similar forces.
According
to a global online AC Nielsen Consumer Survey of 22,000 internet users around
the world conducted in June 2006:
20%
of
all respondents frequently buy convenience food while 45% of all respondents
buy
convenience food occasionally;
56%
of
all respondents do not have enough time to cook (55% of respondents in the
Asia
Pacific region did not have enough time to cook);
25%
of
consumers who eat convenience food prefer all-in-one meals; and
44%
of
consumers make their purchases at a supermarket.
Chestnut
Industry
The
chestnut belongs to the Fagaceae family, along with oaks and beech trees. The
chestnut, in contrast to many other tree nuts, contains small quantities of
oil
and is very high in complex carbohydrates. This makes them useful for a wider
food range than other common ‘oily’ type nuts. They are very wholesome and
nutritive food.
The
following table compares the nutritional composition of chestnuts to
apples:
|
Nutritional
composition of Chestnut compared with Apple (per 100 g fresh
fruit)
|
|
|
|
|
|
Constituent
|
|
Chestnut
|
|
Apple
|
|
|
Water
(%)
|
|
|
52.5
|
|
|
84.8
|
|
|
Protein
(g)
|
|
|
2.9
|
|
|
0.2
|
|
|
Fat
(g)
|
|
|
1.5
|
|
|
0.6
|
|
|
Carbohydrate,
total (g)
|
|
|
42.1
|
|
|
14.1
|
|
|
Thiamine
(mg)
|
|
|
0.22
|
|
|
0.03
|
|
|
Riboflavin
(mg)
|
|
|
0.22
|
|
|
0.02
|
|
|
Niacin
(mg)
|
|
|
0.6
|
|
|
0.1
|
|
|
Calcium
(mg)
|
|
|
27
|
|
|
7
|
|
|
Phosphorus
(mg)
|
|
|
88
|
|
|
10
|
|
|
Iron
(mg)
|
|
|
1.7
|
|
|
0.3
|
|
|
Sodium
(mg)
|
|
|
6
|
|
|
1
|
|
|
Potassium
(mg)
|
|
|
454
|
|
|
110
|
|
Source:
USDA 1964, Handbook No. 8
According
to the United Nation FAO Statistics Division (2006), China is the largest grower
of chestnuts followed by Korea and Japan. In 2004, China’s production accounted
for approximately 72% of the world’s total chestnut production. Japan, Korea,
China and the European Union are also large consumers of chestnuts. The total
consumption in these areas accounted for 89.8% of the world’s total consumption
in 2004. The compound annual growth rate of world consumption of chestnuts
is
approximately equal to the compound annual growth rate of world production
of
chestnuts in the period of 2000 to 2004, which was 3.6%.
In
recent
years, chestnut production in Korea and Japan has declined. This has been
attributed to the increasing labor costs and operational costs incurred in
growing chestnuts. Because of the slowing domestic production, Korean and
Japanese customers have grown to rely more on imported chestnut
products.
Chestnuts
are harvested in the fall. Traditionally, people eat chestnuts in the fall
and
winter. Chestnuts are commonly steamed, boiled, sugar stir-fried, roasted or
added into dishes or desserts as an ingredient. Chestnut fruit is covered in
a
red inner skin and an outer hard shell. Chestnuts are typically peeled after
being processed by traditional approaches.
Frozen,
Canned and Bulk Food Industry
Frozen,
canned and bulk foods are a large portion of the food industry. In 2006, China
exported 4.42 metric tons of frozen vegetables, an increase of 8.55% over 2005
levels.
Our
Products, Production Processes and Services
Our
products are categorized into the following three types: convenience food,
chestnut products, and frozen, canned and bulk food.
Convenience
Foods
Our
convenience food products are: ready-to-cook (or “RTC”) food products,
ready-to-eat (or “RTE”) food products and meals ready-to-eat (or “MRE”) food
products. Our convenience food products are seasoned foods. RTCs can be served
after a couple of easy preparatory steps. RTEs can be consumed immediately
and
MREs are basically meal kits with self heating devices. Our convenience food
products fit the modern food demands of consumers who require safe, wholesome,
and tasty food that requires very little time or preparation.
Our
best
selling RTCs are Oden eggs and Cattle Bone Soup. Typically, when preparing
an
RTC, customers only need to heat the food in microwaves, or boil it for several
minutes before enjoying the meal.
We
also
produce RTEs, the best selling of which is Smoked Fish and Stewed Beef with
Sauce. Other RTEs include spiced beltfish, cherry tomato, spicy pork fillet,
pork and egg roll, spicy source, pears and pineapples.
Our
MREs
are meal kits with self-heating devices (thus differing from the MRE food
products which US customers associate with the phrase MRE). We produce various
MREs focused on Chinese cuisine, the best sellers of which are our stir fried
rice and stir fried noodles. Other MREs are based on other styles of food,
such
as Italian cuisine.
Our
MREs
are used in both military and civilian uses, such as camping, traveling, meals
on trains, and other situations where a person does not have access to
traditional cooking supplies and equipment, such as a stove or
microwave.
Chestnut
Products
We
produce approximately 45
high
value-added processed chestnut products, the best selling of which are our
aerated open-bottom chestnuts (chestnuts packaged with nitrogen), sweet heart
chestnuts (which are sweet preserved chestnuts), chestnuts in syrup (which
is
very popular in Japan and Korea), and chopped chestnut kernels. In addition,
we
have begun preliminary production of a chestnut extract that is produced from
the chestnut’s inner skin (the extract had previously been discarded in the
production process). We plan to sell this extract to Japanese food processors
who sell the extract for use as an additive to foods and beverages.
Frozen,
Canned and Bulk Food
We
produce various frozen, canned and bulk foods, including frozen vegetables,
frozen fruits, frozen fish, and frozen meats. The best selling frozen, canned
and bulk foods are our chestnut in syrup, frozen peas and frozen chestnuts.
Although they contributed 33.7% of the total revenue in 2006, the frozen, canned
and bulk products’ gross margins are lower than the margins for chestnut
products and convenience foods. However, the frozen, canned and bulk food
portion of our business is able to mitigate the significant production
seasonality of chestnut products and increase the utilization rate of our
production capacity.
We
are
presently operating four facilities two of which are located in Junan County,
Shandong Province, one in Luotian county, Hubei Province, and one in Miyun
county, Beijing. The following table provides the name of our facilities, the
year that operations commenced at the facilities and the size of the
facilities.
|
Facility
|
|
Year
Operations Commenced
|
|
Construction
Size
(square
meter)
|
|
|
Junan
Hongrun
|
|
|
2002
|
|
|
25,665
|
|
|
Shandong
Lorain
|
|
|
1995
|
|
|
15,392
|
|
|
Luotian
Lorain
|
|
|
2003
|
|
|
9,558
|
|
|
Beijing
Lorain
|
|
|
2003
|
|
|
20,290
|
|
Current
Production Lines
We
currently manufacture our products using 13 production lines, including
deep-freezing lines (which are used to freeze raw materials for year-round
production and to produce frozen food), canning lines (which are used to produce
canned food and canned chestnut products) and convenience food lines (which
are
used for producing RTCs, RTEs and MREs, all of which have nitrogen preservation
capacity).
The
following table shows the types of production lines at each facility, the
product produced and the production capacity:
|
Facility
|
|
Production
Lines
|
|
Amount
|
|
Capacity
(metric
tons per line per year)
|
|
Product
|
|
Shandong
Lorain
|
|
Deep-freezing
line
|
|
1
|
|
9912
|
|
Chestnut
products
|
|
|
|
Convenience
food line
|
|
1
|
|
1425
|
|
Canned
and frozen food
Convenience
food
|
|
|
|
|
|
|
|
|
|
|
|
Junan
Hongrun
|
|
Deep-freezing
line
|
|
1
|
|
9912
|
|
Chestnut
products
|
|
|
|
Canning
line
|
|
4
|
|
5767
|
|
Canned
and frozen food
|
|
|
|
|
|
|
|
|
|
|
|
Beijing
Lorain
|
|
Deep-freezing
line
|
|
1
|
|
9912
|
|
Chestnut
products
|
|
|
|
Convenience
food line
|
|
3
|
|
1425
|
|
Frozen
and canned food
Convenience
food
|
|
|
|
|
|
|
|
|
|
|
|
Luotian
Lorain
|
|
Deep-freezing
line
|
|
1
|
|
9912
|
|
Chestnut
products
|
|
|
|
Convenience
food line
|
|
1
|
|
600
|
|
Frozen
and canned food
RTC
& RTE (mainly fish)
|
We
allocate the production lines for our various products among our facilities
based upon the location of the facilities to take advantage of efficiencies
in
transportation of required raw materials. For example, all of our fish products
are manufactured by Luotian Lorain, because the Luotian region is an area that
has an abundance of the fish that we use as a raw material.
Although
our production lines are multi-functional, we only have regulatory approvals
to
produce the products at our facilities that are currently being produced there.
If we desire to produce other products at these facilities in the future, we
would have to obtain additional regulatory approvals.
With
limited exception, we produce our products all year round. Some of our chestnut
products, however, are not produced year round and, therefore, there are times
that our production lines are operating at less than full capacity.
Proposed
Production Lines
We
expect
that our convenience food and chestnut products will be our main profit centers
in 2007. Convenience food is the fastest growing portion of our business and
the
main catalyst of our growth. We currently have enough capacity for our chestnut
products; however, we do not have enough capacity to satisfy existing demand
for
our convenience food products. Therefore, in 2007, we plan to construct three
new production facility additions to existing plants, some with multiple
production lines (for a total of six new lines) for the production of our
convenience food products. In 2008, we plan to construct another new production
facility addition at a new facility in Luotian County, China with three
production lines for the production of our convenience food products and deep
freezing. Each new facility addition in 2007 will contain a convenience food
line that that also allows for nitrogen preservation of products. Finally,
we
plan to add additional frozen storage to complement the additional production
lines. We estimate that the cost of constructing these new facility additions
will be approximately $17,525,000
.
The
following table describes the proposed new production lines for our convenience
food products.
|
Facility
|
|
Production
Lines
|
|
Amount
|
|
Capacity
(metric tons per line per year)
|
|
Proposed
Year of Expansion
|
|
Junan
Hongrun
|
|
Convenience
food line
|
|
2
|
|
1500
|
|
2007
|
|
Beijing
Lorain
|
|
Convenience
food line
|
|
3
|
|
1500
|
|
2007
|
|
Luotian
Lorain
|
|
Convenience
food line
|
|
2
|
|
1500
|
|
2007
|
|
New
Facility
|
|
Deep
Freezing Line
|
|
1
|
|
9912
|
|
2008
|
|
|
|
Convenience
food line
|
|
2
|
|
1500
|
|
2008
|
Current
Storage Capacity
Storage
of our raw materials and inventory is a critical element of our business. Our
raw materials, half-done and partially finished products need to be preserved
in
frozen storages (-18ºC to -20ºC) or constant temperature storages (-5ºC to 5ºC).
The
following table illustrates on a facility by facility basis the type and
capacity of our storage resources.
|
Facility
|
|
Storage
|
|
Number
of
Storage
Units
|
|
Capacity
(metric
tons)
|
|
Junan
Hongrun
|
|
Frozen
Storage
|
|
5
|
|
2000
|
|
|
|
Constant
Temperature
|
|
8
|
|
4800
|
|
|
|
|
|
|
|
|
|
Shandong
Lorain
|
|
Frozen
Storage
|
|
5
|
|
2000
|
|
|
|
Constant
Temperature
|
|
3
|
|
1500
|
|
|
|
|
|
|
|
|
|
Luotian
Lorain
|
|
Frozen
Storage
|
|
8
|
|
4500
|
|
|
|
|
|
|
|
|
|
Beijing
Lorain
|
|
Frozen
Storage
|
|
4
|
|
1850
|
|
|
|
Constant
Temperature
|
|
3
|
|
1800
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
18,450
|
Future
Storage Capacity
We
plan
to enlarge our storage capacity along with the planned expansion of our
production capacity. By the end of 2007, we expect that our total storage
capacity will reach 22,450 metric tons, and by the end of 2008, we expect that
our total storage capacity will reach 25,450 metric tons.
The
following table illustrates our planned additional frozen and constant
temperature storage capacity.
|
Facility
|
|
Storage
|
|
Capacity
(metric
ton)
|
|
Year
of
Expansion
|
|
Junan
Hongrun
|
|
Frozen
Storage
|
|
1000
|
|
2007
|
|
Luotian
Lorain
|
|
Frozen
Storage
|
|
2000
|
|
2007
|
|
Beijing
Lorain
|
|
Frozen
Storage
|
|
1000
|
|
2007
|
|
New
Facility
|
|
Frozen
Storage
|
|
3000
|
|
2008
|
Chestnut
Harvesting Operations
Since
2003 we have grown our own chestnut trees in an attempt to reduce operating
costs and ensure the availability of raw material supplies and quality of our
products. Although we have self-supplied a large portion of our fresh vegetable
needs, our agricultural operations to date have not been a significant source
of
raw materials.
We
believe the development of agricultural facilities is a good strategy for
long-term cost-savings. For instance, by growing Korean superior cultivar
chestnuts domestically, we will be able to use our Korean-style chestnuts grown
in China as a substitute for those imported from Korea. Unlike most vegetables
and fruits, chestnut trees have a 3-5 year growing phrase before they can be
harvested. Our current chestnut planting base is expected to start supplying
chestnuts in 2007. By 2010, our current chestnut agricultural operations are
projected to harvest around 700 metric tons of high-end chestnuts based on
the
number of tress currently planted and planned expansion of our chestnut
agricultural operations.
Our
current agricultural operations are illustrated by the following
table.
|
Harvest
|
|
Area
(Acre)
|
|
Location
|
|
Chestnut
(Korean,
Japanese, Australian cultivar)
|
|
329
|
|
Shandong
|
|
|
|
|
|
|
|
Chestnut
(Japanese
cultivar)
|
|
165
|
|
Beijing
|
|
|
|
|
|
|
|
Sticky
Corn
|
|
329
|
|
Beijing
|
|
|
|
|
|
|
|
Green
Pea &Sweet Corn
|
|
297
|
|
Beijing
|
|
|
|
|
|
|
|
Pumpkin
|
|
82
|
|
Heilongjiang
|
We
plan
to expand our agricultural operations this year. Among other things, we plan
to
develop an 824 acre Korean-type chestnut farm, located in China. The following
table illustrates the proposed expansion of our agricultural
operations.
|
Harvest
|
|
Area
(Acre)
|
|
Location
|
|
Organic
Chestnut
|
|
165
|
|
Beijing
|
|
Mixed
Vegetables
|
|
494
|
|
Hebei
|
|
Japanese
Pumpkin
|
|
329
|
|
Inner
Mongolia
|
Production
Seasonality
Our
raw
materials are mostly fresh agricultural products. Therefore, we are subject
to
production seasonality by product, though we are able to maintain overall
year-round production by altering the product in production to match the
seasonally available raw materials. For example, the main processing season
for
chestnut products is from the latter half of August to the next January. During
the busy season, our chestnut production lines are running with full capacity.
In other periods, we still maintain a small amount of chestnut production by
utilizing frozen chestnuts.
The
typical production seasons for our products are as follows:
|
1.
|
We
produce convenience foods year
round.
|
|
2.
|
We
produce frozen, canned and bulk vegetables & fruits primarily from
April through August, our peak season, although we do produce some
frozen,
canned and bulk vegetables & fruits throughout the
year.
|
|
3.
|
We
produce our chestnut products from August through January of the
following
year.
|
Our
Suppliers of Raw Materials
In
2006
about 85 percent of our raw materials consisted of agricultural products; 12
percent consisted of packaging materials and 3 percent consisted of
condiments.
Our
business depends on obtaining a reliable supply of various agricultural
products, including fresh produce, red meat, fish, eggs, rice, flour and
chestnuts. We self-supplied less than 5% of our total raw material needs in
2006
(by value). In addition, we also purchased packaging materials, sugar,
condiments and other products we need for production. We believe our raw
materials to be in adequate supply and generally available from numerous
sources.
In
order
to control procurement costs, we located our facilities near our raw material
suppliers. For example Junan Hongrun and Shandong Lorain are located in Shandong
Province, which, the National Bureau of Statistics of China reports is China’s
largest supplier of fresh produce in volume terms. Shandong Providence is also
a
major chestnut producing region.
By
using
local procurement, we reduce our costs, especially transportation costs, and
are
able to acquire first-hand harvest and market information. However, despite
our
efforts some raw materials with special properties must be imported. For
example, we have to use South Korean chestnuts and sugar to manufacture some
chestnut products at the required quality level. To reduce our dependence on
imports, we have begun to grow Korean-style chestnuts in China and will expand
the growing area in 2007, which will provide us with a substitute for these
expensive imported chestnuts in the future.
Our
raw
materials presently come from three sources: markets overseas, domestic
procurement (excluding self-supply), and self-supply. Domestic procurement
(including self-supply) is the biggest source of our raw materials in value
terms and accounted for 90.5% of our total raw material costs in 2006
(self-supply has not been a significant source to date -- accounting for less
than 5% of our total raw material costs in 2006). In 2006, overseas procurement
accounted for 9.5% of our total raw material costs.
We
generally purchase the raw materials that we use to produce our products from
wholesalers, who collect agricultural products directly from farmers. However,
we do occasionally work directly with farmers. For instance, we operate an
initiative we refer to as “Green-moist base” which involves a series of
cooperation and lease agreements between Shandong Lorain, Beijing Lorain and
local farmers. The Green-moist base involves approximately 6,000 mu
(approximately 1,000 acres) of land which is used primarily to produce Japanese
and Korean style chestnuts, sticky corns, and pumpkins for our
operations.
We
have a
long-term relationship with many international and domestic suppliers. Each
year
we select those who can offer us the best prices without compromising on
quality. We typically rely on many suppliers each year. The top 10 suppliers
accounted for 17.22% of the total procurement in 2006 in value
terms.
The
following table lists the name of our top ten suppliers, the dollar value of
the
raw materials supplied and the percentage of total raw materials (by cost)
supplied.
|
Supplier
|
|
Supply
Value $
1USD=7.8RMB
|
|
Percentage
of Total Raw Material Cost
|
|
|
Youli
Duan
|
|
|
856,300
|
|
|
2.99
|
%
|
|
Youcun
Min
|
|
|
783,192
|
|
|
2.74
|
%
|
|
Fuzhou
Jinlingsheng Food Company
|
|
|
698,401
|
|
|
2.41
|
%
|
|
Guo
Qi
|
|
|
511,085
|
|
|
1.79
|
%
|
|
Guangquan
Wang
|
|
|
432,039
|
|
|
1.51
|
%
|
|
Hyup
Sung Nongsan Agricultural
|
|
|
376,580
|
|
|
1.32
|
%
|
|
Jianjiang
Xu
|
|
|
339,333
|
|
|
1.19
|
%
|
|
Shuaishuai
Zhang
|
|
|
322,928
|
|
|
1.13
|
%
|
|
Jinbao
Yuan
|
|
|
315,887
|
|
|
1.1
|
%
|
|
Hainong
Co. Ltd.
|
|
|
302,651
|
|
|
1.06
|
%
|
To
ensure
high quality, we have strict standards for our suppliers. We have an internal
procurement employee who travels to the harvest location during harvest season
to select high quality materials and supervise the harvest process.
The
prices of agricultural materials reflect external factors such as weather
conditions, and commodity market fluctuations. We are unable to control these
external factors; however we strive to get the best prices each year for each
product. We have a procurement employee who stays at the harvest market during
harvest season and sends back daily price information to us so that we can
purchase raw materials at the best available prices. Internationally, we collect
daily reported price information and utilize it in our decision making process.
In addition, each year we predict the expected harvest yields. If the harvest
is
expected to be good, we anticipate that the raw material price will decrease
and
we will use that information to lock in the best price.
Our
Customers
In
China,
we sell our products to supermarket chains, large wholesalers, and others.
We
are long-term suppliers of approximately 40 Wal-Mart stores and more than 30
Metro stores. We also supply to Carrefour, Hualian, Nong-gong-shan, Suguo,
Jusco,
Lianhua,
and RT-mart. We also sell to small customers through our contract sales
representatives in order to reduce sale effort. We plan to gradually increase
the portion of direct sales to our supermarket and chain store clients by
reducing the amount sales that are made through wholesalers.
Internationally,
we sell directly to wholesalers, food processors and mass merchandisers. Being
in the food business for more than a decade, we have established long-term
relationships with many international customers, especially in Japan and Korea.
Many of our customers are well known in their national food market. We are
a
major chestnut product supplier to several customers, including Shinsei Foods
Co. Ltd., Yamato and Traders Co., and Tokai Denpun Co.
Our
top
ten customers contributed 50.7% of the total revenue in 2006. The following
table names our largest customers and provides the dollar value of sales to
these customers and the percentage contribution to revenues made by these
customers.
2006
Top 10 Customers
|
Customers
|
|
Value
|
|
Contribution
|
|
|
Shandong
Lvan Import & Export Co., Ltd.
|
|
$
|
6,587,174.76
|
|
|
13.46
|
%
|
|
Shinsei
Foods
|
|
$
|
5,584,708.14
|
|
|
11.41
|
%
|
|
Wal-Mart
(China)
|
|
$
|
3,076,351.50
|
|
|
6.29
|
%
|
|
Tokaid
Denpun. Co.
|
|
$
|
2,882,773.68
|
|
|
5.89
|
%
|
|
Yamato
and Traders Co.
|
|
$
|
2,890,676.68
|
|
|
5.91
|
%
|
|
The
Sultan Center CO.P.
|
|
$
|
1,453,985.67
|
|
|
2.97
|
%
|
|
NC
Sogo Kaihatsu Co., Ltd
|
|
$
|
629,290.69
|
|
|
1.29
|
%
|
|
Daiichi
Metax Co.
|
|
$
|
569,136.15
|
|
|
1.16
|
%
|
|
Al
Rabah Trading
|
|
$
|
568,881.64
|
|
|
1.16
|
%
|
|
Korea
New Oriental
|
|
$
|
557,955.37
|
|
|
1.14
|
%
|
|
Total
|
|
$
|
24,800,934.27
|
|
|
50.69
|
%
|
Our
Sales and Marketing Efforts
We
seek
to expand our client base by:
|
1.
|
Direct
sales communications with our larger customers, such as Wal-Mart;
|
|
2.
|
Referrals
from existing customers; and
|
|
3.
|
Participating
in domestic and international food exhibitions and trade
conferences.
|
Domestically,
in 2006, we sold 86.5%
of
our
products directly to our customers with the remaining 13.5%
being
sold through Shandong Loan, a food trading company that we have contracted
with.
Our sales area covers 19 provinces and administrative regions in China and
23
countries globally.
About
59%
of our total export sales are to Japan and South Korea, about 7% of our total
export sales are to the European Union; 33% of our total export sales are to
Asia (outside of Japan and South Korea) and about 1% of our total export sales
are to North America.
Our
export sales destinations include:
|
1.
|
Asian
and Middle Eastern countries including Japan, South Korea, Singapore,
the
Philippines, Malaysia, Kuwait, the United Arab Emirates, Saudi Arabia,
Yemen, Israel, and Qatar;
|
|
2.
|
European
countries, including Belgium, Germany, France, Netherlands, Spain,
and
Sweden; and
|
|
3.
|
North
American countries, including the U.S. and
Canada.
|
Japan
and
South Korea are our largest foreign markets, accounting for approximately 59%
of
our 2006 total exports, followed by Asia (other than Japan or Korea) and
Europe.
We
sell
our products both under the “Lorain” and “Yimeng Lorain” brand and under private
labels. We have not spent a significant amount of capital on advertising in
the
past. However, we plan to commence a branding and advertising strategy in the
second half of 2007 that will reinforce our domestic branding using customer
promotions and media advertising, and establishing international branding by
increasing our market presence, attending more international exhibits and
similar activities.
Our
Competition and Our Market Position
The
overall food market is fragmented. According to USDA, the world’s top 50 food
manufacturers’ shares of packaged food retail sales was less than 30% of the
total in 2003. We do not have a significantly large market share, and are
subject to different competitive conditions in each business division.
Chestnut
Products
The
world
market for chestnut products is highly fragmented. The total world-wide
consumption of chestnuts was around 1 million metric tons in 2004, according
to
the UDSA.
We
compete primarily on the basis of the uniqueness of our products, quality,
price
and market recognition. We utilize proprietary and patented technology in the
production of our chestnut products. We believe that the use of this technology
gives us an advantage over our Chinese competitors by allowing us to produce
chestnut products that are superior in quality and to offer more varieties
of
products than those of our Chinese competitors. We believe that we enjoy cost
advantages over our foreign competitors due to the lower labor and procurement
costs in China.
Our
strongest competitors in the Chestnut product market are Hebei Liyun and
Foodwell (a Korean company).
Convenience
Food Products
The
production and sale of convenience food products is currently only a small
portion of our total production, but we expect convenience foods to be an
important growth area for us in the future.
Convenience
food products market competition is based mostly upon quality and product
variety.
We
use
modern food processing technology, such as nitrogen preservation and self
heating devices, in the production of our convenience food products. Nitrogen
preservation is an innovative technology which has not been widely applied
in
China. With an increasing demand for wholesome, tasty and safety convenience
food we can utilize our established relationship with numerous customers,
especially large supermarket chains, to market our convenience foods. We have
determined that our marketing efforts for convenience food will mainly focus
on
the domestic Chinese market.
The
convenience food market in China is highly fragmented and we do not face
competitive pressure from any single competitor or small group of
competitors.
Frozen,
Canned and Bulk Food Products
Our
frozen, canned and bulk food division was previously a crucial portion of our
business. Despite its historical importance, because of its relatively low
gross
margin, we expect that the contribution of this business sector to our total
revenues will gradually decline.
In
the
frozen, canned and bulk food product market competition is based mostly upon
quality, ability to provide a reliable product supply and customer
relationships.
Our
strongest competitors in the frozen, canned and bulk food products market are
Weitang Langdong, Yuyao Hongji Food Co. Ltd. and YantaiPengshun Food Co.
Ltd.
Competitive
Advantages
We
believe that we have a lower cost and more abundant labor supply than our
international competitors. Labor cost is a large portion of total operating
costs for food companies, so keeping labor cost low provides us with a
competitive advantage over our international peers.
We
seek
to manage our raw material costs by partially self-supplying various raw
materials to our operations. We also locate our production facilities in
locations that are close to our main sources of raw materials used in the
production of our products at those facilities. This emphasis on location
provides us with first-hand market awareness and lower transportation costs.
We
believe this location strategy provides us with an advantage over our
competitors who do not similarly locate their production facilities in the
vicinity of their raw material suppliers.
We
seek
to use modern food processing technology and innovation in our formulations
and
manufacturing processes to create high quality products. We regularly test
our
products with customers to ensure that we are providing high quality products.
We maintain high food safety standards, which satisfy both domestic and
international requirements.
We
offer
a large variety of products, numbering in the hundreds. We are the sole supplier
of some products in China, such as bottom-open chestnuts and chestnut
inner-skin extract. We believe that we are able to provide our customers with
greater selection and a more reliable supply than many of our customers, which
is especially important for our supermarket chain and large wholesaler
customers.
Our
Research and Development
Our
research and development efforts are focused on three objectives:
1.Superior
product safety and quality;
2.The
reduction of operating costs; and
3.
Sustaining growth through the development of new products.
We
have
research and development staff at each of our facilities. In total, about 30
of
our personnel are dedicated to research and development.
We
rely
heavily on customer feedback to assist us in the modification and development
of
our products. We also utilize customer feedback to assist us in the development
of new varieties of products. On average, we add ten to twenty new varieties
to
our product portfolio each year. We also phase out about 3 to 5 products each
year.
The
amount we spent on research and development activities during the fiscal years
ended December 31, 2006, 2005 and 2004 was not a material portion of our total
expenses for those years.
Our
Intellectual Property
Trademarks
We
use
the trademarks “
”
and
“
”on
all
of our domestically sold products and international sales throughout Asia.
Patents
We
do not
have any patented technology. However, we have developed three proprietary
technologies that we have filed patent applications for.
The
first
proprietary technology that we are in the process of patenting relates to the
production of Oden egg packages. Oden is a Japanese style dish consisting of
several ingredients such as boiled eggs, daikon radish, konnyaku and processed
fish cakes stewed in a light, soy-flavored dashi broth. Ingredients vary
according to region and between each household. Our technology relates to the
process we use to control the sterilization of the packages that contain the
Oden eggs and related food products.
The
second technology that we have filed a patent application for relates to the
production of our sweetheart chestnut products, which are preserved chestnut
products. The proprietary technology relates to the process that we use to
distribute the syrup used in the processing of these preserved chestnuts evenly
throughout the chestnuts. The process also enhances the texture and preserves
the natural form of the chestnut.
The
third
technology that we have filed a patent application for relates to the method
and
process that we use to produce an extract from the chestnut’s inner skin. In the
past, the chestnut inner skin had been discarded as a waste product. This method
allows us to produce an extract that can then be sold to other food processors
(all of whom are currently based in Japan) who package and sell the extract
for
use in combination with other foods or drinks.
Our
Employees
As
of
February 28, 2007, we had a total of 1,253 full-time employees and 227 part-time
employees. Among 1,253 full-time employees, 282 of them have signed the
employment contracts with Shandong Lorain, and the remaining have signed their
employment contracts with Linyi Zhifu Labor Service Company, an outside company
that provides employees to meet our staffing needs. We
compensate
the employees of
Linyi
Zhifu Labor Service Company
directly
for the services of the employees rendered to us
,
paying
Linyi Zhifu Labor Service Company
a
service
fee. The following table illustrates the allocation of these personnel (both
direct employees and leased employees) among the various job functions conducted
at our company.
|
Department
|
|
Number
of Employees
|
|
|
Production
|
|
|
1,091
|
|
|
Quality
Control
|
|
|
19
|
|
|
Domestic
Sales
|
|
|
19
|
|
|
Human
Resources
|
|
|
4
|
|
|
Research
and Development
|
|
|
26
|
|
|
International
Sales
|
|
|
25
|
|
|
Finance
|
|
|
15
|
|
|
Sourcing
|
|
|
14
|
|
|
Admin
|
|
|
22
|
|
|
Strategic
planning
|
|
|
4
|
|
|
Storage
and Distribution
|
|
|
12
|
|
|
Trade
Union
|
|
|
2
|
|
|
Total
|
|
|
1,253
|
|
We
believe that our relationship with our employees is good. We compensate our
production line employees by unit produced (piece work) and compensate other
employees by salaries and bonus based on performance. We also provide training
for our staff from time to time to enhance their technical and product knowledge
as well as their knowledge of industry quality standards.
We
have
not experienced any significant problems or disruption to our operations due
to
labor disputes, nor have we experienced any difficulties in recruitment and
retention of experienced staff.
One
of
our Chinese subsidiaries, Shandong Lorain has a trade union which protects
employees’ rights, aims to assist in the fulfillment of its economic objectives,
encourages employee participation in management decisions and assists in
mediating disputes between us and union members.
As
required by applicable Chinese laws, we have entered into employment contracts
with all of our officers, managers and employees.
Our
employees in China participate in a state pension scheme organized by Chinese
municipal and provincial governments. We are required to contribute to the
scheme
at
a rate
of 20%, 19% and 19%
of
the
average monthly salary for the fiscal years ended December 31, 2006, 2005 and
2004, respectively. Most of the personnel that provide labor to our company
are
employed by an outside company. We compensate the employees of that company
directly for the services rendered to us and that company pays the employee’s
contribution to the pension scheme.
In
addition, we are required by Chinese laws to cover employees in China with
various types of social insurance. We have purchased social insurance for all
of
our employees. We are required to contribute to the scheme
at
a rate
of 4%, 4% and 3%
of
the
average monthly salary. As is the case with pension scheme payments, most of
the
personnel that provide labor to our company are employed by an outside company.
We compensate the employees of that company directly for the services rendered
to us and that company pays the employee’s social insurance.
Our
Facilities
All
land
in China is owned by the Chinese government. Individuals and companies are
permitted to acquire rights to use land or land use rights for specific
purposes. In the case of land used for industrial purposes, land use rights
are
granted for a period of up to 50 years. Granted land use rights are transferable
and may be used as security for borrowings and other obligations. We currently
have land use rights to 10 parcels of land with approximately 257,641.9 square
meters in aggregate (excluding 78,670.6 square meters pending land use right
of
Beijing Lorain), consisting of manufacturing facilities, office buildings and
land reserved for future expansion. Our land is located in Junan county,
Shandong Providence and Luotain county, Hubei Providence. We have fully paid
for
these land use rights. We are in the process of acquiring land use rights for
our property in Beijing Providence, and currently occupy such lands pursuant
to
a grant of authority by the government.
We
also
own approximately 54 buildings with approximately 43,137 square meters of space
in the aggregate outside of Beijing. In Beijing we have 6 buildings, totaling
approximately 65,767.24 square meters, are undergoing the application of real
property rights. Some of our real property is subject to liens that are security
for our bank borrowings.
We
currently operate the following manufacturing plants:
Shandong
Lorain operates a manufacturing plant that consists of a deep freezing line
and
two convenience food lines, with capacities of 9,912 and
1,425
metric
tons per line per year each, respectively.
Junan
Hongrun operates a manufacturing plant consisting of a deep freezing line and
three canning lines with capacities of 9,912 and 5,767 metric tons per line
per
year, respectively.
Beijing
Lorain operates a manufacturing plant consisting of a deep freezing line and
four convenience food lines with production capacities of 9,912 and 1,425 metric
tons per line per year each, respectively.
Luotian
Lorain operates a manufacturing plant consisting of a deep freezing line and
a
convenience food line with capacity of 9,912 and 1,425 metric tons per line
per
year each, respectively.
We
also
plan to add additional lines in the future at three of our manufacturing plants,
and to add an additional plant.
We
believe that all our properties have been adequately maintained, are generally
in good condition, and are suitable and adequate for our business
needs.
Regulation
We
are
subject to national and local laws of China, including China’s environmental
laws and regulations. Under the relevant Chinese environmental laws, all
manufacturing enterprises must submit an environmental impact report to the
relevant
environmental protection authority before starting production operations. In
addition, manufacturing enterprises must engage professional environmental
organizations to monitor and report on pollutants and emission regularly. The
main pollutants generated by our plants are solid waste and waste water. We
have
taken the necessary measures to control the discharge of these pollutants.
We
are in material compliance with the Chinese environmental laws and regulations
as of December 31, 2006.
Moreover,
under the relevant PRC Provisions on Sanitation of Food for Export (for Trial
Implementation), unless an exporters products are exempted from inspection,
an
inspection is conducted by PRC’s entry-exit inspection and quarantine
authorities in accordance with the PRC Law on Import and Export Commodity
Inspection. We have not been exempted from inspection, however, we have been
authorized by the relevant authorities to conduct self-inspection of our certain
export products, and all of products that we export have been inspected and
are
qualified for exportation.
Legal
Proceedings
From
time
to time, we may become involved in various lawsuits and legal proceedings that
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have a material
adverse affect on our business, financial condition or operating
results.
RISK
FACTORS
You
should carefully consider the risks described below, which constitute all of
the
material risks facing us. If any of the following risks actually occur, our
business could be harmed. You should also refer to the other information about
us contained in this report, including our financial statements and related
notes.
RISKS
RELATED TO OUR BUSINESS
We
may not be able to obtain sufficient raw materials to satisfy our production
requirements and any decline in the amount or quality of raw materials could
reduce our sales and negatively affect our financial prospects.
In
2006,
we procured approximately 16,181 metric tons of chestnuts and approximately
23,300 metric tons of vegetables and other raw materials from a number of third
party suppliers and produced approximately 220 metric tons of chestnuts and
approximately 1,980 metric tons of vegetables and other raw materials from
our
own agricultural operations. We may have to increase the number of our suppliers
of raw materials and expand our own agricultural operations in the future to
meet growing production demands. We may not be able to locate new suppliers
who
could provide us with sufficient materials to meet our needs and we may not
be
able to expand our own agricultural operations in a timely manner to satisfy
our
needs. Any interruptions to or decline in the amount or quality of our raw
materials supply could materially disrupt our production and adversely affect
our business and financial condition and financial prospects.
The
average price we paid for our raw materials experienced significant fluctuation
during the three years ended December 31, 2004, 2005 and 2006. These price
fluctuations could result in fluctuations in our profit margins and could
materially adversely affect our financial condition.
The
average prices we paid for chestnuts in 2004, 2005 and 2006 were approximately
$805 per metric ton, $884 per metric ton, and $713 per metric ton respectively,
excluding any value added tax assessed on the purchased chestnuts. The prices
that we pay for our raw materials may not be stable in the future. Price changes
may result in unexpected increases in production costs, and we may be unable
to
increase the prices of our products to offset these increased costs and
therefore may suffer a reduction to our profit margins. We do not currently
hedge against changes in our raw material prices.
If
the
costs of raw materials or other costs of production and distribution of our
products increase further, and we are unable to entirely offset these increases
by raising the prices of our products, our profit margins and financial
condition could be adversely affected.
Our
sales and reputation may be affected by product liability claims, litigation,
product recalls, or adverse publicity in relation to our products.
The
sale
of products for human consumption involves an inherent risk of injury to
consumers. We face risks associated with product liability claims, litigation,
or product recalls, if our products cause injury, or become adulterated or
misbranded. Our products are subject to product tampering, and to contamination
risks, such as mold, bacteria, insects and other pests, shell fragments and
off-flavor contamination during the various stages of the procurement,
production, transportation and storage processes. If any of our products were
to
be tampered with, or become tainted in any of these respects and we were unable
to detect this, our products could be subject to product liability claims or
product recalls. Our ability to sell products could be reduced if certain
pesticides, herbicides or other chemicals used by growers have left harmful
residues on portions of the crop or that the crop has been contaminated by
other
agents.
Although
we have never had a product recall in the past, we have experienced product
liability claims that were made by our customers. On average, we experience
and
expect to continue to experience product liability claims in the amount of
approximately $30,000 to $40,000 per year. However, we have no control over
the
amount of claims made in any year and larger claims of product defect or product
liability may be made in the future.
We
would
be liable for the full amount of any damages awarded against us in any product
liability claim. As the insurance industry in China is still in an early stage
of development, business insurance is not readily available in China. To the
extent that we suffer a loss of a type which would normally be covered by
insurance in the United States, such as product liability and general liability
insurance, we would incur significant expenses in both defending any action
and
in paying any claims that result from a settlement or judgment. Product
liability claims and product recalls could have a material adverse effect on
the
demand for our products and on our business goodwill and reputation. Adverse
publicity could result in a loss of consumer confidence in our products.
We
may be unable to manage future rapid growth.
We
have
grown rapidly over the last few years. Our sales increased by 77% from
$27,735,833 in 2004 to $49,560,957 in 2006. The number of product types we
sold
increased from approximately 100 in 2004 to approximately 192 in early 2007.
We
intend to continue to expand the volume and variety of products we offer, as
well as the geographical scope of our sales and production facilities. Our
business growth could place a significant strain on our managerial, operational
and financial resources. Our ability to manage future growth will depend on
our
ability to continue to implement and improve operational, financial and
management information systems on a timely basis and to expand, train, motivate
and manage our workforce. We cannot assure you that our personnel, systems,
procedures and controls will be adequate to support our future growth. Failure
to effectively manage our expansion may lead to increased costs, a decline
in
sales and reduced profitability.
Our
expansion strategy may not prove successful and could adversely affect our
existing business.
Our
growth strategy includes the expansion of our manufacturing operations including
new production lines and agricultural operations. In the past few years, we
have
expanded rapidly. In 2003, Luotian Lorain set up one production line with a
production of 600 metric tons per year, and in 2004, a second production line
with a production of 9,912 metric tons per year. In 2003, Beijing Lorain set
up
one production line with a production of 9,912
metric
tons per year, and in 2004, three additional production lines with a production
of 1,425 metric tons per year per line. In both 2005 and 2006, Shandong Lorain
establish Chestnut planting bases. Beijing Lorain established a Chestnut
planting base in 2005, a sticky corn and sweet corn planting base in 2004 and
pumpkin planting base in 2005. We also plan to expand our sales in China and
internationally. We will need to engage in various forms of promotional and
marketing activities in order to develop branding of our products and increase
our market share in new and existing markets.
The
implementation of this strategy may involve large transactions and present
financial, managerial and operational challenges. We could also experience
financial or other setbacks if any of our growth strategies incur problems
of
which we are not presently aware. We may have difficulty in successfully
expanding the sale of our products in areas that have not traditionally
experienced high levels chestnut consumption due to lack of chestnut
familiarity. If we fail to generate sufficient sales in new markets or increase
our sales in existing markets, we may not be able to recover the production,
distribution, promotional and marketing expenses, as well as administrative
costs, we have incurred in developing such markets.
The
acquisition of other businesses could pose risks to our profitability.
We
may
try to grow through acquisitions in the future. Any proposed acquisition could
result in accounting charges, potentially dilutive issuances of equity
securities, and increased debt and contingent liabilities, any of which could
have a material adverse effect on our existing business and the market price
of
our common stock. Acquisitions, in general, entail many risks, including risks
relating to the failed integration of the acquired operations, diversion of
management’s attention, and the potential loss of key employees of the acquired
organizations. We may be unable to integrate successfully businesses or the
personnel of any business that might be acquired in the future, and our failure
to do so could have a material adverse effect on our business and on the market
price of our common stock.
We
are subject to risks of doing business internationally. If the international
market does not grow as we expect, our business and financial condition may
be
adversely affected.
We
conduct a substantial amount of business with overseas distributors primarily
from Japan, Korea, countries in Asia and western countries. During the year
ended 2004, 2005 and 2006, sales outside China accounted for 45%, 44% and 52%
of
our total sales, respectively. Our international operations are subject to
a
number of inherent risks, including:
|
·
|
chestnut
products may not be widely recognized internationally, especially
in
western countries;
|
|
·
|
local
economic and political conditions, including disruptions in trading
markets;
|
|
·
|
restrictive
foreign governmental actions, including restrictions on transfers
of funds
and trade;
|
|
·
|
protection
measures, including export duties and quotas and customs duties and
tariffs;
|
|
·
|
currency
exchange rate fluctuations; and
|
|
·
|
earthquakes,
tsunamis, floods or other major disasters may limit the imported
food
products.
|
Any
of
the foregoing risks could have a material and adverse effect on our operating
results. As a result, our products and our revenues would be decreased and
we
may need to adjust our market strategy.
We
mainly rely on distributors to sell our products. Any delays in delivery or
poor
handling by distributors and third-party transport operators may affect our
sales and damage our reputation.
In
2006,
we sold over 81% of our products through over 180 distributors. We rely on
these
distributors for the distribution of our products. A significant portion of
our
revenues historically have been derived from a limited number of domestic
supermarkets and international distributors, particularly in our chestnut
processing business. The sales to our five largest customers and overseas
retailers accounted for approximately 27%, 37%, and 43% of our total revenue
in
2004, 2005 and 2006 respectively. The loss of any of these customers and
international distributors or a material decrease in purchases could result
in
decreased sales and adversely impact our revenues.
Additionally,
the distribution service provided by these distributors could be suspended
and
could cause interruption to the supply of our products to overseas retailers
in
the case of unforeseen events. Delivery disruptions may occur for various
reasons beyond our control, including poor handling by distributors or third
party transport operators, transportation bottlenecks, natural disasters and
labor strikes, and could lead to delayed or lost deliveries. Poor handling
by
distributors and third-party transport operators could also result in damage
to
our products. If our products are not delivered to retailers on time, or are
delivered damaged, or our products are contaminated during the stage of
transportation or storage, we would be liable for the compensation, and we
could
lose business and our reputation could be harmed.
The
development and introduction of new products is key to our expansion strategy.
Failure to do so may cause us to lose our competitiveness in the food industry
and may cause our profits to decline.
If
we are
unable to gain market acceptance or significant market share for the new
products we introduce, then we will incur development, production and marketing
costs which we would not be able to recover. We constantly introduce new
packaging and new flavors for our products. For example, we have introduced
15
new products in 2006, and we will be introducing about 20 new products in
2007.
The
success of the new products we introduce depends on our ability to anticipate
the tastes and dietary habits of consumers and to offer products that appeal
to
their preferences. We intend to introduce new product lines including different
flavors, different sizes and packaging. We may not be able to gain market
acceptance or significant market share for our new products. Consumer
preferences change, and any new products that we introduce may fail to meet
the
particular tastes or requirements of consumers, or may be unable to replace
their existing preferences. Our failure to anticipate, identify or react to
these particular tastes or changes could result in reduced demand for our
products, which could in turn cause us to be unable to recover our development,
production and marketing costs, thereby leading to a decline in our
profitability.
We
are dependent on certain key personnel and loss of these key personnel could
have a material adverse effect on our research and development, operations
and
revenue.
The
Lorain Group Companies were founded in 1995 by Mr. Si Chen, our chairman and
chief executive officer. Since then, Mr. Chen and our senior management team
have developed us into a leading food production company. Mr. Chen, together
with other senior management, has been the key driver of our strategy and has
been fundamental to our achievements to date. The successful management of
our
business is, to a considerable extent, dependent on the services of Mr. Chen
and
other senior management. The loss of the services of any key management employee
or failure to recruit a suitable or comparable replacement could have a
significant impact upon our ability to manage our business effectively and
our
business and future growth may be adversely affected.
We
compete for qualified personnel with other food processing companies, food
retailers and research institutions. Intense competition for these personnel
could cause our compensation costs to increase significantly, which could have
a
material adverse effect on our results of operations. Our future success and
ability to grow our business will depend in part on the continued service of
these individuals and our ability to identify, hire and retain additional
qualified personnel. If we are unable to attract and retain qualified employees,
we may be unable to meet our business and financial goals.
We
face increasing competition from both domestic and foreign companies, which
may
affect our market share and profit margins.
The
food
industry in China is fragmented. Our ability to compete against other national
and international enterprises is, to a significant extent, dependent on our
ability to distinguish our products from those of our competitors by providing
large volumes and high quality products at reasonable prices that appeal to
consumers’ tastes and preferences. Some of our competitors may have been in
business longer than we have, may be better established in their markets. Our
current or future competitors may provide products comparable or superior to
those we provide or adapt more quickly than we do to evolving industry trends
or
changing market requirements. Increased competition may result in price
reductions, reduced margins and loss of market share, any of which could
materially adversely affect our profit margins. We cannot assure you that we
will be able to compete effectively against current and future
competitors.
We
may be adversely affected by a change in consumer preferences, which may result
in decreased demand for our products.
Consumer
tastes can change rapidly due to many factors, including shifting consumer
preferences, and spending habits. A general decline in the consumption of our
chestnuts products and other products could occur as a result of a change in
consumer preferences, perceptions and spending habits at any time and future
success will depend partly on our ability to anticipate or adapt to such changes
and to offer, on a timely basis, new products that meet consumer preferences.
Our failure to adapt our products offering to respond to such changes, may
result in reduced demand and lower prices for our products and a decline in
the
market share of our products. Any changes in consumer preferences could result
in lower sales of our products, put pressure on pricing or lead to increased
levels of selling and promotional expenses, resulting in a material adverse
effect on our sales volumes, sales and profits.
An
increase in the cost of energy could affect our
profitability.
Recently,
we have experienced significant increases in energy costs, and energy costs
could continue to rise, which would result in higher distribution, freight
and
other operating costs. Our future operating expenses and margins will be
dependent on our ability to manage the impact of cost increases.
Our
chestnut products and brand names may be subject to counterfeiting or imitation,
which could impact upon our reputation and brand name as well as lead to higher
administrative costs.
While
we
sell our products both under our brand name and under private labels, we regard
brand positioning as the core of our competitive strategy, and intend to
position our "Lorain" and “Yimeng Lorain” brand to promote the consumption of
our products by our customers. We believe our advanced processing technology
makes it difficult for illegal manufacturers to counterfeit our products.
Although we have experienced limited counterfeiting and imitation of our
chestnut products, we cannot guarantee that counterfeiting or imitation of
our
products will not occur in the future or 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, particularly if the
counterfeit or imitation products cause sickness, or injury to consumers. In
addition, counterfeit or imitation products could result in a reduction in
our
market share, a loss of revenues or an increase in our administrative expenses
in respect of detection or prosecution.
We
rely on an outside contractor to provide a majority of our labor.
We
hire
Linyi Zhifu Labor Service Company to provide employees to our production
facilities. During normal production times Linyi Zhifu Labor Service Company
provides about 5 out of every 6 of our production line personnel. During times
of peak production Linyi Zhifu Labor Service Company usually provides the
additional personnel needed to meet the additional production demands which
increases the ratio of Linyi Zhifu Labor Service Company employees to our
employees above the 5 out of every 6 mark. Under our arrangement with Linyi
Zhifu Labor Service Company we pay their employees directly for services
rendered to our Company and we pay Linyi Zhifu Labor Service Company a fee
for
their services related to providing employees to our business. Linyi Zhifu
Labor
Service Company pays for state pension contribution and social insurance for
its
employees.
Should
Linyi Zhifu Labor Service Company be unable continue to provide the number
of
employees we need for our facilities our production could be disrupted. Linyi
Zhifu Labor Service Company could raise their service fees or terminate their
relationship with us in the future which may result in increased production
costs which we may not be able to pass on to our customers.
REGULATORY
RISKS
Government
regulation could increase our costs of production and increase our legal and
regulatory expenditures.
The
food
industry is subject to extensive regulation by Chinese government agencies.
Among other things, these regulations govern the manufacturing, importation,
processing, packaging, storage, exportation, distribution and labeling of our
products. New or amended statutes and regulations, increased production at
our
existing facilities, and our expansion into new operations and jurisdictions
may
require us to obtain new licenses and permits and could require us to change
our
methods of operations at costs that could be substantial. If the relevant
regulatory authorities set standards with which we are unable to comply or
which
increase our production costs, our ability to sell products may be
limited.
Changes
in the existing laws and regulations or additional or stricter laws and
regulations on environmental protection in China may cause us to incur capital
expenditures.
We
carry
on our business in an industry that is subject to PRC environmental protection
laws and regulations. These laws and regulations require enterprises engaged
in
manufacturing and construction that may cause environmental waste to adopt
effective measures to control and properly dispose of waste gases, waste water,
industrial waste, dust and other environmental waste materials, as well as
fee
payments from producers discharging waste substances. Fines may be levied
against producers causing pollution. If failure to comply with such laws or
regulations results in environmental pollution, the administrative department
for environmental protection can levy fines. If the circumstances of the breach
are serious, it is at the discretion of the central government of the PRC
including all governmental subdivisions to cease or close any operation failing
to comply with such laws or regulations. The Chinese government may also change
the existing laws or regulations or impose additional or stricter laws or
regulations, compliance with which may cause us to incur significant capital
expenditures, which we may be unable to pass on to our customers through higher
prices for our products.
Changes
in existing PRC food hygiene laws may cause us to incur additional costs to
comply with the more stringent laws and regulations, which could have an adverse
impact on our financial position.
Manufacturers
in food industry operating in China are subject to compliance with PRC food
hygiene laws and regulations. These food hygiene laws require all enterprises
engaged in the production of chestnut and other various vegetables and fruits
to
obtain a hygiene license for each of their production facilities. They also
set
out hygiene standards with respect to food and food additives, packaging and
containers, information to be disclosed on packaging as well as hygiene
requirements for food production and sites, facilities and equipment used for
the transportation and sale of food. Failure to comply with PRC food hygiene
laws may result in fines, suspension of operations, loss of hygiene licenses
and, in more extreme cases, criminal proceedings against an enterprise and
its
management. Although we are in compliance with current food hygiene laws, in
the
event that the PRC government increases the stringency of such laws, our
production and distribution costs may increase, and we may be unable to pass
these additional costs on to our customers.
FINANCIAL
RISKS
We
are subject to credit risk in respect of account
receivables.
We
offer
credit terms of between 90 to 180 days to most of our international distributors
and between 30 to 120 days for many of our domestic distributors. For each
of
the three years ended December 31, 2004, 2005 and 2006, our third party trade
receivables outstanding were $7,611,531, $7,992,923 and $11,805,229, which
accounted for 16.6%, 14.7%, and 24.8%, of our total assets, respectively. Should
a significant number of our customers fail to settle the account receivables
in
full for any reasons, our financial conditions and profitability could be
adversely effected.
Our
operations are cash intensive, and our business could be adversely affected
if
we fail to maintain sufficient levels of working
capital.
We
spent
a significant amount of cash in our operations, principally to fund our raw
material procurement. Our suppliers, in particular farmers of chestnuts,
vegetables and fruits, and suppliers of packaging materials usually grant us
a
credit period. In turn, we require our customers and distributors to make
payment either prior to or shortly after delivery, although we offer some of
our
long-standing customers credit terms. We generally fund most of our working
capital requirements out of cash flow generated from operations. If we fail
to
generate sufficient sales, or if we suffer decreasing sales to customers as
a
result of failing to offer credit terms, if our suppliers stop to offer us
credit terms, or if we were to experience difficulties in collecting our
accounts receivables, we may not have sufficient cash flow to fund our operating
costs and our business could be adversely affected.
Our
borrowing levels and significant interest payment obligations could limit the
funds we have available for various business
purposes.
We
have
relied mainly on a high level of short-term borrowings to fund a portion of
our
capital requirements, and expect to continue to do so in the future. As of
December 31, 2006, we had total borrowings of $23,248,325. Our ratio of total
indebtedness to total assets stood at 48.88% as at December 31, 2006. As at
December 31, 2006, 94.04%, of such borrowings was due within one year, primarily
from our use of short-term loans from Chinese banks to satisfy our working
capital needs. Historically, we have repaid a significant portion of such
short-term loans by rolling over the loans on an annual basis. In addition,
we
may not have sufficient funds available to pay all of our borrowings upon
maturity. Failure to roll over our short-term borrowings at maturity or to
service our debt could result in the imposition of penalties, including
increases in rates of interest that we pay on our debt and legal actions against
us by our creditors, or even insolvency.
The
discontinuation of any preferential tax treatment or other incentives currently
available to us in the PRC could materially and adversely affect our business,
financial condition and results of operations.
Our
subsidiaries enjoy certain special or preferential tax treatments regarding
foreign enterprise income tax in accordance with the “Income Tax Law of the PRC
for Enterprises with Foreign Investment and Foreign Enterprises” and its
implementing rules. Accordingly, they have been entitled to tax concessions
whereby the profit for the first two financial years beginning with the first
profit-making year (after setting off tax losses carried forward from prior
years) is exempt from income tax in the PRC and the profit for each of the
subsequent three financial years is taxed at 50% of the prevailing tax rates
set
by the relevant tax authorities. However, on March 16, 2007, the PRC’s National
People’s Congress passed a new corporate income tax law, which will be effective
on January 1, 2008. This new corporate income tax unifies the corporate income
tax rate, cost deduction and tax incentive policies for both domestic and
foreign-invested enterprises. According to the new corporate income tax law,
the
applicable corporate income tax rate of our operating subsidiary will be moved
up to a rate of 25% over a five-year grandfather period. We expect the measures
to implement this grandfather period to be enacted by the PRC government in
the
coming months and we will make an assessment of what the impact of the new
unified tax law is expected to be in the grandfather period. The discontinuation
of any such special or preferential tax treatment or other incentives could
have
an adverse affect our business, financial condition and results of
operations.
Under
current PRC tax law, regulations and rulings, dividends from our operations
in
China paid to us (as a foreign legal person) are not currently subject to PRC
income tax. If these distributions become subject to tax in the future, our
net
income would be adversely affected.
RISKS
RELATING TO OUR CORPORATE GOVERNANCE STRUCTURE
The
concentration of ownership of our securities by our controlling stockholder
who
does not participate in the management of our business and who may have
conflicting interests can result in stockholder votes that are not in our best
interests or the best interests of our minority
stockholders.
Mr.
Akazawa, is the record owner of approximately 65.43% of our outstanding voting
securities, giving him a controlling interest in the Company. However, Mr.
Akazawa is not an executive officer or director of the Company and is not a
participant in any way in the day to day affairs of the Company. Mr. Akazawa
may
have little to no knowledge of the details of the Company’s operations and does
not participate in the corporate governance of the Company. To the extent that
Mr. Akazawa does participate as a stockholder in the governance of the Company's
affairs, his interests may be conflicted since he is an affiliate of one of
our
largest customers and he may act in his best interests or in our customer’s best
interest instead of our best interests. Additionally, Mr. Akazawa may act as
if
he has little or no economic interest in the Company in his role as stockholder
since he has granted an option to our sole director and Chief Executive Officer,
Mr. Chen, allowing Mr. Chen to buy 90% of Mr. Akazawa's interest in the Company
at a fixed price at a future time in accordance with the terms of an option
agreement between the two parties. The result of this option agreement is that
Mr. Akazawa has only limited economic benefit if our financial performance
excels as he will have only limited benefit from any upward movement in our
stock price since most of the stock that he currently owns is subject to the
option in favor of Mr. Chen.
We
do not have any independent directors and may be unable to appoint any qualified
independent directors.
We
currently do not have any independent directors. We plan to appoint a number
of
independent directors which will constitute a majority of our board of directors
before our common stock is listed on a national securities exchange, but we
may
not be able to identify independent directors qualified to be on our board
that
are willing to serve on our board.
We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the
Securities and Exchange Commission adopted rules requiring public companies
to
include a report of management on the Company’s internal controls over financial
reporting in their annual reports, including Form 10-K. In addition, the
independent registered public accounting firm auditing a company’s financial
statements must also attest to and report on management’s assessment of the
effectiveness of the Company’s internal controls over financial reporting as
well as the operating effectiveness of the Company’s internal controls. We were
not subject to these requirements for the fiscal year ended December 31, 2006.
Accordingly, we have not evaluated our internal control systems in order to
allow our management to report on, and our independent auditors to attest to,
our internal controls as required by these requirements of SOX 404. Under
current law, we will be subject to these requirements beginning with our annual
report for the fiscal year ending December 31, 2007. We can provide no assurance
that we will comply with all of the requirements imposed thereby. There can
be
no assurance that we will receive a positive attestation from our independent
auditors. In the event we identify significant deficiencies or material
weaknesses in our internal controls that we cannot remediate in a timely manner
or we are unable to receive a positive attestation from our independent auditors
with respect to our internal controls, investors and others may lose confidence
in the reliability of our financial statements.
We
may be exposed to potential risks relating to Lorain Holding’s acquisition of
certain interests in Lorain Group Companies from a British Virgin Islands
company.
Lorain
Holding acquired certain interests in the Lorain Group Companies
from a British Virgin Islands
company
controlled by Mr. Chen. According to a notice promulgated by SAFE in October
2005 (?otice No. 75?, Mr. Chen is required to register with and obtain approvals
from SAFE or its agency in connection with his direct offshore investment
activities before March 31, 2006. Pursuant to the Notice No. 75, if a PRC
shareholder with a direct or indirect stake in an offshore parent company fails
to make the required SAFE registration, the PRC subsidiaries of such offshore
parent company may be prohibited from making distribution of profit to the
offshore parent and from paying the offshore parents proceeds from any
redirection in capital, share transfer or liquidation in respect of the PRC
subsidiaries. Because Mr. Chen did not register with relevant authorities to
disclose his offshore investment before March 31, 2006, it is uncertain whether
it will affect our acquisition of interests in Lorain Group Companies from
this
British Virgin Island company and what types of actions those authorities might
take, including potential action against British Virgin Islands company, Lorain
Holding and the Lorain Group Companies.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Changes
in China’s political or economic situation could harm us and our operating
results.
Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the government could change these
economic reforms or any of the legal systems at any time. This could either
benefit or damage our operations and profitability. Some of the things that
could have this effect are:
|
|
·
|
Level
of government involvement in the
economy;
|
|
|
·
|
Control
of foreign exchange;
|
|
|
·
|
Methods
of allocating resources;
|
|
|
·
|
Balance
of payments position;
|
|
|
·
|
International
trade restrictions; and
|
|
|
·
|
International
conflict.
|
The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways.
For example, state-owned enterprises still constitute a large portion of the
Chinese economy, and weak corporate governance traditions and a lack of flexible
currency exchange policy continue to persist. As a result of these differences,
we may not develop in the same way or at the same rate as might be expected
if
the Chinese economy were similar to those of the OECD member
countries.
Our
business is largely subject to the uncertain legal environment in China and
your
legal protection could be limited.
The
Chinese legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which precedents set in earlier legal
cases are not generally used. The overall effect of legislation enacted over
the
past 20 years has been to enhance the protections afforded to foreign invested
enterprises in China. However, these laws, regulations and legal requirements
are relatively recent and are evolving rapidly, and their interpretation and
enforcement involve uncertainties. These uncertainties could limit the legal
protections available to foreign investors, such as the right of foreign
invested enterprises to hold licenses and permits such as requisite business
licenses. In addition, all of our executive officers and our directors are
residents of China and not of the U.S., and substantially all the assets of
these persons are located outside the U.S. As a result, it could be difficult
for investors to effect service of process in the U.S., or to enforce a judgment
obtained in the U.S. against our Chinese operations and
subsidiaries.
The
Chinese government exerts substantial influence over the manner in which we
must
conduct our business activities.
Only
recently has China permitted provincial and local economic autonomy and private
economic activities. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may
be
harmed by changes in its laws and regulations, including those relating to
taxation, import and export tariffs, environmental regulations, land use rights,
property and other matters. We believe that our operations in China are in
material compliance with all applicable legal and regulatory requirements.
However, the central or local governments of the jurisdictions in which we
operate may impose new, stricter regulations or interpretations of existing
regulations that would require additional expenditures and efforts on our part
to ensure our compliance with such regulations or interpretations.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.
Future
inflation in China may inhibit our ability to conduct business profitably in
China.
In
recent
years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of inflation
in China has been as high as 20.7% and as low as -2.2%. These factors have
led
to the adoption by the Chinese government, from time to time, of various
corrective measures designed to restrict the availability of credit or regulate
growth and contain inflation. High inflation in the future may cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, and thereby harm the market
for
our products. Likewise, negative inflation could have an unfavorable effect
on
our business profitability in China. Negative inflation may cause a period
where
consumers are reluctant to spend, as consumers anticipate lower prices for
products in the future. In the event of negative inflation, the Chinese
government may impose controls on credit and/or prices, or take other actions,
which could inhibit economic activity, harming the market for our
products.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues will be settled in Renminbi and U.S. Dollars, and
any
future restrictions on currency exchanges may limit our ability to use revenue
generated in Renminbi to fund any future business activities outside China
or to
make dividend or other payments in U.S. dollars. Although the Chinese 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 may only
buy, sell or remit foreign currencies after providing valid commercial documents
at those banks in China 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 China, and
companies are required to open and maintain separate foreign exchange accounts
for capital account items. We cannot be certain that the Chinese regulatory
authorities will not impose more stringent restrictions on the convertibility
of
the Renminbi.
We
may be unable to complete a business combination transaction efficiently or
on
favorable terms due to complicated merger and acquisition regulations
implemented on September 8, 2006.
On
September 8, 2006, the PRC Ministry of Commerce, or “MOFCOM,” together with
several other government agencies, promulgated a comprehensive set of
regulations governing the approval process by which a Chinese company may
participate in an acquisition of its assets or its equity interests and by
which
a Chinese company may obtain public trading of its securities on a securities
exchange outside of the PRC. Depending on the structure of the transaction,
these regulations will require the Chinese parties to make a series of
applications and supplemental applications to the governmental agencies. In
some
instances, the application process may require the presentation of economic
data
concerning a transaction, including appraisals of the target business and
evaluations of the acquirer, which are designed to allow the government to
assess the transaction. Governmental approvals will have expiration dates by
which a transaction must be completed and reported to the governmental agencies.
Compliance with the regulations is likely to be more time consuming and
expensive than in the past and the government now can exert more control over
the combination of two businesses. Accordingly, due to these new regulations,
our ability to engage in business combination transactions has become
significantly more complicated, time consuming and expensive and we may not
be
able to negotiate a transaction that is acceptable to our stockholders or
sufficiently protect their interests in a transaction.
The
new
regulations allow PRC government agencies to assess the economic terms of a
business combination transaction. Parties to a business combination transaction
may have to submit to MOFCOM and the other government agencies an appraisal
report, an evaluation report and the acquisition agreement, all of which form
part of the application for approval, depending on the structure of the
transaction. The regulations also prohibit a transaction at an acquisition
price
obviously lower than the appraised value of the Chinese business or assets
and
in certain transaction structures, require that consideration must be paid
within defined periods, generally not in excess of a year.
The
regulations also limit our ability to negotiate various terms of the
acquisition, including aspects of the initial consideration, contingent
consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction
structures involving trusts, nominees and similar entities are prohibited.
Therefore,
such
regulations may impede our ability to
negotiate
and complete a business combination transaction on financial terms which satisfy
our investors and protect our stockholders’ economic interests and we may not be
able to negotiate a business combination transaction on terms favorable to
our
stockholders.
The
value of our securities will be affected by the foreign exchange rate between
U.S. dollars and Renminbi.
The
value
of our common stock will be affected by the foreign exchange rate between U.S.
dollars and Renminbi, and between those currencies and other currencies in
which
our sales may be denominated. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operational needs and should the Renminbi
appreciate against the U.S. dollar at that time, our financial position, the
business of the Company, and the price of our common stock may be harmed.
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 our subsidiaries in China would be
reduced.
Our
strategy to procure raw ingredients supply is to diversify our suppliers both
in
the PRC and overseas. Currently, some of our raw materials and major equipment
are imported. In the event that the U.S. dollars appreciate against Renminbi,
our costs will increase. If we cannot pass the resulting cost increase on to
our
customers, our profitability and operating results will suffer. In addition,
since our sales to international customers grew rapidly, we are subject to
the
risk of foreign currency depreciation.
Our
licenses are subject to governmental control and renewal, failure to obtain
renewal will cause all or part of our operations to be suspended or
terminated.
In
accordance with PRC laws and regulations, we are required to maintain various
licenses and permits in order to operate our business at each of our production
facilities including, without limitation, hygiene permits, and industrial
products production permits. We are required to comply with applicable hygiene
and food safety standards in relation to our production processes. Our premises
and transportation vehicles are subject to regular inspections by the regulatory
authorities for compliance with the Detailed Rules for Administration and
Supervision of Quality and Safety in Food Producing and Processing Enterprises.
Failure to pass these inspections, or the loss of or failure to renew our
licenses and permits, could require us to temporarily or permanently suspend
some or all of our production activities, which could disrupt our operations
and
adversely affect our business.
RISKS
RELATED TO THE MARKET FOR OUR STOCK
Certain
of our stockholders hold a significant percentage of our outstanding voting
securities.
Mr.
Akazawa, is the record owner of approximately 65.43% of our outstanding voting
securities. As a result, he possesses significant influence and can elect a
majority of our board of directors and authorize or prevent proposed significant
corporate transactions. His ownership and control may also have the effect
of
delaying or preventing a future change in control, impeding a merger,
consolidation, takeover or other business combination or discourage a potential
acquirer from making a tender offer.
Our
common stock is quoted on the OTC Bulletin Board which may have an unfavorable
impact on our stock price and liquidity.
Our
common stock is quoted on the OTC Bulletin Board. The OTC Bulletin Board is
a
significantly more limited market than the New York Stock Exchange or NASDAQ
system. The quotation of our shares on the OTC Bulletin Board may result in
a
less liquid market available for existing and potential stockholders to trade
shares of our common stock, could depress the trading price of our common stock
and could have a long-term adverse impact on our ability to raise capital in
the
future.
We
are subject to penny stock regulations and
restrictions.
The
SEC
has adopted regulations which generally define so-called “penny stocks” to be an
equity security that has a market price less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exemptions. As of May
4,
2007, the closing price for our common stock was $.55 per share and, therefore,
it is designated a “penny stock.” As a “penny stock,” our common stock may
become subject to Rule 15g-9 under the Exchange Act of 1934, or the “Penny Stock
Rule.” This rule imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by Rule 15g-9, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser’s written consent to the transaction prior to sale. As a
result, this rule may affect the ability of broker-dealers to sell our
securities and may affect the ability of purchasers to sell any of our
securities in the secondary market.
For
any
transaction involving a penny stock, unless exempt, the rules require delivery,
prior to any transaction in a penny stock, of a disclosure schedule prepared
by
the SEC relating to the penny stock market. Disclosure is also required to
be
made about sales commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market
in
penny stock.
There
can
be no assurance that our common stock will qualify for exemption from the Penny
Stock Rule. In any event, even if our common stock were exempt from the Penny
Stock Rule, we would remain subject to Section 15(b)(6) of the Securities
Exchange Act of 1934, or “Exchange Act”, which gives the SEC the authority to
restrict any person from participating in a distribution of penny stock, if
the
SEC finds that such a restriction would be in the public interest.
Certain
provisions of our Certificate of Incorporation may make it more difficult for
a
third party to effect a change- in-control.
Our
Certificate of Incorporation authorizes our board of directors to issue up
to
5,000,000 shares of preferred stock without stockholder approval. The preferred
stock may be issued in one or more series, the terms of which may be determined
at the time of issuance by the board of directors without further action by
the
stockholders. These terms may include voting rights including the right to
vote
as a series on particular matters, preferences as to dividends and liquidation,
conversion rights and redemption rights provisions. The issuance of any
preferred stock could diminish the rights of holders of our common stock, and
therefore could reduce the value of such common stock. In addition, specific
rights granted to future holders of preferred stock could be used to restrict
our ability to merge with, or sell assets to, a third party. The ability of
the
board of directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a
change-in-control, which in turn could prevent the stockholders from recognizing
a gain in the event that a favorable offer is extended and could materially
and
negatively affect the market price of our common stock.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Overview
This
subsection of MD&A is an overview of the important factors that management
focuses on in evaluating our businesses, financial condition and operating
performance, our overall business strategy and our earnings for the periods
covered.
General
We
are a
Delaware corporation that was incorporated on February 4, 1986 and we are
headquartered in Shandong Province, China. From our inception in 1986 until
May
3, 2007, when we completed a reverse acquisition transaction with Lorain
Holding, we were a blank check company and did not engage in active business
operations other than our search for, and evaluation of, potential business
opportunities for acquisition or participation.
On
May 3,
2007, we completed a reverse acquisition of Lorain Holding through a share
exchange with Lorain Holding’s former stockholder. Upon completion of the
reverse acquisition, Lorain Holding became our wholly-owned direct subsidiary
and we have assumed the business operations and strategy of Lorain Holding
and
its Chinese subsidiaries.
We
are
engaged in the development, manufacture and sale of convenience foods, chestnut
products, and frozen, canned and bulk foods and we generate revenues through
the
sale of our products, and we also make small amounts of revenues from government
grants, sales of scrap and subcontractor fees. We operate through our indirect
Chinese subsidiaries. Our products are sold in 19 provinces and administrative
regions in China and 23 foreign countries.
Acquisition
of Lorain Holding and Our Related Equity Financing
Transaction
Through
the reverse acquisition of Lorain Holding we acquired all of the issued and
outstanding capital stock of Lorain Holding, which became our wholly-owned
subsidiary, and in exchange for that capital stock we issued to the former
stockholder of Lorain Holding, Mr. Hisashi Akazawa, 697,663 shares of our Series
B Voting Convertible Preferred Stock, which shares of preferred stock will
be
converted into 16,307,872 shares of our common stock, immediately following
the
effectiveness of an amendment and restatement of our charter that will, among
other things, increase the number of our authorized shares of common stock
from
20,000,000 to 200,000,000 shares and effectuate a 1-for-32.84 reverse stock
split.
We
expect
to file this amendment and restatement of our Restated Certificate of
Incorporation within the next forty-five days. Upon the consummation of the
reverse acquisition, the former stockholder of Lorain Holding, Mr. Akazawa,
become our controlling stockholder. In connection with the reverse acquisition,
Mr. Akazawa agreed not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any of his shares of our Series B Voting
Convertible Preferred Stock for a period of 12 months from the date of issuance
of such stock.
On
May 3,
2007 Mr. Akazawa, granted an option to Mr. Si Chen, our Chief
Executive Officer, for the purchase of up to 627,897 of his shares of our Series
B Voting Convertible Preferred Stock along with any shares of Common Stock
that
such Series B Preferred Stock may be converted into, pursuant to the terms
of an
Option Agreement, dated as of May 3, 2007, between Mr. Akazawa and Mr. Chen.
Pursuant to the Option Agreement, if Mr. Chen exercises his option to purchase
such shares he will be bound to the lock-up provisions of the Share Exchange
Agreement to the same extent to which Mr. Akazawa is bound as if the Mr. Chen
had been an original party to the Share Exchange Agreement.
Upon
the
closing of the reverse acquisition, Timothy P. Halter, our sole director and
officer, submitted his resignation letter pursuant to which he resigned from
all
offices of Millennium Quest that he held effective immediately and from his
position as our director effective on the tenth day following the mailing by
us
of an information statement to our stockholders that complies with the
requirements of Section 14f-1 of the Securities Exchange Act of 1934. We expect
that Mr. Halter’s resignation will become effective on or about May 19, 2007. Si
Chen was appointed as our director and Chairman at the closing of the reverse
acquisition of Lorain Holding.
Contemporaneous
with the reverse acquisition, we also completed a private placement transaction
in which we issued and sold to accredited investors 299,055.78 shares of our
Series B Voting Convertible Preferred Stock and warrants for the purchase of
up
to an aggregate of 1,398,065 shares of our Common Stock for gross proceeds
of
approximately $19.8 million. These shares of Series B Voting Convertible
Preferred Stock will convert into 6,990,401 shares of our common stock at the
effective time of an amendment and restatement of our Restated Certificate
of
Incorporation that will, among other things, increase the number of shares
of
our authorized common stock from 20,000,000 to 200,000,000 shares and effectuate
a 1-for-32.84 reverse stock split. We have to increase our authorized common
stock so that there will be enough shares of authorized common stock available
for issuance upon conversion of our Series B Voting Convertible Preferred
Stock.
In
connection with the private placement mentioned above, our majority stockholder,
Mr.
Hisashi
Akazawa
,
and our
Chief Executive Officer, Mr. Si Chen, entered into an escrow agreement with
the
private placement investors. Pursuant to the escrow agreement, Mr. Akazawa
and
Mr. Si Chen agreed to certain “make good” provisions. In the make good escrow
agreement, we established minimum after tax net income thresholds of $9.266
million for the fiscal year ending December 31, 2007 and $12.956 million for
the
fiscal year ending December 31, 2008. If the minimum after tax net income
thresholds for the fiscal year 2007 or for the fiscal year 2008 are not
achieved, then the investors will be entitled to receive additional shares
of
our common stock based upon a pre-defined formula agreed to between the
investors and Mr. Akazawa. Mr. Akazawa deposited a total of 302,336 shares
of
our Series B Voting Convertible Preferred Stock, which are convertible into
7,067,104 shares of our common stock after reverse stock split, into escrow
with
Securities Transfer Corporation under the escrow agreement.
In
connection with the Securities Purchase Agreement, we agreed to issue warrants
to Sterne Agee & Leach, Inc. and its potential designee(s) for the purchase
of up to an aggregate of 16,069,594 shares of our common stock (or 489,330
shares on a post-reverse-split basis), which warrants are for a term of
3 years
and have an exercise price of $0.1294153 per share(or $4.25 per share on
a
post-reverse-split basis), and include piggyback registration rights to
register
such shares (the "Warrants").
In
connection with the acquisition of Lorain Holding, on May 3, 2007 we entered
into a cancelled and escrow agreement with HFI, HFG and Securities Transfer
Corporation, whereby HFI and HFG agreed to deposit into escrow 229,227 shares
of
our common stock that they will hold upon conversion of their Series A Voting
Convertible Preferred Stock into common stock (taking into account the
contemplated 1-for-32.84 reverse stock split and the conversion of Series
B
Voting Convertible Preferred Stock into common stock) and agreed that if
we
report, on a consolidated basis, in our Annual Report filed with the U.S.
Securities and Exchange Commission, net income of $12.5 million for fiscal
2008,, HFI and HFG will transfer to us for cancellation such shares in order
to
reduce the ownership of a certain group of stockholders. If this performance
threshold is not met, such shares will be returned to HFI and HFG.
Industry
Wide Factors that are Relevant to Our Business
Management
believes that the rapid growth of China’s economy, will drive demand for our
products. We believe the growth of China’s economy will cause an increased
demand for our products as consumers become busier and busier and increasingly
demand prepared foods which fit into their active lifestyle. With the continuing
growth of the economy, the upcoming Beijing Olympic Games in 2008 and the
Shanghai World Exposition in 2010, management believes that there will be a
large packaged food market in China in the next a few years.
According
to the USDA, as incomes have risen in many countries during the past few
decades, consumers have begun purchasing fewer staples (like rice and wheat)
and
more high-value food items (such as meat, dairy, pasta, and frozen vegetables).
According to USDA, global sales of high-value products have been growing, with
sales increasing by 25% since 1998. Food manufactures and suppliers responding
to the trend have increased their investment in processing facilities or
purchase of high-value foods. The decision of whether locally producing or
purchasing often depends on the nature of products, regulation environment
and
transaction cost comparison. Our products have been developed and are being
developed to cater to this market.
According
to the USDA, packaged foods account for a large share of total food expenditures
among customers in high-income countries and the demand for convenience is
growing. The United States, European Union and Japan account for over 50% of
global sales of packaged foods. In developing countries, market retail trends
also indicate strong growth in sales of packaged foods and demand for
convenience. We hope to increase our production in the future as the demand
for
our product grows.
As
incomes rise and urbanization increases within China, Chinese consumers are
changing their diets and increasing demand for greater quality, convenience
and
safety in food. China’s food market is becoming segmented. The demand for
quality food by high-income households has fueled recent growth in the
availability of such foods for the Chinese retail market. China’s urban per
capita food expenditure in 2004 was RMB 2,710 (approximately $327), up 12%
from
that of 2003 (USDA, Economic Research Report No. ERR-32).
Uncertainties
that Affect our Financial Condition
Our
efforts are currently concentrated on only a small variety of products,
including a large reliance on chestnut products
.
Should
consumers continue to enjoy chestnut products our market will continue to grow.
However, should consumer preferences change and chestnut products somehow become
unpopular, our sales will decrease.
The
chestnut market has been strong in recent years. The strength of the chestnut
market will likely attract new competitors into the market. This increased
competition may affect our pricing and reduce the demand for our chestnut
products.
We
rely
on a steady supply of chestnuts in order to make our chestnut related products.
Should the market for chestnuts change and chestnuts become more expensive
the
cost of our ingredients would increase which would increase the costs of our
production. We may be unable to pass these additional costs onto consumers
in
which case our financial condition would suffer.
Cost
of Raw Materials
While
we
have begun our own agricultural operations to supply a portion of the raw
materials we require for our operations
we
are
still dependent on our suppliers to supply a majority of the raw materials
we
require. Our suppliers generally charge us a price based on the existing
commodities market price for the raw materials. We do not have any control
over
the raw materials commodity market and prices for raw materials may increase
with or without notice for a variety of reasons, including weather patterns,
crop failures and natural disasters. Raw material price increases may result
in
increases in the costs of our operations. While we may be able to pass the
higher costs onto our customers in the form of higher prices for our finished
products, the higher price for our finished products could reduce the volume
of
our sales.
Results
of Operations
The
following tables set forth key components of our results of operations for
the
periods indicated, both in dollars and as a percentage of net
revenues.
|
(in
thousands of U.S. dollars)
|
|
For
the Year Ended on 12/31/06
|
|
For
the Year Ended on 12/31/05
|
|
For
the Year Ended on 12/31/04
|
|
|
Revenue
|
|
$
|
49,561
|
|
$
|
30,195
|
|
$
|
27,736
|
|
|
Cost
of Revenue
|
|
|
(37,423
|
)
|
|
(22,250
|
)
|
|
(21,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
12,138
|
|
$
|
7,945
|
|
$
|
6,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
(1,454
|
)
|
|
(1,089
|
)
|
|
(1,663
|
)
|
|
General
and administrative
|
|
|
(1,909
|
)
|
|
(1,227
|
)
|
|
(1,184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
8,775
|
|
$
|
5,627
|
|
$
|
3,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
Income(Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
Finance
costs, net
|
|
|
(1,851
|
)
|
|
(1,518
|
)
|
|
(1,378
|
)
|
|
Government
grant
|
|
|
476
|
|
|
123
|
|
|
439
|
|
|
Other
income
|
|
|
100
|
|
|
307
|
|
|
174
|
|
|
Other
expense
|
|
|
(53
|
)
|
|
(8
|
)
|
|
(44
|
)
|
|
Income
before taxes
|
|
$
|
7,447
|
|
$
|
4,531
|
|
$
|
2,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
(1,074
|
)
|
|
(325
|
)
|
|
(214
|
)
|
|
Minority
interest
|
|
|
(414
|
)
|
|
(404
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
5,959
|
|
$
|
3,802
|
|
$
|
2,783
|
|
|
|
|
For
the Year Ended on 12/31/06
|
|
For
the Year Ended on 12/31/05
|
|
For
the Year Ended on 12/31/04
|
|
|
Net
Revenue
|
|
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
Cost
of Revenue
|
|
|
75.51
|
%
|
|
73.69
|
%
|
|
76.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
24.49
|
%
|
|
26.31
|
%
|
|
23.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
2.93
|
%
|
|
3.61
|
%
|
|
6.00
|
%
|
|
General
and administrative
|
|
|
3.85
|
%
|
|
4.07
|
%
|
|
4.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
17.71
|
%
|
|
18.64
|
%
|
|
13.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating
Income(Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
Finance
costs, net
|
|
|
-3.74
|
%
|
|
-5.03
|
%
|
|
-4.97
|
%
|
|
Government
grant
|
|
|
0.96
|
%
|
|
0.41
|
%
|
|
.95
|
%
|
|
Other
income
|
|
|
0.20
|
%
|
|
1.02
|
%
|
|
1.26
|
%
|
|
Other
expense
|
|
|
-0.11
|
%
|
|
-0.03
|
%
|
|
-0.16
|
%
|
|
Income
before taxes
|
|
|
15.03
|
%
|
|
15.01
|
%
|
|
10.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
|
|
|
2.17
|
%
|
|
1.07
|
%
|
|
0.77
|
%
|
|
Minority
interest
|
|
|
0.99
|
%
|
|
1.34
|
%
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
12.86
|
%
|
|
13.93
|
%
|
|
10.04
|
%
|
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
Net
Revenue
.
Net
revenues increased $19.4 million, or approximately 64.1% to $49.6 million in
fiscal year 2006 from $30.2 million in fiscal year 2005. This increase was
mainly attributable to the increased market demand for our products
domestically. We put more effort on marketing our products in our domestic
market in fiscal year 2006, resulting in a dramatic increase in domestic sales.
In addition, we increased our attention to selling convenience foods in 2006,
which had a positive impact on revenues.
Cost
of Revenues
.
Our
cost of revenue increased $15.2 million to $37.4 million in fiscal year 2006
from $22.3 million in fiscal year 2005. The increased cost of revenue is mainly
due to the increased sales volume in 2006 compared to 2005. As a percentage
of
revenues, the cost of revenue increased to 75.51% of revenues in fiscal year
2006 from 73.69% of revenues in fiscal year 2005. The decrease of gross margin
was mainly due to the increased sales in domestic market and the diversification
of our products (the gross margin of our products sold in domestic market was
much lower than our exported products). In addition, as our products
diversification development strategy was implemented in 2006, our sales in
convenience food and frozen, canned and bulk food, which have relatively lower
gross margin as compared our chestnut products, has increased
dramatically.
Gross
Profit
.
Our
gross profit increased $4.19 million, or 52.8%, to $12.1 million in fiscal
year
2006 from $7.9 million in fiscal year 2005. Gross margin was 24.5% in fiscal
year 2006, as compared to 26.3% in fiscal year 2005. The gross margin decrease
was due to the increased cost of revenues described above.
Selling
and Marketing Expenses
.
Our
selling and marketing expenses increased $0.36 million, or 33.5%, to $1.5
million in fiscal year 2006 from $1.1 million in fiscal year 2005. The increase
in selling and marketing expenses was primarily attributable to additional
marketing efforts for our products in domestic market in 2006. As a percentage
of revenues, our selling and marketing expenses decreased to 2.9% in fiscal
year
2006 from 3.6% in fiscal year 2005. The percentage decrease is mainly due to
the
decreased transportation costs as a percentage of revenues in 2006 as
transportation costs as a percentage of revenues for the domestic sales are
typically lower than for export sales.
General
and Administrative Expenses
.
Our
general and administrative expenses increased $0.68 million, or 55.5%, to $1.9
million in fiscal year 2006 from $1.2 million in fiscal year 2005. As a
percentage of revenues, the general and administrative expenses decreased to
3.9% in fiscal year 2006 from 4% in fiscal year 2005. This percentage decrease
was primarily attributable to more efficient controls of our general and
administrative expenses.
Financial
Costs.
Our
financial cost mainly refers to our interest expenses, net of the interest
income. Our financial costs increased $0.33 million to $1.9 million in fiscal
year 2006 from $1.52 million in fiscal year 2005. As a percentage of revenue,
the financial cost decreased to 3.7% of total revenue for fiscal year 2006
from
5.03% of total revenue for fiscal year 2005. The dollar increase in financing
cost is mainly attributable to an increase of short term bank loan balances
in
the fiscal year 2006 as compared to fiscal year 2005.
Income
before Tax
.
Income
before taxation increased $2.9 million, or 64.4%, to $7.4 million in fiscal
year
2006 from $4.5 million in fiscal year 2005. Income before taxation as a
percentage of revenues increased to 15.03% in fiscal year 2006 from 15.01%
in
fiscal year 2005. The increase was mainly attributable to the percentage
decreases of financial expenses, selling expenses and general and administrative
expenses in 2006, as compared to the year of 2005.
Income
taxes.
We
incurred income taxes of $1.1 million in fiscal year 2006, an increase of $0.75
million, compared to $0.3 million in fiscal year 2005. We operate through our
three directly or indirectly wholly-owned subsidiaries Junan Hongrun, Luotian
Lorain, and Beijing Lorain and one majority-owned subsidiary Shandong Lorain
of
which we own 80.2% of the equity (directly and indirectly). As approved by
local
tax authority in the PRC, all the four companies were granted a “tax holiday”
that allows them to be exempt from both the national and local income taxes
for
the first two profitable years followed by a 50% tax exemption in the next
three
years. The four companies started to enjoy the preferential tax policy from
2001, 2004, 2006 and 2007 respectively. The table below shows the detailed
income tax rate for the four companies.
|
Income
Tax Rate
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
|
Junan
Hongrun
|
|
|
0
|
%
|
|
0
|
%
|
|
15
|
%
|
|
15
|
%
|
|
15
|
%
|
|
30
|
%
|
|
Luotian
Lorain
|
|
|
33
|
%
|
|
33
|
%
|
|
0
|
%
|
|
0
|
%
|
|
15
|
%
|
|
15
|
%
|
|
Beijing
Lorain
|
|
|
33
|
%
|
|
33
|
%
|
|
33
|
%
|
|
33
|
%(1)
|
|
33
|
%(1)
|
|
33
|
%(1)
|
|
Shandong
Lorain
|
|
|
15
|
%
|
|
15
|
%
|
|
30
|
%
|
|
30
|
%
|
|
30
|
%
|
|
30
|
%
|
(1)
We
are attempting to get a tax holiday on Beijing Lorain that would bring our
tax
rate to 0%, 0% and 15%
for
Beijing Lorain for the tax years to end December 31, 2007, 2008 and
2009.
Minority
Interest.
The
Company holds 80.2% of the equity of its subsidiary Shandong Lorain. Therefore,
in calculating minority interest according to this proportion against the
Shandong Lorain’s historical financial data, the minority interest of the
Company was $0.4 million in 2005 and $0.41 million in 2006.
Net
income.
Net
income increased $2.2 million, or 56.7%, to $5.96 million in fiscal year 2006
from $3.8 million in fiscal year 2005, as a result of the factors described
above.
Year
Ended December 31, 2005 Compared to Year Ended December 31,
2004
Net
Revenues
.
Net
Revenues increased $2.5 million, or 8.9%, to $30.2 million in fiscal year 2005
from $27.7 million in fiscal year 2004. This slight increase was mainly
attributable to the increased market demands for our products in both domestic
market and international markets. On June 2004, one of our former subsidiaries,
Shandong Green Safety Import & Export Co., Ltd (“Green Safety”), a food
trading company was spun off. Based on this fact, the revenues in 2004 in the
above financial statement include the revenues generated by both our company
and
Green Safety, whereas the revenues in 2005 only include our company’s revenue,
not including the revenue generated by Green Safety. Even with the spin-off,
our
company still realized slightly increased revenue in 2005, as a result of a
successful marketing strategy and huge market demand for our products in fiscal
year 2005.
Cost
of Revenue
.
Our
cost of revenue increased $1.2 million to $22.2 million in fiscal year 2005
from
$21.1 million in fiscal year 2004. This increase was mainly due to the increase
in sales volume. As a percentage of revenues, the cost of revenues decreased
to
73.7% in fiscal year 2005 from 76% in fiscal year 2004. The increased gross
margin was mainly attributable to the spin-off of our former subsidiary, Green
Safety. The gross margin for Green Safety was much lower than the gross margin
of our on-going operations. Due to the spin-off of the low gross margin
subsidiary, our gross margin for our company increased in fiscal year 2005.
Gross
Profit
.
Our
gross profit increased $1.3 million to $7.9 million in fiscal year 2005 from
$6.7 million in fiscal year 2004. Gross profit as a percentage of revenues
was
26% in fiscal year 2005, as compared to 24% in fiscal year 2004. Such increase
was due to the changes in cost of revenue described above.
Selling
and Marketing Expenses
.
Our
selling and marketing expenses decreased $0.57 million to $1.1 million in fiscal
year 2005 from $1.7 million in fiscal year 2004. As a percentage of revenues,
our selling and marketing expenses decreased to 3.6% in fiscal year 2005 from
6%
in fiscal year 2004. These decreases were due to additional promotional fees
associated with the new products launched in 2004 (such as the Bottom-up
Chestnut and Nitrogen Preserved Peeled Chestnut) being included in the 2004
numbers.
General
and Administrative Expenses
.
Our
general and administrative expenses increased $0.04 million or 3.7%, to $1.18
million in fiscal year 2005 from $1.22 million in fiscal year 2004. As a
percentage of revenues, general and administrative expenses decreased to 4.07%
in fiscal year 2005 from 4.27% in fiscal year 2004. This percentage decrease
was
primarily attributable to more efficient controls of our general and
administrative expenses.
Financial
costs.
Financial costs increased $0.14 million to $1.52 million in fiscal year 2005
from $1.38 million in fiscal year 2004. As a percentage of revenue, the
financial costs increased to 5.03% in fiscal year 2005 from 4.97% in fiscal
year
2004. The increase was primarily a result of increased use of short term bank
loans.
Income
before Taxation
.
Income
before taxation was $4.5 million in fiscal year 2005, while the income before
taxation was $3 million in fiscal year 2004. The increase can be attributed
to
the reasons discussed above.
Income
taxes
.
We
incurred income tax of $0.32 million in fiscal year 2005, an increase of $0.11
million, compared to $0.21 million in fiscal year 2004.
Minority
Interest.
The
Company holds 80.2% shares of its subsidiary Shandong Lorain. The remaining
19.8% shares were held by Shandong Economic Development Investment Co. Ltd.
Shandong Economic Development Investment Co. Ltd. acquired the 19.8% shares
of
Shandong Lorain in 2005, which results in an allocation to minority interest
of
$0.4 million in 2005.
Net
income.
Net
income was $3.8 million in fiscal year 2005, an increase of $1 million, compared
to the net income of $2.8 million in fiscal year 2004, as a result of the items
previously described.
Liquidity
and Capital Resources
As
of
December 31, 2006, we had cash and cash equivalents of $2.3 million and pledged
deposits $2.5 million, respectively.
Our
trade
accounts receivable balance was $11.8 million as of December 31, 2006, which
was
approximately 23.8% of total revenues. As of December 31, 2005, our trade
accounts receivables balance was $8 million, which was approximately 26.5%
of
total revenues. In 2004, our trade accounts receivable balance was $7.6 million,
which was approximately 27.4% of revenues. The annual trade account receivable
balance as a percentage of sales has decreased for the past 3 years due to
our
implementation of strict policies with regard to collecting
receivables.
The
following table provides detailed information about our net cash flow for all
financial statement periods presented.
Pro
Forma Consolidated Statements of Cash Flows
|
|
|
Years
Ended December,
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
In
thousands of dollars
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
-879
|
|
|
1,754
|
|
|
177
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
-4,152
|
|
|
2,981
|
|
|
4,654
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
-167
|
|
|
3,738
|
|
|
3,939
|
|
|
Net
cash Flow
|
|
|
-5,199
|
|
|
2,511
|
|
|
538
|
|
Operating
Activities:
Net
cash
used by operating activities was $.88 million for the fiscal year ended December
31, 2006 which is an increase of $2.63 million from the $1.75 million net cash
provided by operating activities for the same period in 2005. During 2006,
the
company’s decreased inventories of $3.62 million caused by our efficient
inventories control was more than offset by the decreased accounts and other
payables of $10.22 million, which generated negative cash flows from operating
activities.
Net
cash
provided by operating activities was $1.75 million in fiscal year 2005, and
the
net cash provided by operating activities was $0.18 million in fiscal year
2004.
The increase of net cash provided by operating activities was mainly due to
the
increased sales and increased minority interest in the fiscal year 2005. The
increased sales and increased minority interest during 2005 was partially offset
by the increased accounts and other receivable of $1.59 million and the
decreased accounts and other payables of $3.06 million, which resulted in the
increase of $1.57million of net cash provided by operations in 2005 as compared
to the net cash provided by operations in 2004.
Investing
Activities:
Our
main
uses of cash for investing activities are payments for the acquisition of plant
and equipment, restricted cash pledged as deposit for bankers’ acceptance bills,
investment in securities and payment of cost of lease prepayment.
Net
cash
used in investing activities in the fiscal year ended December 31, 2006 was
$4.15 million, which is an increase of $1.17 million from net cash used in
investing activities of $2.98 million in the same period of 2005. Such increase
was primarily due to a $3.11 million payment for the purchase of plant and
equipment and $1.41 million payment of cost of lease prepayments.
Net
cash
used in investing activities in fiscal year 2005 was $2.98 million, while the
net cash used in investing activities in fiscal year 2004 was $4.65 million.
Such decrease was primarily due to the deceased payments for the purchase of
plant and equipment in 2005. The payment for purchase of plant and equipment
in
2005 was $1.76 million, which is a decrease of $2.19.8 million from the payments
for the purchase of plant and equipment of $3.85 in 2004.
Financing
Activities:
Net
cash
used in financing activities for the fiscal ended December 31, 2006 totaled
$0.17 million, which is an increase of $3.91 million from the net cash provided
by financing activities of $3.74 million in the same period of 2005. Such
increase was mainly due to the decrease in bank borrowings, net of repayment
in
the fiscal year 2006.
Net
cash
provided by financing activities in fiscal year 2005 totaled $3.74million,
while
the net cash provided by financing activities in fiscal year 2004 was $3.94
million. The net cash in fiscal year 2004 was mainly provided by the net
proceeds of $3.94 million from the new bank loans in 2004.
We
believe that we maintain a good relationship with many banks. As of December
31,
2006, the amounts and maturity dates for our bank loans were as
follows.
|
Short-term
Bank Loan
|
|
Dec
31, 2006
|
|
Dec
31, 2006
|
|
Maturity
Date
|
|
|
Bank
|
|
RMB
|
|
USD
|
|
|
|
|
Junan
County Agriculture Bank
|
|
|
200,000.00
|
|
$
|
25,584
|
|
|
1-19-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
17,500.00
|
|
$
|
2,239
|
|
|
6-29-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
17,500.00
|
|
$
|
2,239
|
|
|
6-29-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
4,000,000.00
|
|
$
|
511,673
|
|
|
1-10-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
3,700,000.00
|
|
$
|
473,297
|
|
|
2-6-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
36,000.00
|
|
$
|
4,605
|
|
|
2-5-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
800,000.00
|
|
$
|
102,335
|
|
|
5-30-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
2,000,000.00
|
|
$
|
255,836
|
|
|
6-29-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
2,530,000.00
|
|
$
|
323,633
|
|
|
3-5-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
1,200,000.00
|
|
$
|
153,502
|
|
|
3-12-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
3,170,000.00
|
|
$
|
405,500
|
|
|
3-26-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
220,000.00
|
|
$
|
28,142
|
|
|
10-09-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
4,500,000.00
|
|
$
|
575,632
|
|
|
10-30-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
2,000,000.00
|
|
$
|
255,836
|
|
|
11-2-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
5,100,000.00
|
|
$
|
652,382
|
|
|
11-15-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
900,000.00
|
|
$
|
115,126
|
|
|
5-12-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
300,000.00
|
|
$
|
38,375
|
|
|
5-12-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
1,130,000.00
|
|
$
|
144,547
|
|
|
2-4-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
1,850,000.00
|
|
$
|
236,649
|
|
|
2-4-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
3,600,000.00
|
|
$
|
460,505
|
|
|
12-5-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
3,800,000.00
|
|
$
|
486,089
|
|
|
12-5-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
60,000.00
|
|
$
|
7,675
|
|
|
1-10-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
300,000.00
|
|
$
|
38,375
|
|
|
1-10-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
2,000,000.00
|
|
$
|
255,836
|
|
|
2-22-2007
|
|
|
Junan
County Construction Bank
|
|
|
3,000,000.00
|
|
$
|
383,754
|
|
|
5-9-2007
|
|
|
Junan
County Construction Bank
|
|
|
2,566,117.32
|
|
$
|
328,253
|
|
|
1-11-2007
|
|
|
Junan
County Construction Bank
|
|
|
3,000,000.00
|
|
$
|
383,754
|
|
|
8-31-2007
|
|
|
Junan
County Construction Bank
|
|
|
2,510,000.00
|
|
$
|
321,075
|
|
|
9-7-2007
|
|
|
Junan
County Construction Bank
|
|
|
791,030.00
|
|
$
|
101,187
|
|
|
1-10-2007
|
|
|
Junan
County Construction Bank
|
|
|
2,601,031.71
|
|
$
|
332,719
|
|
|
1-13-2007
|
|
|
Junan
County Construction Bank
|
|
|
5,420,000.00
|
|
$
|
693,316
|
|
|
1-30-2007
|
|
|
Junan
County Construction Bank
|
|
|
1,900,000.00
|
|
$
|
243,044
|
|
|
1-20-2007
|
|
|
Junan
County Construction Bank
|
|
|
1,716,418.00
|
|
$
|
219,561
|
|
|
1-20-2007
|
|
|
Junan
County Construction Bank
|
|
|
4,364.36
|
|
$
|
558
|
|
|
1-10-2007
|
|
|
Junan
County Construction Bank
|
|
|
4,000,000.00
|
|
$
|
511,673
|
|
|
1-11-2007
|
|
|
Junan
County Industrial and Commercial Bank
|
|
|
7,500,000.00
|
|
$
|
959,386
|
|
|
1-23-2007
|
|
|
Junan
County Industrial and Commercial Bank
|
|
|
1,700,000.00
|
|
$
|
217,461
|
|
|
12-15-2007
|
|
|
Junan
County Industrial and Commercial Bank
|
|
|
4,740,000.00
|
|
$
|
606,332
|
|
|
12-10-2007
|
|
|
Junan
County Industrial and Commercial Bank
|
|
|
5,530,000.00
|
|
$
|
707,387
|
|
|
11-15-2007
|
|
|
Junan
County Agricultural Financial Institution
|
|
|
420,000.00
|
|
$
|
53,726
|
|
|
5-22-2007
|
|
|
Junan
County Agricultural Financial Institution
|
|
|
100,000.00
|
|
$
|
12,792
|
|
|
1-13-2007
|
|
|
Junan
County Agricultural Financial Institution
|
|
|
900,000.00
|
|
$
|
115,126
|
|
|
1-22-2007
|
|
|
Junan
County Construction Bank
|
|
|
598,796.85
|
|
$
|
76,597
|
|
|
1-28-2007
|
|
|
Junan
County Construction Bank
|
|
|
20,665.76
|
|
$
|
2,644
|
|
|
3-1-2007
|
|
|
Junan
County Agriculture Bank
|
|
|
1,870,000.00
|
|
$
|
239,207
|
|
|
5-15-2007
|
|
|
Linyi
Commercial Bank, Yintong Branch
|
|
|
2,400,000.00
|
|
$
|
307,004
|
|
|
10-20-2007
|
|
|
China
Industrial and Commercial Bank, Junan Branch
|
|
|
3,710,000.00
|
|
$
|
474,576
|
|
|
4-26-2007
|
|
|
Agricultural
Development Bank, Junan Branch
|
|
|
5,500,000.00
|
|
$
|
703,550
|
|
|
9-4-2007
|
|
|
Agricultural
Development Bank, Junan Branch
|
|
|
4,500,000.00
|
|
$
|
575,632
|
|
|
7-19-2007
|
|
|
China
Agricultural Bank, Junan Branch
|
|
|
6,000,000.00
|
|
$
|
767,509
|
|
|
3-16-2007
|
|
|
China
Agricultural Bank, Junan Branch
|
|
|
2,440,000.00
|
|
$
|
312,120
|
|
|
1-31-2007
|
|
|
China
Agricultural Bank, Junan Branch
|
|
|
910,000.00
|
|
$
|
116,406
|
|
|
1-11-2007
|
|
|
Linyi
Commercial Bank,Yintong Branch
|
|
|
4,800,000.00
|
|
$
|
614,007
|
|
|
1-16-2007
|
|
|
Linyi
Commercial Bank,Yintong Branch
|
|
|
4,500,000.00
|
|
$
|
575,632
|
|
|
1-9-2007
|
|
|
Linyi
Commercial Bank,Yintong Branch
|
|
|
1,500,000.00
|
|
$
|
191,877
|
|
|
11-29-2007
|
|
|
China’s
Industrial and Commercial Bank Linyi Branch
|
|
|
8,350,000.00
|
|
$
|
1,068,116
|
|
|
3-22-2007
|
|
|
Linyi
Construction Bank
|
|
|
2,447,261.59
|
|
$
|
313,049
|
|
|
1-19-2007
|
|
|
China
Agricultural Bank, Junan Branch
|
|
|
33,333.33
|
|
$
|
4,264
|
|
|
7-20-2007
|
|
|
China
Agricultural Bank, Junan Branch
|
|
|
18,544.64
|
|
$
|
2,372
|
|
|
3-22-2007
|
|
|
Beijing
Agricultural Commercial Bank, Shilipu Branch
|
|
|
14,850,000.00
|
|
$
|
1,899,584
|
|
|
9-27-2007
|
|
|
Beijing
Agricultural Commercial Bank, Shilipu Branch
|
|
|
5,000,000.00
|
|
$
|
639,591
|
|
|
9-26-2007
|
|
|
Beijing
Bank, Xuezhi Branch
|
|
|
2,000,000.00
|
|
$
|
255,836
|
|
|
7-18-2007
|
|
|
China
Agricultural Bank, Luotian County Square Branch
|
|
|
5,000,000.00
|
|
$
|
639,591
|
|
|
9-5-2007
|
|
|
China
Agricultural Bank, Luotian County Square Branch
|
|
|
2,600,000.00
|
|
$
|
332,587
|
|
|
9-15-2008
|
|
|
Total
Short-term Bank Loan
|
|
|
170,878,563.56
|
|
$
|
21,858,467
|
|
|
|
|
On
May 3,
2007, through a private placement, we raised approximately $19.8 million in
gross proceeds, which left us with approximately $18 million in net proceeds
after the deduction of offering expenses in the amount of approximately $ 1.8
million. We plan to use part of the proceeds to build new production lines
and
purchase new equipment for the expansion of our production capacity. This
financing resulted in an increase of our net cash flow and a decrease of our
asset/liability ratio and financial risks.
Our
material capital expenditure requirements for the remaining period of fiscal
year 2007 are approximately $12 million,
which
will be used for the purposes of the updating and expansion of our production
lines, equipment and facilities. In addition, we expect that we will need to
borrow an additional $2.25 million for working capital (to maintain our business
operations) for the remainder of 2007 (the amount does not include existing
borrowings which will be rolled over into new loans). We expect that amount
to
be raised through bank loans. From April 1, 2007 to March 31, 2008, we have
$16.3 million in bank loans that will mature. We plan to replace these loans
with new banks loan in the same amount.
We
believe that our currently available working capital after receiving the
aggregate proceeds of Lorain’s capital raising activities, the credit facilities
referred to above and the expected additional credit facility should be adequate
to sustain our operations at our current levels through at least the next twelve
months.
Obligations
Under Material Contracts
Below
is
a table setting forth our contractual obligations as of December 31, 2006:
Payments
in thousands of U.S. dollars
|
|
|
Total
|
|
Less
than one year
|
|
1-3
years
|
|
3-5
years
|
|
More
than 5 years
|
|
|
Long
term debt obligations
|
|
|
1,384
|
|
|
5
|
|
|
1,384
|
|
|
0
|
|
|
0
|
|
|
Capital
Lease obligations
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Operating
lease obligations
|
|
|
1,825
|
|
|
64
|
|
|
128
|
|
|
128
|
|
|
1,505
|
|
|
Purchase
obligations
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Other
Long-term Liabilities Reflected on Registrant’s Balance Sheet under
GAAP
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Total
|
|
|
3,214
|
|
|
69
|
|
|
1,512
|
|
|
128
|
|
|
1,505
|
|
Below
is
a brief summary of the payment obligations under materials contracts to which
we
are a party.
On
September 28, 2006, our subsidiary Beijing Green Foodstuff Co., Ltd.
enter into a credit facility agreement with the
Shilibao
Branch of Beijing Rural Commercial Bank Co., Ltd.
,
for a
loan in the principal amount of $1,903,846. The company has returned the amount
of $ 5,117 and the balance due is $1,384,741. The interest rate for this loan
is
0.765 % and the loan has a maturity date of September 27, 2007.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures
of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
|
·
|
Method
of Accounting --
We
maintain our general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements
and
notes are representations of management. Accounting policies adopted
by us
conform to generally accepted accounting principles in the United
States
of America and have been consistently applied in the presentation
of
financial statements, which are compiled on the accrual basis of
accounting.
|
|
·
|
Use
of estimates --
The
preparation of the financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Management
makes these estimates using the best information available at the
time the
estimates are made; however actual results could differ materially
from
those estimates.
|
|
·
|
Principles
of consolidation --
The
consolidated financial statements are presented in US Dollars and
include
the accounts of the Company and its commonly controlled entity. All
significant inter-company balances and transactions are eliminated
in
combination.
|
As
of
December 31, 2006, the particulars of the commonly controlled entities are
as
follows:
|
Name
of company
|
|
Place
of incorporation
|
|
Attributable
equity interest %
|
|
Registered
capital
|
|
|
Shandong
Green Foodstuff CO.,LTD.
|
|
|
PRC
|
|
|
80.2
|
%
|
|
RMB
100,860,000
|
|
|
Luotian
Green Foodstuff CO.,LTD.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
10,000,000
|
|
|
Junan
Hongrun Foodstuff CO.,LTD.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
19,000,000
|
|
|
Beijing
Green Foodstuff CO.,LTD.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
10,000,000
|
|
Accounting
for the Impairment of Long-Lived Assets -- The long-lived assets held and used
by us are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. It is
reasonably possible that these assets could become impaired as a result of
technology or other industry changes. Determination of recoverability of assets
to be held and used is by comparing the carrying amount of an asset to future
net undiscounted cash flows to be generated by the assets.
If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
During
the reporting years, there was no impairment loss.
Revenue
recognition --
Our
revenue recognition policies are in compliance with Staff Accounting
Bulletin
(SAB) 104. Sales revenue is recognized at the date of shipment to customers
when
a formal arrangement exists, the price is fixed or determinable, the delivery
is
completed, we have no other significant obligations and collectibility is
reasonably assured. Payments received before all of the relevant criteria for
revenue recognition are satisfied are recorded as unearned revenue.
Our
revenue consists of invoiced value of goods, net of a value-added tax (VAT).
No
product return or sales discount allowance is made as products delivered and
accepted by customers are normally not returnable and sales discount is normally
not granted after products are delivered.
Recent
accounting pronouncements
In
July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those fiscal
year.
In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108, the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods, based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values
of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.
The
management of the Company does not anticipate that the adoption of these three
standards will have a material impact on these consolidated financial
statements.
Seasonality
Our
operating results and operating cash flows historically have been subject to
seasonal variations. Our raw materials are mostly fresh agricultural products.
Therefore, we are subject to production seasonality by product, though we are
able to maintain overall year-round production. Specifically, the main
processing season for chestnut products is from the latter half of August to
the
next January. During the busy season, our chestnut production lines are running
with full capacity. Other than this period, we still maintain a small amount
of
chestnut production by using frozen chestnuts. However, this pattern may change,
as a result of new market opportunities or new product
introductions.
Off-Balance
Sheet Arrangements
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest
Rate Risk
We
are
exposed to interest rate risk primarily with respect to our short-term bank
loans. Although the interest rates are fixed for the terms of the loans, the
terms are typically 12 months and interest rates are subject to change upon
renewal. Since April 28, 2006, China People’s Bank has increased the interest
rate of RMB bank loans with a term of 6 months or less by 0.27%, and loans
with
a term of 6 to 12 months by 0.54%. The new interest rates are 5.67% and 6.39%
for RMB bank loans with a term 6 months or less and loans with a term of 6-12
months, respectively. The change in interest rates has no impact on our bank
loans that were made before April 28, 2006. A hypothetical 1.0% increase in
the
annual interest rates for all of our credit facilities at December 31, 2006
would decrease net income before provision for income taxes by approximately
$230,000 for the six months ended December 31, 2006. Management monitors the
banks’ interest rates in conjunction with our cash requirements to determine the
appropriate level of debt balances relative to other sources of funds. We have
not entered into any hedging transactions in an effort to reduce our exposure
to
interest rate risk.
Foreign
Exchange Risk
While
our
reporting currency is the U.S. Dollar, all of our consolidated revenues and
consolidated costs and expenses are denominated in Renminbi. All of our assets
are denominated in RMB except for cash. As a result, we are exposed to foreign
exchange risk as our revenues and results of operations may be affected by
fluctuations in the exchange rate between U.S. Dollars and RMB. If the RMB
depreciates against the U.S. Dollar, the value of our RMB revenues, earnings
and
assets as expressed in our U.S. Dollar financial statements will decline. We
have not entered into any hedging transactions in an effort to reduce our
exposure to foreign exchange risk.
Inflation
Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net revenues, if the
selling prices of our products do not increase with these increased costs.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding beneficial ownership of our
voting stock as of May 8, 2007 (i) by each person who is known by us to
beneficially own more than 5% of any class of our voting stock; (ii) by each
of
our officers and directors; and (iii) by all of our officers and directors
as a
group.
Unless
otherwise specified, the address of each of the persons set forth below is
in
care of Lorain International, Beihuan Zhong Road, Junan County, Shandong, China
276600.
|
|
|
|
|
Shares
Beneficially Owned
1
|
|
|
|
|
|
|
Common
Stock
2
|
|
Series
A Voting Convertible Preferred Stock
3
|
|
Series
B Voting Convertible Preferred Stock
4
|
|
%
Total
|
|
|
Name
& Address of Beneficial Owner
|
|
|
|
Shares
|
|
%
of Class
|
|
Shares
|
|
%
of Class
|
|
Shares
|
|
%
of Class
|
|
Voting
Power
5
|
|
|
Officers
and Directors
|
|
|
Si
Chen
6
|
|
|
CEO
and Secretary
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
627,897
|
|
|
63.00
|
%
|
|
58.89
|
%
|
|
Xiaodong
Zhou
|
|
|
President
and COO
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
*
|
|
|
Huanxiang
Sheng
|
|
|
CFO
and Treasurer
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
*
|
|
|
Timothy
P. Halter
7
12890
Hill Top Road Argyle, TX 76226
|
|
|
Director
|
|
|
0
|
|
|
*
|
|
|
100,000
|
|
|
100
|
%
|
|
0
|
|
|
*
|
|
|
5.24
|
%
|
|
All
Officers and Directors as a group (4 persons named above)
|
|
|
|
|
|
0
|
|
|
*
|
|
|
100,000
|
|
|
100
|
%
|
|
627,897
|
|
|
63.00
|
%
|
|
64.13
|
%
|
|
5%
Security Holder
|
|
|
Hisashi
Akazawa
|
|
|
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
697,663
|
|
|
70.00
|
%
|
|
65.43
|
%
|
|
Jeffrey
L. Feinberg
c/o
JLF Asset Management, LLC
8
2775
Via De La Valle, Suite 204
Del
Mar, CA 92014
|
|
|
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
68,027.21
|
|
|
6.83
|
%
|
|
6.39
|
%
|
|
Jayhawk
Private Equity Fund, L.P.
5410
West 61st Place, Suite 100
Mission,
KS 66205
|
|
|
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
56,886.92
|
|
|
5.71
|
%
|
|
5.34
|
%
|
|
Kent
C. McCartthy
9
5410
West 61st Place, Suite 100
Mission,
KS 66205
|
|
|
|
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
60,468.63
|
|
|
6.07
|
%
|
|
5.68
|
%
|
|
Halter
Financial Investments, L.P.
12890
Hill Top Road Argyle, TX 76226
|
|
|
|
|
|
0
|
|
|
*
|
|
|
50,000
|
|
|
50
|
%
|
|
0
|
|
|
*
|
|
|
2.52
|
%
|
|
Halter
Financial Group, L.P.
12890
Hill Top Road Argyle, TX 76226
|
|
|
|
|
|
0
|
|
|
*
|
|
|
50,000
|
|
|
50
|
%
|
|
0
|
|
|
*
|
|
|
2.72
|
%
|
|
David
Brigante
10
12890
Hill Top Road Argyle, TX 76226
|
|
|
|
|
|
0
|
|
|
*
|
|
|
100,000
|
|
|
100
|
%
|
|
0
|
|
|
*
|
|
|
5.24
|
%
|
|
George
Diamond
11
12890
Hill Top Road Argyle, TX 76226
|
|
|
|
|
|
0
|
|
|
*
|
|
|
100,000
|
|
|
100
|
%
|
|
0
|
|
|
*
|
|
|
5.24
|
%
|
|
Marat
Rosenberg
12
12890
Hill Top Road Argyle, TX 76226
|
|
|
|
|
|
0
|
|
|
*
|
|
|
100,000
|
|
|
100
|
%
|
|
0
|
|
|
*
|
|
|
5.24
|
%
|
|
Dimitri
W. Cocorinis
1200
South Bonneville Drive
Salt
Lake City, UT 84108
|
|
|
|
|
|
1,486,925
|
|
|
14.15
|
%
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
*
|
|
|
Terry
Cononelos
4089
Mount Olympus Way
Salt
Lake City, UT 84124
|
|
|
|
|
|
1,875,456
|
|
|
17.85
|
%
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
*
|
|
|
Heritage
Management Consultants, Inc.
101
Watersedge
Hilton
Head Island, SC, 29928
|
|
|
|
|
|
1,642,000
|
|
|
15.63
|
%
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
*
|
|
|
Chunhua
Xiong
Floor
7, Room 702
128
Prinsep Street,
Singapore
188647
|
|
|
|
|
|
4,105,000
|
|
|
39.06
|
%
|
|
0
|
|
|
*
|
|
|
0
|
|
|
*
|
|
|
*
|
|
*
Less
than 1%
1
Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Each of the
beneficial owners listed above has direct ownership of and sole voting power
and
investment power with respect to the shares of our common stock. For each
Beneficial Owner above, any options exercisable within 60 days have been
included in the denominator.
2
A
total
of 10,508,643 shares of our Common Stock are considered to be outstanding
pursuant to SEC Rule 13d-3(d)(1).
3
Shares
of
Series A Voting Convertible Preferred Stock, which are convertible into shares
of our common stock on the basis of one share of Series A Voting Convertible
Preferred Stock for 428.56 shares of common stock. Holders of Series A Preferred
Stock vote with the holders of Common Stock on all matters on an as converted
to
common stock basis. Each share of Series A Preferred Stock is entitled to 428.56
votes per share whereas each share of common stock is entitled to one vote
per
share. It is expected that all Series A Voting Convertible Preferred Stock
will
be converted into our common stock immediately following the filing of an
amendment and restatement of our Certificate of Incorporation that will, among
other things, effect a 1-for-32.84 reverse stock split. A total of 100,000
shares of our Series A Voting Convertible Preferred Stock are considered to
be
outstanding pursuant to SEC Rule 13d-3(d)(1).
4
Shares
of
Series B Voting Convertible Preferred Stock will be converted into shares of
our
common stock on the basis of one share of Series B Voting Convertible Preferred
Stock for 23.375 shares of our common stock upon the effectiveness of our
planned 1-for-32.84 reverse stock split. Holders of Series B Voting Convertible
Preferred Stock vote with the holders of common stock on all matters on an
as
converted to common stock basis. A total of 996,718.78 shares of our Series
B
Voting Convertible Preferred Stock are considered to be outstanding pursuant
to
SEC Rule 13d-3(d)(1).
5
Percentage
total voting power represents voting power with respect to all shares of our
common stock, Series A Voting Convertible Preferred Stock and Series B Voting
Convertible Preferred Stock, as a single class.
6
Mr.
Akazawa has granted Mr. Chen the right to purchase a total of 627,867 shares
of
his Series B Voting Convertible Preferred Stock in accordance with the terms
of
an option agreement between Mr. Akazawa and Mr. Chen.
7
Includes
48,000 shares owned by Halter Financial Investments, L.P. (“HFI”) and 52,000
shares owned by Halter Fincial Group, L.P. (“HFG”). TPH, L.P. is a limited
partner of both HFI and HFG, of which TPH GP, LLC is the sole general partner,
of which Timothy P. Halter is the sole member.
8
Includes
29,811.04 shares owned by JLF Partners I, LP, 2,101.28 shares owned by JLF
Partners II, LP and 36,114.89 shares owned by JLF Offshore Fund, Ltd. Jeffrey
L.
Feinberg is the managing member of JLF Asset Management, LLC, which serves
as
the management company and/or investment manager to JLF Partners I, LP, JLF
Partners II, LP and JLF Offshore Fund, Ltd.
9
Includes
56,886.92 shares owned by Jayhawk Private Equity Fund, L.P. and 3,581.71 shares
owned by Jayhawk Private Equity Co-Invest Fund, L.P. Kent McCarthy is the
Managing Member of Jayhawk Capital Management LLC, which is the General Partner
of Jayhawk Private Equity GP, LP, which is the General Partner of both Jayhawk
Private Equity Fund, L.P. and Jayhawk Private Equity Co-Invest Fund,
L.P.
10
Includes
48,000 shares owned by HFI and 52,000 shares owned by HFG. Bellfield Capital,
L.P. is a limited partner of both HFI and HFG, of which Bellfield Capital
Management, LLC is the sole general partner of which David Brigante is the
sole
member.
11
Includes
48,000 shares owned by HFI and 52,000 shares owned by HFG. Colhurst Capital,
L.P. is a limited partner of both HFI and HFG, of which Colhurst Capital GP,
LLC
is the sole general partner of which George L. Diamond is the sole member.
12
Includes
48,000 shares owned by HFI and 52,000 shares owned by HFG. Rivergreen Capital,
L.L.C. is a limited partner of both HFI and HFG, of which Marat Rosenberg is
the
sole member.
DIRECTORS
AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The
following sets forth the name and position of each of our current executive
officers and directors.
|
Name
|
|
Age
|
|
Position
|
|
Timothy
P. Halter
(1)
|
|
40
|
|
Director
|
|
|
|
|
|
|
|
Si
Chen
|
|
44
|
|
Director,
Chief Executive Officer and Secretary
|
|
|
|
|
|
|
|
Xiaodong
Zhou
|
|
36
|
|
President
and Chief Operating Officer
|
|
|
|
|
|
|
|
Huanxiang
Sheng
|
|
36
|
|
Chief
Financial Officer and Treasurer
|
(1)
Former President, Secretary, Treasurer, Chief Executive Officer and Chief
Financial Officer prior to
May
3,
2007
and
current director until the 10
th
day
following the mailing of an information statement complying with Rule 14f-1
of
the Securities Exchange Act.
Timothy
P. Halter
.
Timothy
P. Halter, age 40, has been the president and the sole stockholder of Halter
Financial Group, Inc., a Dallas, Texas based consulting firm specializing in
the
area of mergers, acquisitions and corporate finance, since 1995. Mr. Halter
currently serves as a director of the following public companies: DXP
Enterprises, Inc. (a Texas corporation), Nevstar Corporation (a Nevada
corporation), Point Acquisition Corporation (a Nevada corporation), Marketing
Acquisition Corporation (a Nevada corporation), BTHC VI, Inc. (a Delaware
corporation), BTHC VII, Inc. (a Delaware corporation), BTHC VIII, Inc. (a
Delaware corporation), and BTHC X, Inc. (a Delaware corporation).
Mr. Halter will devote as much of his time to the Company’s business
affairs as may be necessary to implement its business plan.
Si
Chen.
Mr.
Chen
became a director and our Chief Executive Officer and Secretary on May 3, 2007
when we completed our reverse acquisition of Lorain Holding
.
Mr.
Chen is the founder of the Lorain Group Companies and served as the chairman
of
the Lorain Group Companies at all times since their founding and until the
Lorain Group Companies were acquired in August, 2006. After the acquisition
in
August, 2006, Mr. Chen served as a director of Shandong Lorain until the reverse
acquisition of Lorain Holding. He established Shandong Lorain in 1995. Before
establishing our business, he worked for the county government and was
responsible for the local agricultural economic development. Since 1995, Mr.
Chen has been in charge of our strategic decisions and operational management.
Xiaodong
Zhou
.
Mr.
Zhou
became our President and Chief Operating Officer on May 3, 2007 when we
completed our reverse acquisition of Lorain Holding. Mr. Zhou joined the Lorain
Group Companies in 1995 as a manager. He has been the CEO of the Lorain Group
Companies since 2000. Before he joined the Lorain Group Companies, he worked
for
the county government as an economic official.
Huanxiang
Sheng
.
Mr.
Sheng
became our Chief Financial Officer and Treasurer on May 3, 2007 when we
completed our reverse acquisition of Lorain Holding. Mr. Sheng has been the
chief financial officer of the Lorain Group Companies since August 2004. He
has
16-years of experience in corporate accounting and finance. Before joining
our
company, he served as the chief executive officer and chief financial officer
of
Linyi Jiangxin Steel Co., Ltd, a steel manufacturer, from 2002 until 2004.
Between 1990 and 2001, he worked in the accounting department of Shandong Gold
Group, a gold mining company
Directors
are elected until their successors are duly elected and qualified.
Board
Composition and Committees
The
board
of directors is currently composed of two persons, Mr. Timothy P.
Halter and Mr. Si Chen. Mr. Halter has submitted his resignation as the sole
director of the Company, which will become effective on the
10
th
day
following the mailing of an information statement complying with Rule 14f-1
of
the Securities Exchange Act.
We
currently do not have standing audit, nominating or compensation committees,
although we may form such committees in the future as the membership of the
board of directors increases. Since we do not currently have an audit committee,
we do not have an audit committee financial expert. Our board of directors
handles the functions that would otherwise be handled by an audit committee.
Upon the establishment of an audit committee, the board of directors will
determine whether any of the directors qualify as an audit committee financial
expert.
We
have
not implemented a process for stockholders to send communications to the board
of directors because we have not had significant operations until recently.
We
intend to establish a reporting mechanism as soon as practicable.
Director
Compensation
Historically,
we have not paid our directors fees for attending scheduled and special meetings
of our board of directors. In the future, we may adopt a policy of paying
independent directors a fee for their attendance at board and committee
meetings. We do reimburse our directors for reasonable travel expenses related
to attendance at board of director meetings.
Family
Relationships
There
are
no family relationships among our director or officers.
Code
of Ethics
On
April
30, 2007, our board of directors adopted a new code of ethics that applies
to
our director and all of our officers and employees, including our principal
executive officer, principal financial officer, and principal accounting
officer. The new code addresses, among other things, honesty and ethical
conduct, conflicts of interest, compliance with laws, regulations and policies,
including disclosure requirements under the federal securities laws,
confidentiality, trading on inside information, and reporting of violations
of
the code. A copy of the Code of Ethics has been filed as Exhibit 14 to this
report.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Overview
The
following is a discussion of our program for compensating our named executive
officers and director. Currently, we do not have a compensation committee,
and
as such, our board of directors is responsible for determining the compensation
of our named executive officers.
Compensation
Program Objectives and Philosophy
The
primary goals of our policy of executive compensation are to attract and retain
the most talented and dedicated executives possible, to assure that our
executives are compensated effectively in a manner consistent with our strategy
and competitive practice and to align executives
compensation
with the achievement of our short- and long-term business objectives
.
The
board
of directors considers a variety of factors in determining compensation of
executives, including their particular background and circumstances, such as
their training and prior relevant work experience, their success in attracting
and retaining savvy and technically proficient managers and employees,
increasing our revenues, broadening our product line offerings, managing our
costs and otherwise helping to lead our company through a period of rapid
growth.
In
the
near future, we expect that our board of directors will form a compensation
committee charged with the oversight of executive compensation plans, policies
and programs of our company and with the full authority to determine and approve
the compensation of our chief executive officer and make recommendations with
respect to the compensation of our other executive officers. We expect that
our
compensation committee will continue to follow the general approach to executive
compensation that we have followed to date, rewarding superior individual and
company performance with commensurate cash compensation.
Elements
of Compensation
Our
compensation program for the named executive officers consists of two elements:
base salary and bonus. The base salary we provide is intended to equitably
compensate the named executive officers based upon their level of
responsibility, complexity and importance of role, leadership and growth
potential, and experience. We offer bonuses as a vehicle by which the named
executive officers can earn additional compensation depending on individual,
business unit and Company performance. The Company did not provide any other
type of compensation to our named executive officers in 2006.
Base
Salary
.
Our
named executive officers receive base salaries commensurate with their roles
and
responsibilities. Subject to any applicable employment agreements, base salaries
and subsequent adjustments, if any, are reviewed and approved by our board
of
directors annually, based on an informal review of relevant market data and
each
executive’s performance for the prior year, as well as each executive’s
experience, expertise and position. The base salaries paid to our named
executive officers in 2006 are reflected in the Summary Compensation Table
below.
Incentive
Bonus
.
Our
named executive officers are eligible for an annual performance-based cash
bonus
in accordance with the Company’s unwritten incentive bonus plan. We provide this
bonus opportunity as a way to attract and retain highly skilled and experienced
executive officers and to motivate them to achieve annual corporate,
departmental and individual goals which consist of various revenue, cost and
operational targets established by the board of directors. The bonus amounts
are
determined following the end of the fiscal year based on our performance and
the
performance of our executives. The bonus amounts paid to our named executive
officers in 2006 are reflected in the Summary Compensation Table
below.
Stock-Based
Awards under the Equity Incentive Plan
.
Historically,
we have not granted equity awards as a component of compensation, and we
presently do not have an equity-based incentive program. In the future, we
will
likely adopt and establish an equity incentive plan pursuant to which equity
awards may be granted to eligible employees, including each of our named
executive officers, if our board of directors determines that it is in the
best
interest of Lorain Holding and our stockholders to do so.
Retirement
Benefits
Currently,
we do not provide any company sponsored retirement benefits to any employee,
including the named executive officers.
Perquisites
Historically,
we have provided certain of our named executive officers with minimal
perquisites and other personal benefits. We do not view perquisites as a
significant element of our compensation structure, but do believe that
perquisites can be useful in attracting, motivating and retaining the executive
talent for which we compete. It is expected that our historical practices
regarding perquisites will continue and will be subject to periodic review
by
our by our board of directors.
SUMMARY
COMPENSATION TABLE
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the following persons for services
performed for us and our subsidiaries during 2006 in all capacities. No
executive officers received compensation of $100,000 or more in
2006.
|
Name
and Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards ($)
|
|
Option
Awards ($)
|
|
Non-
Equity
Incentive Plan Compensation Earnings ($)
|
|
Non-
qualified
Deferred Compensation Earnings ($)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
|
Dimitri
Cocorinis, former Director and CEO (1)
|
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
1,500
|
(2)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terry
Cononelos, former Director, Secretary, Treasurer and CFO
(3)
|
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
1,500
|
(2)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hisashi
Akazawa (4)
|
|
|
2006
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Si
Chen, principal executive officer (5)
|
|
|
2006
|
|
|
6,300
|
|
|
50,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huanxiang
Sheng, CFO and Treasurer (6)
|
|
|
2006
|
|
|
12,308
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
(1)
|
Mr.
Cocorinis served as our chief executive officer from 1994 until his
resignation on April 12, 2007.
At
such time, Timothy P. Halter became our chief executive
officer.
|
|
|
(2)
|
On
February 17, 2006, our board of directors approved the issuance of
150,000
shares of our common stock each to Dimitri Cocorinis and Terry Cononelos,
who were officers of Millennium Quest. The issuance of this stock
was
authorized in consideration of services rendered by Messrs. Cocorinis
and
Cononelos to Millennium Quest. The transaction was valued at $1,500
per
officer ($0.01 per share) in accordance with FAS-123R.
|
|
|
(3)
|
Mr.
Cononelos served as our chief financial officer from 1994 until his
resignation on
April
5, 2007.
|
|
|
(4)
|
Mr.
Hisahsi Akazawa served as the chairman and CEO or Lorain Holding
from the
time of formation of Lorain Holding in August, 2006 until the completion
of the reverse acquisition of Lorain Holding on May 3,
2007.
|
|
|
(5)
|
On
May 3, 2007, we acquired Lorain Holding in a reverse acquisition
transaction that was structured as a share exchange and in connection
with
that transaction, Mr. Chen
became
our chief executive officer and a director
.
Prior to the effective date of the reverse acquisition, Mr. Chen
served
the Lorain Group Companies as a director of one of its subsidiaries,
Shandong Lorain. Prior to Lorain Holdings acquiring the Lorain Group
Companies in August, 2006, Mr. Chen served as the chairman and principal
executive officer of the Lorain Group Companies. The annual, long
term and
other compensation shown in this table includes the amount Mr. Chen
received in 2006 from the Lorain Group
Companies.
|
|
|
(6)
|
On
May 3, 2007, we acquired Lorain Holding in a reverse acquisition
transaction that was structured as a share exchange and in connection
with
that transaction, Mr. Huanxiang Sheng
became
our chief financial officer. Prior to the effective date of the reverse
acquisition, Mr. Huanxiang Sheng served the Lorain Group Companies
as
chief financial officer of our subsidiary, Shandong Lorain. Prior
to
Lorain Holdings acquiring the Lorain Group Companies in August, 2006,
Mr.
Sheng served as the chief financial officer of the Lorain Group Companies.
The annual, long term and other compensation shown in this table
includes
the amount Mr. Huanxiang Sheng received in 2006 from the Lorain Group
Companies.
|
Bonuses
and Deferred Compensation
We
do not
have any bonus, deferred compensation or retirement plan. We do not have a
compensation committee. All decisions regarding compensation are determined
by
our entire board of directors.
Stock
Option and Stock Appreciation Rights
We
do not
currently have a stock option plan or stock appreciation rights plan. No stock
options or stock appreciation rights were awarded during the fiscal year ended
December 31, 2006.
Director
Compensation
No
cash
compensation or other compensation was paid to our director for services as
a
director during the fiscal year ended December 31, 2006 and we have no standard
arrangement pursuant to which any director is compensated for services as a
director.
Employment
Agreements
Our
subsidiary, Shandong Lorain, has employment agreements with the following three
executive officers:
Mr.
Si Chen
- our
CEO’s employment agreement with Shandong Lorain became effective as of March 2,
2005. Mr. Chen is an employee-at-will of Shandong Lorain.
Mr.
Xiandong Zhou
- our
COO’s employment agreement with Shandong Lorain became effective as of July 2,
2002. Mr. Zhou is an employee-at-will of Shandong Lorain.
Mr.
Huanxianian Sheng
- our
CFO’s employment agreement with Shandong Lorain became effective as of December
7, 2004. Mr. Sheng is an employee-at-will of Shandong Lorain.
Each
of
the employment agreements provide that the executives will be provided cash
compensation. The employment agreements provide that ten thousand RMB
(approximately $1250) will be paid to the non-breaching party if there is a
breach of contract. The employment agreements do not provide any change in
control or severance benefits to the executives, and we do not have any separate
change-in-control agreements with any of our executive officers.
Indemnification
of Directors and Executive Officers and Limitation of
Liability
Our
bylaws provide for the indemnification of our present and prior directors and
officers or any person who may have served at our request as a director or
officer of another corporation in which we own shares of capital stock or of
which we are a creditor, against expenses actually and necessarily incurred
by
them in connection with the defense of any actions, suits or proceedings in
which they, or any of them, are made parties, or a party, by reason of being
or
having been director(s) or officer(s) of us or of such other corporation, in
the
absence of negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which
we
may be unable to recoup.
Insofar
as indemnification by us for liabilities arising under the Exchange Act may
be
permitted to our directors, officers and controlling persons pursuant to
provisions of the Certificate of Incorporation and Bylaws, or otherwise, we
have
been advised that in the opinion of the SEC, such indemnification is against
public policy and is, therefore, unenforceable. In the event that a claim for
indemnification by such director, officer or controlling person of us in the
successful defense of any action, suit or proceeding is asserted by such
director, officer or controlling person in connection with the securities being
offered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed in the Exchange Act and will be governed by the final adjudication
of
such issue.
At
the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such
indemnification.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On
May 3,
2007, we consummated the transactions contemplated by a share exchange agreement
with the owners of the issued and outstanding capital stock of Lorain Holding.
Pursuant to the share exchange agreement, we acquired 100% of the outstanding
capital stock of Lorain Holding in exchange for 697,663 shares of our Series
B
Voting Convertible Preferred Stock, which shares of preferred stock will be
converted into 16,307,872 shares of our common stock when an amendment to our
certificate of incorporation increasing the total authorized shares and
effectuating a reverse stock split becomes effective. As a result of this
transaction, Mr. Akazawa, a Japanese citizen, became the beneficial owner of
approximately 65.43% of our outstanding capital stock.
On
April
10, 2007, we completed the sale of an aggregate of 100,000 restricted shares
of
our Series A Preferred Stock to HFI for a cash purchase price of $455,000
pursuant to a Stock Purchase Agreement entered into between us and HFI dated
as
of April 5, 2007. The Series A Preferred Stock is entitled to 428.56 votes
per share and represents approximately 90% of the voting control of the Company
as of the date of such acquisition. The transaction resulted in a change
in
control of the Company. HFI used its own funds to acquire the Series A
Preferred Stock which is convertible into Common Stock at the option of the
holder at any time on or after the earliest to occur of: (a) September 30,
2007;
(b) the date on which we complete a business combination with a corporation
or
business entity with current business operations; or (c) the date such
conversion is approved by our board of directors. The Preferred Stock is
also
convertible at our option upon five days advance notice to the
holder.
On
May 3,
2007 we entered into a cancellation and escrow agreement with HFI, HFG and
Securities Transfer Corporation, whereby HFI and HFG agreed to deposit into
escrow 229,227 shares of our common stock that they will hold upon conversion
of
their Series A Voting Convertible Preferred Stock into common stock (taking
into
account the contemplated 1-for-32.84 reverse stock split and the conversion
of
Series B Voting Convertible Preferred Stock into common stock) and agreed
that
if we report, on a consolidated basis, in our Annual Report filed with the
U.S.
Securities and Exchange Commission, net income of $12.5 million for fiscal
2008,
HFI and HFG will transfer to us for cancellation such shares in order to
reduce
the ownership of a certain group of stockholders. If this performance threshold
is not met, such shares will be returned to HFI and HFG. Our director Timothy
P.
Halter is the Chairman of both HFI and HFG.
On
February 14, 2007 our subsidiary Shandong Lorain entered into a financial
advisory agreement with HFG International, Limited, a Hong Kong corporation,
whereby HFG agreed to provide certain financial advisory and consulting services
in implementing a restructuring plan, advising us on matters related to a
capital raising transaction and facilitating Lorain Holding’s going public
transaction. In consideration for these services, HFG International, Limited
was
paid a fee of $450,000 upon the closing of the going public transaction.
Our
director Timothy P. Halter is the principal stockholder and the chief executive
officer of HFG International, Limited.
On
February 17, 2006, our board of directors approved the issuance of 150,000
shares of our common stock each to Dimitri Cocorinis and Terry Cononelos, our
former officers, or a total of 300,000 shares of common stock. The issuance
of
this stock was authorized in consideration of services rendered by Messrs.
Cocorinis and Cononelos to Millennium Quest. The transaction was valued at
$3,000 ($0.01 per share).
On
or
about February 1, 2006, C&C Investment Partnership, a partnership owned by
Messrs. Cocorinis and Cononelos, loaned the Company the sum of $20,000, to
cover
business operations and outstanding payables. The loan was repayable, with
interest at 7% per annum, on or before August 1, 2006 or the date on which
the
Company entered into a merger, reorganization or acquisition transaction,
whichever occurred first. At the time of this loan the board of directors of
the
Company consisted of Messrs. Cocorinis and Cononelos, so this transaction cannot
be considered the result of arms’ length negotiations. On August 11, 2006,
C&C Investment Partnership agreed to extend the due date of this note for an
additional 120 days. Pursuant to a Settlement and Stock Issuance Agreement
dated
on or about April 5, 2007, C&C Investment Partnership agreed to accept
2,500,000 shares of restricted common stock in the Company in payment and
satisfaction of all amounts owed to C&C Investment Partnership by the
Company.
DESCRIPTION
OF SECURITIES
Common
Stock
We
are
authorized to issue up to 20,000,000 shares of common stock, par value $0.001
per share.
Each
outstanding share of common stock entitles the holder thereof to one vote per
share on all matters. Our bylaws provide that the persons receiving the greatest
number of votes shall be the directors. Stockholders do not have preemptive
rights to purchase shares in any future issuance of our common stock. Upon
our
liquidation, dissolution or winding up, and after payment of creditors and
preferred stockholders, if any, our assets will be divided pro-rata on a
share-for-share basis among the holders of the shares of common
stock.
The
holders of shares of our common stock are entitled to dividends out of funds
legally available when and as declared by our board of directors. Pursuant
to a
Preferred Stock Purchase Agreement with Halter Financial Investments, L.P.,
dated April 5, 2007, we paid a special cash dividend in the aggregate amount
of
$415,000, or $0.18 per share, to holders of common stock outstanding on April
16, 2007. Other than this special dividend, our board of directors has never
declared a dividend and does not anticipate declaring a dividend in the
foreseeable future. Should we decide in the future to pay dividends, as a
holding company, our ability to do so and meet other obligations depends upon
the receipt of dividends or other payments from our operating subsidiaries
and
other holdings and investments. In addition, our operating subsidiaries, from
time to time, may be subject to restrictions on their ability to make
distributions to us, including as a result of restrictive covenants in loan
agreements, restrictions on the conversion of local currency into U.S. dollars
or other hard currency and other regulatory restrictions. In the event of our
liquidation, dissolution or winding up, holders of our common stock are entitled
to receive, ratably, the net assets available to stockholders after payment
of
all creditors.
All
of
the issued and outstanding shares of our common stock are duly authorized,
validly issued, fully paid and non-assessable. To the extent that additional
shares of our common stock are issued, the relative interests of existing
stockholders will be diluted.
We
have
obtained the written consent of a majority in interest of our stockholders
approving an amendment and restatement of our Restated Certificate of
Incorporation that, among other things, increases our authorized common stock
from 20 million to 200 million shares and effectuates a 1 for 32.84 reverse
stock split of our common stock. We expect to file this amendment with the
Delaware Secretary of State within 45 days. We must comply with the requirements
of Regulation 14C of the Securities Exchange Act of 1934, before we file such
amendment.
Preferred
Stock
We
are
authorized to issue 5,000,000 shares of preferred stock. We may issue shares
of
preferred stock in one or more classes or series within a class as may be
determined by our board of directors, who may establish the number of shares
to
be included in each class or series, may fix the designation, powers,
preferences and rights of the shares of each such class or series and any
qualifications, limitations or restrictions thereof. Any preferred stock so
issued by the board of directors may rank senior to the common stock with
respect to the payment of dividends or amounts upon liquidation, dissolution
or
winding up of us, or both. Moreover, under certain circumstances, the issuance
of preferred stock or the existence of the un-issued preferred stock might
tend
to discourage or render more difficult a merger or other change in
control.
Series
A Voting Convertible Preferred Stock
As
of May
3, 2007, we have 100,000 shares of Series A Voting Convertible Preferred Stock
issued and outstanding, which are owned by Halter Financial Investments, L.P.
and Halter Financial Group, L.P. Each share of Series A Voting Convertible
Preferred Stock is entitled to 428.56 votes and can be converted into 428.56
shares of our common stock. We expect that the 100,000 shares of Series A Voting
Convertible Preferred Stock will be converted 1,304,992 shares of common stock
upon the effectiveness of a 1-for-32.84 reverse stock split which is expected
to
occur immediately following the filing of an amendment and restatement of our
Restated Certificate of Incorporation in or about June 2007. The issuance of
preferred stock while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of our outstanding voting
stock.
Series
B Voting Convertible Preferred Stock
On
May 3,
2007, in connection with the reverse acquisition of Lorain Holding, we issued
697,663 shares of our Series B Voting Convertible Preferred Stock to holders
of
capital stock of Lorain Holding in exchange for all issued and outstanding
share
of capital stock of Lorain Holding. On May 3, 2007, we also completed a private
placement pursuant to which we issued and sold to certain accredited investors
299,055.78 shares of our Series B Voting Convertible Preferred Stock for $19.8
million. As a result, as of May 8, 2007 we have 996,718.78 shares of Series
B
Voting Convertible Preferred Stock issued and outstanding.
The
shares of Series B Voting Convertible Preferred Stock vote on all matters
together with all other classes of stock on an as-converted to common stock
basis. Holders of Series B Convertible Preferred Stock have protective class
voting veto rights on matters, such as business combination transactions,
payment of dividends, the issuance of other classes of stock with senior rights,
changes to our charter documents and stock redemptions. Shares of Series B
Voting Convertible Stock have a senior liquidation payment preference in the
event of a liquidation or sale of the company. Shares of Series B Voting
Convertible Preferred Stock will be automatically converted into common stock
at
the rate of 23.375 shares of common stock for each share of Series B Voting
Convertible Preferred Stock on the date we file an amendment and restatement
of
our Restated Certificate of Incorporation that will, among other things, effect
a 1-for-32.84 reverse stock split. Adjustments to the conversion ratio of the
Series B Voting Convertible Preferred Stock are made upon events such as stock
dividends, stock splits and recapitalizations.
Warrants
We
have
granted a group of accredited investors three-year warrants to purchase
1,398,065 shares of our Common Stock exercisable at $4.25 per share. The
number
of underlying shares and the stated exercise price reflect the contemplated
1-for-32.84 reverse stock split of our outstanding common stock.
We
have
agreed to issue warrants to Sterne Agee & Leach, Inc. and its potential
designee(s), for the purchase of up to an aggregate of
16,069,594
shares of our common stock (or 489,330 shares on a post-reverse-split basis),
which warrants are for a term of 3 years and have an exercise price of
$0.1294153 per share (or $4.25 per share on a post-reverse-split basis),
and
include piggyback registration rights to register such shares.
The
exercise price of the foregoing warrants was determined based on the offering
price of our common stock sold in the private placement transaction completed
on
May 3, 2007.
Transfer
Agent and Registrar
Our
independent stock transfer agent is Progressive Transfer, Inc. Their mailing
address is 1981 East Holladay Blvd., Salt Lake City, UT 84117. Their phone
number is (801) 272-9294.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
Reference
is made to the disclosure set forth under Item 4.01 of this report, which
disclosure is incorporated herein by reference.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock is quoted on the Electronic Bulletin Board maintained by the
National Association of Securities Dealers, Inc. under the symbol “MLQT.OB” but
has not been traded in the Over-The-Counter market except on a limited and
sporadic basis. The CUSIP number is 600375109.
The
following table sets forth, for the periods indicated, the high and low bid
prices of our common stock. These prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
|
|
|
Closing
Bid Prices
(1)
|
|
|
|
|
High
|
|
Low
|
|
|
TYD
Through March, 2007
|
|
|
|
|
|
|
|
|
1
st
Fiscal Quarter (1/1/07-3/31/07)
|
|
|
1.10
|
|
|
1.10
|
|
|
Fiscal
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
1
st
Fiscal Quarter (1/1/06-3/31/06)
|
|
|
1.05
|
|
|
1.05
|
|
|
2
nd
Fiscal Quarter (4/1/06-6/30/06)
|
|
|
1.05
|
|
|
1.05
|
|
|
3
rd
Fiscal Quarter (7/1/06-9/30/06)
|
|
|
1.05
|
|
|
1.05
|
|
|
4
th
Fiscal Quarter (10/1/06-12/31/06)
|
|
|
1.10
|
|
|
1.10
|
|
|
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
1
st
Fiscal Quarter (1/1/05-3/31/05)
|
|
|
N/A
|
|
|
N/A
|
|
|
2
nd
Fiscal Quarter (4/1/05-6/30/05)
|
|
|
N/A
|
|
|
N/A
|
|
|
3
rd
Fiscal Quarter (7/1/05-9/30/05)
|
|
|
N/A
|
|
|
N/A
|
|
|
4
th
Fiscal Quarter (10/1/05-12/31/05)
|
|
|
N/A
|
|
|
N/A
|
|
(1)
The
above
tables set forth the range of high and low closing bid prices per share of
our
common stock as reported by www.quotemedia.com for the periods
indicated.
Reports
to Stockholders
We
plan
to furnish our stockholders with an annual report for each fiscal year ending
December 31 containing financial statements audited by our independent certified
public accountants. We intend to comply with the periodic reporting requirements
of the Exchange Act.
Approximate
Number of Holders of Our Common Stock
On
May 7,
2007, there are approximately 155 stockholders of record of our Common Stock.
Dividends
Pursuant
to a Preferred Stock Purchase Agreement with Halter Financial Investments,
L.P.,
dated April 5, 2007, we paid a special cash dividend in the aggregate amount
of
$415,000, or $0.18 per share, to holders of common stock outstanding on April
16, 2007. Other than noted above, we have
never
declared or paid cash dividends. Any future decisions regarding dividends will
be made by our board of directors. We currently intend to retain and use any
future earnings for the development and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.
RESENT
SALE OF UNREGISTERED SECURITIES
Reference
is made to the disclosure set forth under Item 3.02 of this report, which
disclosure is incorporated by reference into this section.
ITEM
3.02
UNREGISTERED
SALES OF EQUITY SECURITIES
On
May 3,
2007, we consummated the transactions contemplated the Share Exchange Agreement
with the owners of the issued and outstanding capital stock of Lorain Holding.
Pursuant to the Share Exchange Agreement, we acquired 100% of the outstanding
capital stock of Lorain Holding in exchange for 697,663 shares of our Series
B
Voting Convertible Preferred Stock, which shares of our preferred stock will
be
converted into 16,307,872 shares of our common stock when an amendment and
restatement of our Restated Certificate of Incorporation increasing the total
authorized shares and effectuating a reverse stock split becomes effective.
As a
result of this transaction, Mr. Akazawa, a Japanese citizen, became the
beneficial owner of approximately 65.43% of our outstanding capital
stock.
On
April
10, 2007, we completed the sale of an aggregate of 100,000 restricted shares
of
our Series A Voting Convertible Preferred Stock to Halter Financial Investments,
L.P. (the “Purchaser”) for a cash purchase price of $455,000 pursuant to the
Stock Purchase Agreement entered into between us and the Purchaser and dated
as
of April 5, 2007. We reported the signing of the Stock Purchase Agreement in
our
Annual Report on Form 10-KSB filed with the Commission on April 9, 2007 and
the
Stock Purchase Agreement was included as an exhibit to such report. The
Preferred Stock is entitled to 428.56 votes per share and represented
approximately 90% of the voting control of the Company (after giving effect
to
the issuance of stock to two former officers in cancellation of debt as
described below). The foregoing transfers were made in reliance upon exemptions
provided by Section 4(2) of the Securities Act for the offer and sale of
securities not involving a public offering and Regulation D promulgated
thereunder
.
On
February 17, 2006, our board of directors approved the issuance of 150,000
shares of common stock each to Dimitri Cocorinis and Terry Cononelos, our former
officers, or a total of 300,000 shares of common stock. The issuance of this
stock was authorized in consideration of services rendered by Messrs. Cocorinis
and Cononelos to us. The transaction was valued at $3,000 ($0.01 per share).
On
or
about February 1, 2006, C&C Investment Partnership, a partnership owned by
Messrs. Cocorinis and Cononelos, loaned Millennium Quest $20,000 to cover
business operations and outstanding payables. The loan was repayable, with
interest at 7% per annum, on or before August 1, 2006 or the date on which
the
Company entered into a merger, reorganization or acquisition transaction,
whichever occurred first. At such time, the board of directors of the Company
consisted of Messrs. Cocorinis and Cononelos, so this transaction cannot be
considered the result of arms’ length negotiations. On August 11, 2006, C&C
Investment Partnership agreed to extend the due date of this note for an
additional 120 days. Pursuant to a Settlement and Stock Issuance Agreement
dated
on or about April 5, 2007, C&C Investment Partnership agreed to accept
2,500,000 shares of restricted common stock in the Company in payment and
satisfaction of all amounts owed to C&C Investment Partnership by the
Company.
In
instances described above where we issued securities in reliance upon Regulation
D, we relied upon Rule 506 of Regulation D of the Securities Act. These
stockholders who received the securities in such instances made representations
that (a) the stockholder is acquiring the securities for his, her or its own
account for investment and not for the account of any other person and not
with
a view to or for distribution, assignment or resale in connection with any
distribution within the meaning of the Securities Act, (b) the stockholder
agrees not to sell or otherwise transfer the purchased shares unless they are
registered under the Securities Act and any applicable state securities laws,
or
an exemption or exemptions from such registration are available, (c) the
stockholder has knowledge and experience in financial and business matters
such
that he, she or it is capable of evaluating the merits and risks of an
investment in us, (d) the stockholder had access to all of our documents,
records, and books pertaining to the investment and was provided the opportunity
ask questions and receive answers regarding the terms and conditions of the
offering and to obtain any additional information which we possessed or were
able to acquire without unreasonable effort and expense, and (e) the stockholder
has no need for the liquidity in its investment in us and could afford the
complete loss of such investment. Management made the determination that the
investors in instances where we relied on Regulation D are accredited investors
(as defined in Regulation D) based upon management’s inquiry into their
sophistication and net worth. In addition, there was no general solicitation
or
advertising for securities issued in reliance upon Regulation D.
ITEM
4.01 CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
(a)
Dismissal of Previous Independent Registered Public Accounting Firm
On
April
30,
2007
,
our
board of directors approved the dismissal of
Michael
J. Larsen, PC
as our
independent auditor, effective upon the filing of the Company’s Quarterly Report
on Form 10-QSB for the first quarter of 2007. Upon the effective date of the
dismissal, we will file a separate current report on Form 8-K to disclose the
effectiveness of the dismissal in accordance with Item 304(a) of Regulation
S-K.
A copy of the letter from
Michael
J. Larsen, PC
addressed to the SEC will be also filed by us as Exhibit 16.1 to such current
report on Form 8-K.
(b)
Engagement of New Independent Registered Public Accounting Firm
On
April
30, 2007,
concurrent
with the decision to dismiss
Michael
J. Larsen, PC
as
our
independent auditor,
our
Board
of Directors elected to continue the existing relationship of our new subsidiary
Lorain Holding with Samuel H. Wong & Co., LLP, Certified Public Accountants
and appointed Samuel H. Wong & Co., LLP, Certified Public Accountants as our
independent auditor.
During
our two most recent fiscal years (ended December 31, 2006 and 2005) and from
January 1, 2007 to the date of this report, there were no disagreements with
Michael J. Larsen, PC on any matter of accounting principles or practices,
financial disclosure, or auditing scope or procedure. There were no reportable
events, as described in Item 304(a)(1)(v) of Regulation S-K, during our two
most
recent fiscal years (ended December 31, 2006 and 2005) and from January 1,
2007
to the date of this report.
ITEM
5.01
CHANGES
IN CONTROL OF REGISTRANT
Reference
is made to the disclosure set forth under Item 2.01 of this report, which
disclosure is incorporated herein by reference.
As
a
result of the closing of the reverse acquisition with Lorain Holding, the former
stockholder of Lorain Holding, Hisashi Akazawa (prior to the private placement
transaction as described under Item 2.01) owned 100% of the total outstanding
shares of our Series B Preferred Stock and 91% total voting power of all our
outstanding voting securities. After the private placement, Mr. Akazawa’s
interest in the company with diluted to 70% of the total outstanding shares
of
our Series B Voting Preferred Stock and 65.43% of the total voting power of
all
our outstanding voting securities. Mr. Akazawa has granted Mr. Chen, our Chief
Executive Officer, an option, pursuant to that certain Option Agreement, dated
May 3, 2007, for Mr. Chen to purchase 627,867 shares of our series B Voting
Preferred stock in accordance with the terms thereof.
ITEM
5.02
DEPARTURE
OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF DIRECTORS; APPOINTMENT OF
CERTAIN OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS
Upon
the
closing of the reverse acquisition, as of May 3, 2007, Timothy P. Halter, our
sole director, submitted his resignation letter pursuant to which he resigned
from all offices of the Company that he holds effective immediately and from
his
position as our director that will become effective on the tenth day following
the mailing by us of an information statement to our stockholders that complies
with the requirements of Section 14f-1 of the Exchange Act, which information
statement will be mailed out on or about May 19, 2007. The resignation of Mr.
Halter is not in connection with any known disagreement with us on any matter.
Mr. Si Chen was appointed to the board of the directors at the
closing time of the reverse acquisition.
On
May 3,
2007 in connection with the closing of the reverse acquisition, Mr. Si Chen
was
appointed as our Chief Executive Officer and Secretary. Mr.
Huanxiang
Sheng
was
appointed as Chief Financial Officer.
For
certain biographical and other information regarding the newly appointed
officers and directors, see the disclosure under Item 2.01 of this report,
which
disclosure is incorporated herein by reference.
ITEM
5.03 AMENDMENT TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL YEAR
We
plan
to amend and restate our Restated Certificate of Incorporation to (i) change
our
name to American Lorain Corporation (ii) increase our authorized common stock
from 20 million to 200 million shares and (iii) effect a 1-for-32.84 reverse
stock split. Such amendments are expected to become effective in or about June
2007.
ITEM
5.06 CHANGE IN SHELL COMPANY STATUS
Reference
is made to the disclosure set forth under Item 2.01 and 5.01 of this report,
which disclosure is incorporated herein by reference.
ITEM
9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a)
Financial
Statements of Business Acquired
Filed
herewith are audited consolidated financial statements of International Lorain
Holding, Inc., Shandong Green Foodstuff Co., Ltd, Junan Lorain Foodstuff Co.,
Ltd, Beijing Green Foodstuff Co., Ltd, and Loutian Green Foodstuff Co., Ltd.
for
the fiscal years ended December 31, 2006, 2005 and 2004.
(b)
Pro
forma
financial information
Filed
herewith is the unaudited pro forma condensed consolidated financial information
of Millennium Quest, Inc. and its subsidiaries for the requisite periods.
(d)
Exhibits
|
Exhibit
No.
|
|
Description
|
|
2.1
|
|
Share
Exchange Agreement, dated May 3, 2007, by and among the registrant,
International Lorain Holding, Inc. and Hisashi Akazawa.
|
|
|
|
|
|
3.1
|
|
Restated
Certificate of Incorporation of the registrant, as amended.
|
|
|
|
|
|
3.2
|
|
By-Laws
of the registrant, adopted on March 31, 2000. [incorporated by reference
to Exhibit 3.2 to the registrant’s Registration Statement on Form 10SB12G
filed on October 19, 2001, in commission file number
0-31619].
|
|
|
|
|
|
4.1
|
|
Certificate
of Designation of Series A Voting Convertible Preferred Stock of
the
registrant as filed with the Secretary of State of Delaware on April
9,
2007. [incorporated by reference to Exhibit 4.1 to the registrant’s Annual
Report on Form 10-KSB filed on April 9, 2007].
|
|
|
|
|
|
4.2
|
|
Certificate
of Designation of Series B Voting Convertible Preferred Stock of
the
registrant as filed with the Secretary of State of Delaware on April
30,
2007.
|
|
|
|
|
|
4.3
|
|
Option
Agreement, dated May 3, 2007, between Mr. Si Chen and Mr. Hisashi
Akazawa.
|
|
|
|
|
|
4.4
|
|
Form
of Registration Rights Agreement, dated May 3, 2007.
|
|
|
|
|
|
4.5
|
|
Form
of Common Stock Purchase Warrant issued to Investors dated May 3,
2007.
|
|
|
|
|
|
4.6
|
|
Form
of Common Stock Purchase Warrant issued to Sterne Agee & Leach, Inc.,
and its designee.
|
|
10.1
|
|
Form
of the Securities Purchase Agreement, dated May 3, 2007.
|
|
|
|
|
|
10.2
|
|
Make
Good Escrow Agreement, dated May 3, 2007, by and among the registrant,
Sterne Agee & Leach, Inc., Mr. Hisashi Akazawa, Mr. Si Chen and
Securities Transfer Corporation.
|
|
|
|
|
|
10.3
|
|
Closing
Escrow Agreement, dated May 3, 2007, by and among the registrant,
Sterne
Agee & Leach, Inc. and Thelen Reid Brown Raysman & Steiner LLP.
|
|
|
|
|
|
10.4
|
|
Cancellation
and Escrow Agreement, dated May 3, 2007, by and among the registrant,
Halter Financial Investments, L.P., Halter Financial Group, L.P.
and
Security Transfer Corporation.
|
|
|
|
|
|
10.5
|
|
Employment
Agreement, dated March 2, 2005, by and between Shandong Green Foodstuff
CO., LTD and Si Chen.
|
|
|
|
|
|
10.6
|
|
Employment
Agreement, dated July 2, 2002, by and between Shandong Green Foodstuff
CO., LTD and Xiaodong Zhou.
|
|
|
|
|
|
10.7
|
|
Employment
Agreement, dated December 7, 2004, by and between Shandong Green
Foodstuff
CO., LTD and Huanxiang Sheng.
|
|
|
|
|
|
10.8
|
|
Cooperation
Agreement, dated May 18, 2006, by and between Beijing
Green Foodstuff Co., Ltd. and the Chestnut Cooperation of Zhenzhai
Village, Gaoling town, Miyun County.
|
|
|
|
|
|
10.9
|
|
Equity
Transfer Agreement, dated August 15, 2006, by and between International
Lorain Co., Ltd and International Lorain Holding, Inc.
|
|
|
|
|
|
10.10
|
|
Credit
Facility Agreement, dated September 28, 2006, by and between Beijing
Green Foodstuff Co., Ltd. and the
Shilibao
Branch of Beijing Rural Commercial Bank Co., Ltd.
|
|
|
|
|
|
10.11
|
|
Sales
contract, dated May 13, 2006, by and between
Shandong Green Foodstuff Co., Ltd. and the Shandong Lu An
Import & Export Co., Ltd.
|
|
|
|
|
|
10.12
|
|
Sales
contract, dated September 5, 2006, by and between
Shandong Green Foodstuff Co., Ltd. and the Shinsei Foods
Co., Ltd.
|
|
|
|
|
|
10.13
|
|
Sales
Contract, dated September 10, 2006, by and between Junan
Hongrun Foodstuff Co., Ltd. and the Shinsei Foods Co.,
Ltd.
|
|
|
|
|
|
10.14
|
|
Financial
Advisory Agreement, dated February 14, 2007, by and between HFG
International, Limited and Shandong Green Foodstuff Co.,
Ltd.
|
|
|
|
|
|
10.15
|
|
Consulting
Agreement, dated March 8, 2007, by and between Heritage Management
Consultants, Inc. and International Lorain Holding, Inc.
|
|
|
|
|
|
14
|
|
Business
Ethics Policy and Code of Conduct, adopted on April 30,
2007.
|
|
|
|
|
|
21
|
|
List
of subsidiaries of the registrant.
|
|
|
|
|
|
99.1
|
|
Press
Release, dated May 3, 2007
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
|
Millennium
Quest,
Inc.
|
|
|
|
|
|
|
|
|
|
Date: May 9 , 2007
|
|
|
|
|
|
|
|
|
|
/s/ Si
Chen
|
|
|
|
Chief
Executive Officer
|
|
|
|
INTERNATIONAL
LORAIN HOLDING, INC.
FINANCIAL
STATEMENTS
AS
OF DECEMBER 31, 2006
(Stated
in US dollars)
INTERNATIONAL
LORAIN HOLDING, INC.
|
CONTENTS
|
|
PAGES
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
|
|
|
|
ACCOUNTING
FIRM
|
|
2
|
|
|
|
|
|
CONSOLIDATED
BALANCE SHEET
|
|
3
-
4
|
|
|
|
|
|
CONSOLIDATED
STATEMENT OF INCOME
|
|
5
|
|
|
|
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
6
|
|
|
|
|
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
7
|
|
|
|
|
|
NOTES
TO FINANCIAL STATEMENTS
|
|
8
-
27
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
To:
|
The
Board of Directors and Stockholders of
International Lorain Holding,
Inc.
|
We
have
audited the accompanying consolidated balance sheet of International Lorain
Holding, Inc. as of December 31, 2006 and the related consolidated statements
of
operations, stockholders' equity, and cash flows for the short year from
August
4, 2006(date of incorporation) to December 31, 2006. These financial statements
are the responsibility of the Company's management. Our responsibility is
to
express an opinion on these financial statements based on our
audit.
We
conducted our audit in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of International Lorain Holding,
Inc.
as of December 31, 2006 and the results of its operations, and cash flows
for
the short year then ended in conformity with accounting principles generally
accepted in the United States of America.
|
|
|
|
|
|
South San Francisco, California
|
|
|
Samuel H. Wong & Co., LLP
|
|
March 1, 2007
|
|
|
Certified Public
Accountants
|
|
INTERNATIONAL
LORAIN HOLDING, INC.
|
|
|
|
CONSOLIDATED
BALANCE SHEET
|
|
AS
OF DECEMBER 31, 2006
|
|
(Stated
in US Dollars)
|
|
|
|
Note
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
2,316,425
|
|
|
Pledged
bank deposits
|
|
|
3
|
|
|
2,549,321
|
|
|
Trade
accounts receivable
|
|
|
4
|
|
|
11,805,229
|
|
|
Trading
securities
|
|
|
|
|
|
26,618
|
|
|
Prepayments
for raw materials
|
|
|
|
|
|
2,406,161
|
|
|
Income
tax prepayment
|
|
|
|
|
|
38,375
|
|
|
Other
receivables
|
|
|
5
|
|
|
4,466,169
|
|
|
Inventories
|
|
|
6
|
|
|
12,294,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
$
|
35,902,652
|
|
|
Property,
plant and equipment, net
|
|
|
7
|
|
|
8,883,464
|
|
|
Leasehold
Land, net
|
|
|
8
|
|
|
2,777,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
|
|
$
|
47,563,592
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Short
term debts
|
|
|
9
|
|
$
|
21,858,467
|
|
|
Notes
payable
|
|
|
10
|
|
|
3,466,581
|
|
|
Accounts
payable
|
|
|
|
|
|
1,795,968
|
|
|
Customers’
deposits
|
|
|
|
|
|
843,089
|
|
|
Accrued
expenses and other payables
|
|
|
11
|
|
|
2,903,995
|
|
|
Acquisition
payable
|
|
|
12
|
|
|
7,324,272
|
|
|
Current
maturities of long term debts
|
|
|
13
|
|
|
5,117
|
|
|
Income
tax payable
|
|
|
|
|
|
402,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
$
|
38,599,706
|
|
|
Long
term debts
|
|
|
13
|
|
|
1,384,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
$
|
39,984,447
|
|
See
accompanying notes to financial statements
|
INTERNATIONAL
LORAIN HOLDING, INC.
|
|
|
|
CONSOLIDATED
BALANCE SHEET (Continued)
|
|
AS
OF DECEMBER 31, 2006
|
|
(Stated
in US Dollars)
|
|
|
|
Note
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
14
|
|
$
|
3,474,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock US$0.001 par value; 21,000,000 authorized; 100,000 issued
and
outstanding as
|
|
|
|
|
|
|
|
|
of
December 31, 2006
|
|
|
1
|
|
$
|
100
|
|
|
Additional
paid-in-capital
|
|
|
|
|
|
19,900
|
|
|
Statutory
reserves
|
|
|
|
|
|
904,594
|
|
|
Retained
earnings
|
|
|
|
|
|
3,149,926
|
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
30,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,105,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
$
|
47,563,592
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial
statements
|
INTERNATIONAL
LORAIN HOLDING, INC.
|
|
|
|
CONSOLIDATED
STATEMENT OF INCOME
|
|
FOR
THE PERIOD FROM AUGUST 4, 2006 (DATE OF
INCORPORATION)
|
|
TO
DECEMBER 31, 2006
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
18
|
|
$
|
29,131,850
|
|
|
Cost
of revenues
|
|
|
|
|
|
(21,765,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
$
|
7,366,640
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
|
|
|
(606,828
|
)
|
|
General
and administrative expenses
|
|
|
|
|
|
(934,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
$
|
5,825,762
|
|
|
|
|
|
|
|
|
|
|
|
Finance
costs, net
|
|
|
16
|
|
|
(811,940
|
)
|
|
Government
grant
|
|
|
|
|
|
393,240
|
|
|
Other
income
|
|
|
|
|
|
35,053
|
|
|
Other
expenses
|
|
|
|
|
|
(30,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxation
|
|
|
|
|
$
|
5,411,264
|
|
|
Income
tax
|
|
|
17
|
|
|
(943,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before minority interests
|
|
|
|
|
$
|
4,468,133
|
|
|
Minority
interests
|
|
|
|
|
|
(413,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
$
|
4,054,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share, basic and diluted
|
|
|
|
|
$
|
40.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding of common stock
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements
|
INTERNATIONAL
LORAIN HOLDING, INC.
|
|
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
FOR
THE PERIOD FROM AUGUST 4, 2006 (DATE OF
INCORPORATION)
|
|
TO
DECEMBER 31, 2006
|
|
(Stated
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
stock
|
|
Additional
|
|
|
|
|
|
other
|
|
|
|
|
|
|
Number
|
|
|
|
paid-in-
|
|
Statutory
|
|
Retained
|
|
comprehensive
|
|
|
|
|
|
|
of
share
|
|
Amount
|
|
capital
|
|
reserves
|
|
earnings
|
|
income
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
|
100,000
|
|
$
|
100
|
|
|
19,900
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,054,520
|
|
|
|
|
|
4,054,520
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
|
|
|
|
|
|
904,594
|
|
|
(904,594
|
)
|
|
|
|
|
-
|
|
|
Adjustments
to foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
currency
translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,583
|
|
|
30,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
100,000
|
|
$
|
100
|
|
|
19,900
|
|
|
904,594
|
|
|
3,149,926
|
|
|
30,583
|
|
|
4,105,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements
|
INTERNATIONAL
LORAIN HOLDING, INC.
|
|
|
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
FOR
THE PERIOD FROM AUGUST 4, 2006 (DATE OF
INCORPORATION)
|
|
TO
DECEMBER 31, 2006
|
|
(Stated
in US Dollars)
|
|
Cash
flows from operating activities
|
|
|
|
|
Net
income
|
|
$
|
4,054,520
|
|
|
Minority
interest
|
|
|
413,613
|
|
|
Depreciation
|
|
|
251,375
|
|
|
Amortization
|
|
|
23,788
|
|
|
Increase
in accounts and other receivables
|
|
|
33,729,902
|
|
|
Increase
in inventories
|
|
|
6,112,052
|
|
|
Increase
in accounts and other payables
|
|
|
(36,310,583
|
)
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
8,274,667
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
Acquisition
of subsidiaries, net of cash equivalents
|
|
|
873,966
|
|
|
Purchase
of plant and equipment
|
|
|
(1,566,164
|
)
|
|
Increase
in pledged deposits
|
|
|
(417,738
|
)
|
|
Payment
of cost of lease prepayment
|
|
|
(1,391,577
|
)
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
$
|
(2,501,513
|
)
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
Issue
of common stock
|
|
|
20,000
|
|
|
Bank
borrowings
|
|
|
8,248,038
|
|
|
Bank
repayment
|
|
|
(11,744,862
|
)
|
|
|
|
|
|
|
|
Net
cash used in financing activities
|
|
$
|
(3,476,824
|
)
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
2,296,330
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation on cash
|
|
|
|
|
|
and
cash equivalents
|
|
|
20,095
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents-beginning of year
|
|
|
-
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents-end of year
|
|
$
|
2,316,425
|
|
|
|
|
|
|
|
|
Supplementary
cash flow information:
|
|
|
|
|
|
Interest
received
|
|
$
|
37,195
|
|
|
Interest
paid
|
|
|
1,005,531
|
|
See
accompanying notes to financial statements
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
1.
|
ORGANIZATION,
BASIS OF PRESENTATION AND PRINCIPAL
ACTIVITIES
|
Organization
International
Lorain Holding, Inc. (“the Company”) was incorporated under the Companies Law of
the Cayman Islands with limited liabilities on August 4, 2006. The Company
currently operates through three wholly-owned and one holding subsidiaries
located in Mainland China: Shandong Green Foodstuff Co., Ltd. (“Shandong
Lorain”), Junan Hongrun Foodstuff Co., Ltd. (“Junan Hongrun”), Luotian Green
Foodstuff Co., Ltd. (“Luotian Lorain”), and Beijing Green Foodstuff Co., Ltd.
(“Beijing Lorain”).
The
Company and its subsidiaries (hereinafter, collectively referred to as “the
Group”) are engaged in development, manufacture and sales of food products
worldwide. The Group produces hundreds of varieties of food categorized into
three divisions: chestnut products, convenient food including Ready-to-Cook
(RTCs), Ready-to-Eat (RTEs) and Meals Ready-to-Eat (MREs), and frozen and
canned
food.
Basis
of Presentation
The
current equity structure is established through a series of restructuring
transactions:
The
Company was incorporated in Cayman Islands in August 2006. Mr. Hisashi Akazawa
has 100% equity ownership. In July, 2006, Junan Hongrun acquired the 100%
equity
ownership of Beijing Lorain. In September, 2006, the Company acquired the
100%
equity ownership of Luotian Lorain. On August 30, 2006, the Company acquired
the
100% equity ownership of Junan Hongrun, and thus Beijing Lorain became our
indirectly wholly-owned subsidiary through Junan Hongrun. In August, 2006,
the
Company acquired the 25% equity ownership of Shandong Lorain. After that,
the
Company hold 80.2% equity ownership of Shandong Lorain including 55.2%
indirectly holdings through our wholly-owned subsidiary Junan Hongrun. The
remaining 19.8% equity of Shangdong Lorain is held by a state-owned interest,
Shandong Economic Development Investment Corporation.
After
the
restructuring described as above, the Company presently has two direct
wholly-owned subsidiaries Junan Hongrun and Luotian Lorain, one indirect
wholly-owned subsidiary through Junan Hongrun, which is Beijing Lorain. In
addition, the Company directly and indirectly own 80.2% ownership of Shandong
Lorain. The rest 19.8% state-owned equity of Shandong Lorain is not included
in
the listing subject.
Mr.
Hisashi Akazawa owns 100% equity interest of the Company.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and
notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States
of
America and have been consistently applied in the presentation of financial
statements, which are compiled on the accrual basis of accounting.
|
(b)
|
Principles
of consolidation
|
The
consolidated financial statements are presented in US Dollars and include
the
accounts of the Company and its commonly controlled entity. All significant
inter-company balances and transactions are eliminated in
combination.
The
Company owned its subsidiaries soon after its inception and continued to
own the
equity interests through December 31, 2006. The following table depicts the
identity of each subsidiary:
|
Name
of Company
|
|
Place
of Incorporation
|
|
Attributable
EquityInterest %
|
|
Registered
Capital
|
|
|
|
|
Shandong
Green Foodstuff Co., Ltd
|
|
|
PRC
|
|
|
80.2
|
|
$
|
12,901,823
|
|
|
(RMB
100,860,000)
|
|
|
Luotian
Green
Foodstuff
Co., Ltd.
|
|
|
PRC
|
|
|
100
|
|
$
|
1,279,181
|
|
|
(RMB
10,000,000)
|
|
|
Junan
Hongrun
Foodstuff
Co., Ltd
|
|
|
PRC
|
|
|
100
|
|
$
|
2,430,445
|
|
|
(RMB
19,000,000)
|
|
|
Beijing
Green
Foodstuff
Co., Ltd
|
|
|
PRC
|
|
|
100
|
|
$
|
1,279,181
|
|
|
(RMB
10,000,000)
|
|
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management
to
make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the
best
information available at the time the estimates are made; however actual
results
could differ materially from those estimates.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
|
(d)
|
Economic
and political risks
|
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced
by the
political, economic and legal environment in the PRC, and by the general
state
of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange.
The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among
other
things.
Leasehold
Land represents cost of land use rights in the PRC. Land use rights are carried
at cost and amortized on a straight-line basis over the period of rights
of 50
year.
|
(f)
|
Property,
Plant and Equipment
|
Plant
and
Equipment are carried at cost less accumulated depreciation. Depreciation
is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows:
|
Buildings
|
40
years
|
|
Machinery
and equipment
|
10
years
|
|
Office
equipment
|
5
years
|
|
Motor
vehicles
|
10
years
|
The
cost
and related accumulated depreciation of assets sold or otherwise retired
are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
|
(g)
|
Accounting
for the Impairment of Long-Lived
Assets
|
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
assets may not be recoverable. It is reasonably possible that these assets
could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to
be
generated by the assets.
If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
During
the reporting period, there was no impairment loss.
|
(h)
|
Construction
in progress
|
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction
in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended
use.
|
(i)
|
Investment
securities
|
The
Company classifies its equity securities into trading or available-for-sale.
Trading securities are bought and held principally for the purpose of selling
them in the near term. All securities not included in trading securities
are
classified as available-for-sale.
Trading
and available-for-sale securities are recorded at fair value. Unrealized
holding
gains and losses on trading securities are included in the net income.
Unrealized holding gains and losses, net of the related tax effect, on available
for sale securities are excluded from net income and are reported as a separate
component of other comprehensive income until realized. Realized gains and
losses from the sale of available-for-sale securities are determined on a
specific-identification basis.
A
decline
in the market value of any available-for-sale security below cost that is
deemed
to be other-than-temporary results in a reduction in carrying amount to fair
value. The impairment is charged as an expense to the statement of income
and
comprehensive income and a new cost basis for the security is established.
To
determine whether an impairment is other-than-temporary, the Company considers
whether it has the ability and intent to hold the investment until a market
price recovery and considers whether evidence indicating the cost of the
investment is recoverable outweighs evidence to the contrary. Evidence
considered in this assessment includes the reasons for the impairment,
the
severity and duration of the impairment, changes in value subsequent to year
end, and forecasted performance of the investee.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Premiums
and discounts are amortized or accreted over the life of the related
available-for-sale security as an adjustment to yield using the
effective-interest method. Dividend and interest income are recognized when
earned.
As
at
December 2006, the unrealized gains and loses on these investments are
immaterial.
Inventories
consisting of finished goods and raw materials are stated at the lower of
cost
or market value. Finished goods are comprised of direct materials, direct
labor
and an appropriate proportion of overhead.
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts
is
made when collection of the full amount is doubtful. Bad debts are written
off
as incurred.
Customer
deposits were received from customers in connection with orders of products
to
be delivered in future periods.
|
(m)
|
Cash
and cash equivalents
|
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts only in the PRC. Thus far, no bank account is maintained in
the
United States of America.
All
advertising costs are expensed as incurred. The Group incurred $1,265 for
advertising costs during the period from August 4, 2006 (date of incorporation)
to December 31, 2006.
|
(o)
|
Shipping
and handling
|
All
shipping and handling are expensed as incurred. The Group incurred $627,420
for
shipping and handling expenses during the period from August 4, 2006 (date
of
incorporation) to December 31, 2006.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
|
(p)
|
Research
and development
|
All
research and development costs are expensed as incurred. The Group incurred
$1,249 for research and development costs during the period from August 4,
2006
(date of incorporation) to December 31, 2006.
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the consolidated statement
of
income as incurred. The Group incurred (date of incorporation) $4,719 for
the
retirement benefits during the period from August 4, 2006 to December 31,
2006.
The
Company accounts for income tax using an asset and liability approach and
allows
for recognition of deferred tax benefits in future year. Under the asset
and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for
financial reporting purposes and the amounts used for income tax purposes.
A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future realization is uncertain.
Statutory
reserves refer to the amount appropriated from the net income in accordance
with
PRC laws or regulations, which can be used to recover losses and increase
capital, as approved, and are to be used to expand production or
operations.
|
(t)
|
Foreign
currency translation
|
The
accompanying financial statements are presented in United States dollars.
The
functional currency of the Company is the Renminbi (RMB). The financial
statements are translated into United States dollars from RMB at year-end
exchange rates as to assets and liabilities and average exchange rates as
to
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
|
|
|
2006
|
|
|
Period
end RMB : US$ exchange rate
|
|
|
7.81750
|
|
|
Average
yearly RMB : US$ exchange rate
|
|
|
7.90911
|
|
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into
US$ at
the rates used in translation.
The
Company's revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist
and collectability is reasonably assured. Payments received before all of
the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
The
Company's revenue consists of invoiced value of goods, net of a value-added
tax
(VAT). When goods have been delivered and accepted by customer, no sales
return
and discount is granted.
Basic
earnings per share is computed by dividing net income by the weighted average
number of ordinary shares outstanding during the period. Diluted earnings
per
share is computed by dividing net income by the sum of the weighted average
number of ordinary shares outstanding and dilutive potential ordinary shares
during the year. During the year ended December 31, 2006, no dilutive potential
ordinary shares was issued.
The
Company uses the “management approach” in determining reportable operating
segments. The management approach considers the internal reporting used by
the
Company’s chief operating decision-maker as the source for determining the
Company’s reportable segments.
|
(x)
|
Commitments
and contingencies
|
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines
and
penalties and other sources are recorded when it is probable that a liability
has been incurred and the amount of the assessment can be reasonably estimated
pursuant to FASB No. 5
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Comprehensive
income is defined to include all changes in equity except those resulting
from
investments by owners and distributions to owners. Among other disclosures,
all
items that are required to be recognized under current accounting standards
as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. The Company’s current component of other comprehensive income is the
foreign currency translation adjustment.
|
(z)
|
Recent
accounting pronouncements
|
In
July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting
for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change
in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which
defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those
fiscal
years.
In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108,
the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods,
based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values
of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.
The
management of the Company does not anticipate that the adoption of these
three
standards will have a material impact on these consolidated financial
statements.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
Pledged
bank deposits are restricted cash with banks for general banking facilities
and
notes payables.
|
4.
|
TRADE
ACCOUNTS RECEIVABLE
|
|
Trade
accounts receivable
|
|
$
|
12,032,110
|
|
|
Less:
Allowance for doubtful accounts
|
|
|
(226,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,805,229
|
|
|
|
|
|
|
|
The
Group
offer credit terms of between 90 to 180 days to most of their international
distributors and between 30 to 90 days for most of their domestic distributors.
An
analysis of the allowance for doubtful accounts for the year ended December
31,
2006 is as follows:
|
Balance
at beginning of year
|
|
$
|
-
|
|
|
Arising
through acquisition
|
|
|
67,090
|
|
|
Addition
of bad debt expense, net
|
|
|
159,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
226,881
|
|
|
|
|
|
|
|
Other
receivables at December 31, 2006 consist of the following:
|
Advances
to suppliers
|
|
$
|
1,083,467
|
|
|
Amount
due from a director
|
|
|
561,995
|
|
|
Turnover
taxes prepayment
|
|
|
159,136
|
|
|
Purchases
advances
|
|
|
2,661,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,466,169
|
|
|
|
|
|
|
|
Amount
due from a director is unsecured, interest free and has no fixed repayment
date.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
Inventories
at December 31, 2006 consist of the following:
|
Raw
materials
|
|
$
|
7,785,927
|
|
|
Finished
goods
|
|
|
4,508,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,294,354
|
|
|
|
|
|
|
|
|
7.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property,
plant and equipment at December 31, 2006 consist of the following:
|
At
cost
|
|
|
|
|
Buildings
|
|
$
|
5,706,515
|
|
|
Landscaping,
plant and tree
|
|
|
462,654
|
|
|
Machinery
and equipment
|
|
|
3,658,663
|
|
|
Office
equipment
|
|
|
163,100
|
|
|
Motor
vehicles
|
|
|
245,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,236,071
|
|
|
Less:
accumulated depreciation
|
|
|
(2,184,172
|
)
|
|
Construction
in progress
|
|
|
831,565
|
|
|
|
|
|
|
|
|
|
|
$
|
8,883,464
|
|
|
|
|
|
|
|
Depreciation
and amortization expense is included in the statement of income and
comprehensive income as follows:
|
Cost
of revenues
|
|
$
|
221,046
|
|
|
Selling
and marketing expenses
|
|
|
9,518
|
|
|
General
and administrative expenses
|
|
|
20,811
|
|
|
|
|
|
|
|
|
|
|
$
|
251,375
|
|
|
|
|
|
|
|
Construction
in progress mainly comprises capital expenditures for construction of the
Company’s new corporate campus, including offices, factories and staff
dormitories. Capital commitments for the construction are immaterial for
the
three year.
Landscaping,
plant and tree are chestnut tree in the growing bases, which have not been
the
significant procurement source.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
Leasehold
Land at December 31, 2006 consists of the following:
|
Leasehold
Land, at cost
|
|
$
|
2,886,587
|
|
|
Accumulated
amortization
|
|
|
(109,111
|
)
|
|
|
|
|
|
|
|
|
|
$
|
2,777,476
|
|
|
|
|
|
|
|
Leasehold
Land represents the prepaid land use right. The PRC government owns the land
on
which the Company’s corporate campus is being constructed.
Amortization
expense for the above leasehold land was $23,788 for the period from August
4,
2006 (date of incorporation) to December 31, 2006. Amortization expense
calculated by straight-line is at $48,037 per year.
Short-term
debts are as follows:
|
|
|
|
|
|
Loans
from Junan County Construction Bank,
|
|
|
|
|
|
interest
rate at 6.264% per annum
|
|
|
|
|
|
Due
between 1/10/2007 and 9/7/2007
|
|
$
|
3,652,576
|
|
|
|
|
|
|
|
|
Loans
from Junan County Agriculture Bank, interest
|
|
|
|
|
|
rate
at 7.6500% to 10.404% per annum
|
|
|
|
|
|
Due
between 1/10/2007 and 12/5/2007
|
|
|
6,269,636
|
|
|
|
|
|
|
|
|
Loan
from Junan County Industrial and Commercial
|
|
|
|
|
|
Bank,
interest rate at 4.650% to 6.120% per annum
|
|
|
|
|
|
Due
between 1/11/2007 and 12/10/2007
|
|
|
4,699,925
|
|
|
|
|
|
|
|
|
Loan
from Junan County Agricultural Financial
|
|
|
|
|
|
Institution,
interest rate at 9.765% per annum
|
|
|
|
|
|
Due
between 1/13/2007 and 5/22/2007
|
|
|
181,644
|
|
|
|
|
|
|
|
|
|
|
$
|
14,803,781
|
|
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
|
9.
|
SHORT-TERM
DEBTS (Continued)
|
|
Loan
from Linyi Commercial Bank, interest rates
|
|
|
|
|
|
at
9.765% to 10.4715% per annum
|
|
|
|
|
|
Due
between 1/9/2007 and 11/29/2007
|
|
$
|
1,688,520
|
|
|
|
|
|
|
|
|
Loan
from Junan Agricultural Development Bank,
|
|
|
|
|
|
interest
rate at rates at 5.3625% to 6.435% per annum
|
|
|
|
|
|
Due
between 7/19/2007 and 9/4/2007
|
|
|
1,279,182
|
|
|
|
|
|
|
|
|
Loan
from Beijing Miyun County Shilipu Rural
|
|
|
|
|
|
Financial
Institution, interest rates at 0.6600% to
|
|
|
|
|
|
0.7650%
per annum
|
|
|
|
|
|
Due
between 3/30/2007 and 5/27/2007
|
|
|
2,539,174
|
|
|
|
|
|
|
|
|
Loan
from China Agricultural Bank, Miyun Branch,
|
|
|
|
|
|
interest
rate at 0.5850% per annum
|
|
|
|
|
|
Due
7/18/2007
|
|
|
575,632
|
|
|
Loan
from China Agricultural Bank, Luotian Square
|
|
|
|
|
|
Branch
interest rates at 7.605% to 7.950% per annum
|
|
|
|
|
|
Due
6/30/2007 and 9/5/2007
|
|
|
972,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,054,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,858,467
|
|
|
|
|
|
|
|
The
loans
were primarily obtained for general working capital.
Interest
expenses for the loans were $966,031 for the period from August 4, 2006 (date
of
incorporation) to December 31, 2006.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
Notes
payable at December 31, 2006 consist of the following:
|
Notes
to Industrial and Commercial
|
|
$
|
|
|
|
Bank,
bank commission charge at
|
|
|
|
|
|
3.7440%
, due June 1, 2007
|
|
|
3,274,704
|
|
|
Notes
to Linyi Commercial Bank
|
|
|
|
|
|
bank
commission charge at
|
|
|
|
|
|
2.85%
, due May 20, 2007
|
|
|
191,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,466,581
|
|
|
|
|
|
|
|
|
11.
|
ACCRUED
EXPENSES AND OTHER
PAYABLES
|
Accrued
expenses and other payables at December 31, 2006 consist of the
following:
|
Accrued
salaries and wages
|
|
$
|
346,738
|
|
|
Accrued
utility expenses
|
|
|
114,856
|
|
|
Accrued
Interest expenses
|
|
|
11,178
|
|
|
Accrued
transportation expenses
|
|
|
100,089
|
|
|
Other
accruals
|
|
|
90,000
|
|
|
Business
and other taxes
|
|
|
734,492
|
|
|
Purchases
disbursements payables
|
|
|
1,506,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,903,995
|
|
|
|
|
|
|
|
Customer
deposits were received from customers in connection with orders of products
to
be delivered in future periods.
Acquisition
Payable represented total amount due to shareholders of the four subsidiaries
involved in the acquisition deal, which is disclosed in Note 15.
After
paying-down $2,967,115 towards this debt on April 13, 2007, on April 25,
2007,
the Company has agreed with the related debtor and the stockholder to convert
the remaining balance of $4,357,157 into common stock equity to the
stockholder.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
Long-term
debts are as follows:
|
Loan
from Bank of China, Junan Branch
|
|
|
|
|
|
interest
rates at 0.67% per annum
|
|
|
|
|
|
Due
5/19/2009
|
|
$
|
14,738
|
|
|
|
|
|
|
|
|
Loan
from International Trust & Investment Co., Ltd,
|
|
|
|
|
|
interest
rates at 0.67% per annum
|
|
|
|
|
|
Due
6/13/2008
|
|
|
1,279,181
|
|
|
|
|
|
|
|
|
Loan
from Agricultural Development Department of
|
|
|
|
|
|
Luotian
Government, interest rates at 0.67% per
|
|
|
|
|
|
Annum
|
|
|
|
|
|
Due
12/11/2010
|
|
|
95,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,389,858
|
|
|
|
|
|
|
|
|
Less:
Current maturities of long-term debts
|
|
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,384,741
|
|
|
|
|
|
|
|
Interest
expenses for the loans were $39,500 for the period from August 4, 2006 (date
of
incorporation) to December 31, 2006.
This
represents the 19.8% equity of Shangdong Lorain held by a state-owned interest,
Shandong Economic Development Investment Corporation.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
In
July,
2006, Junan Hongrun acquired 100% equity ownership of Beijing Lorain. In
September, 2006, the Company acquired 100% equity ownership of Luotian Lorain.
On August 30, 2006, the Company acquired 100% equity ownership of Junan Hongrun,
and thus Beijing Lorain became the indirectly wholly-owned subsidiary through
Junan Hongrun. In August, 2006, the Company acquired 25% equity ownership
of
Shandong Lorain. After that, the Company holds 80.2% equity ownership of
Shandong Lorain including 55.2% indirectly holdings through the wholly-owned
subsidiary Junan Hongrun. The remaining 19.8% equity of Shangdong Lorain
is held
by a state-owned interest, Shandong Economic Development Investment
Corporation.
The
following table depicts total assets acquired and liabilities assumed from
the
above-mentioned subsidiaries at fair values. However, pursuant to the
Acquisition Agreement, the Purchase Price was $7,319,476, which was less
than
the Net Assets acquired of $11,867,757 by $4,546,281. This differential
represents Negative Goodwill, which was accounted for according to generally
accepted accounting principles in the United States as addressed
below.
|
Cash
|
|
$
|
8,055,825
|
|
|
Other
current assets
|
|
|
68,783,142
|
|
|
Property
and equipment
|
|
|
10,508,588
|
|
|
Other
assets
|
|
|
2,379,848
|
|
|
|
|
|
|
|
|
Total
assets acquired
|
|
|
89,727,403
|
|
|
Current
liabilities
|
|
|
(77,861,646
|
)
|
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
11,865,757
|
|
|
Less
:
Negative goodwill
|
|
|
(4,546,281
|
)
|
|
|
|
|
|
|
|
Acquisition
price
|
|
|
7,319,476
|
|
|
|
|
|
|
|
Negative
goodwill has been applied to reduce the property and equipment as at the
acquisition.
Details
of finance costs are summarized as follows:
|
Total
interest expense:
|
|
|
|
|
Short-term
loans (refer to Note 9)
|
|
$
|
966,031
|
|
|
Long-term
loans (refer to Note 13)
|
|
|
39,500
|
|
|
|
|
|
1,005,531
|
|
|
Interest
Income
|
|
|
(37,195
|
)
|
|
Others
|
|
|
(156,396
|
)
|
|
|
|
|
811,940
|
|
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
All
of
the Group’s income before income taxes and related tax expenses are from PRC
sources. In accordance with the relevant tax laws and regulations of PRC,
the
corporation income tax rate is 33%. However, also in accordance with the
relevant taxation laws in the PRC, some of the subsidiaries of the Group
are
eligible for tax exemption. In particular, from the time that a company has
its
first profitable tax year, the company is exempt from corporate income tax
for
its first two year and is then entitled to a 50% tax reduction for the
succeeding three year. Actual income tax expenses reported in the consolidated
statements of income and comprehensive income differ from the amounts computed
by applying the PRC statutory income tax rate of 33% to income before income
tax
for the period from August 4, 2006 (date of incorporation) to December 31,
2006
for the following reasons:
|
Income
before tax
|
|
$
|
5,411,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
at the income tax rate
|
|
|
1,785,717
|
|
|
Effect
of tax exemption granted
|
|
|
(842,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
$
|
943,131
|
|
|
|
|
|
|
|
As
of
December 31, 2006, there existed no deferred tax assets or liabilities for
the
Group pursuant to the PRC tax law.
INTERNATIONAL
LORAIN HOLDING, INC.
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
The
Group
currently engages in the manufacturing and distribution of a wide variety
of
convenient food and chestnuts products. Net revenues for the period from
August
4, 2006 (date of incorporation) to December 31, 2006 were as
follows:
Net
revenues by product:
|
Chestnut
|
|
$
|
13,983,288
|
|
|
48
|
%
|
|
Convenience
Food
|
|
|
3,495,822
|
|
|
12
|
%
|
|
Frozen,
Canned and Bulk Food
|
|
|
11,652,740
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,131,850
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Net
revenues by geographic area:
|
China
|
|
$
|
11,267,798
|
|
|
39
|
%
|
|
Japan
|
|
|
9,597,286
|
|
|
33
|
%
|
|
Kuwait
|
|
|
1,129,209
|
|
|
4
|
%
|
|
Others
|
|
|
7,137,557
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,131,850
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Shandong
Green Foodstuff Co., Ltd
FINANCIAL
STATEMENTS
AS
OF DECEMBER 31, 2006, 2005 AND 2004
(Stated
in US dollars)
SHANDONG
GREEN FOODSTUFF CO., LTD
|
CONTENTS
|
|
PAGES
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
|
|
|
|
ACCOUNTING
FIRM
|
|
1
|
|
|
|
|
|
BALANCE
SHEETS
|
|
2
-
3
|
|
|
|
|
|
STATEMENTS
OF INCOME
|
|
4
|
|
|
|
|
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY
|
|
5
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
6
|
|
|
|
|
|
NOTES
TO FINANCIAL STATEMENTS
|
|
7
-
18
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To:
The
board of directors and stockholders of
Shandong
Green Foodstuff Co., Ltd
We
have
audited the accompanying balance sheets of Shandong Green Foodstuff Co.,
Ltd as
of December 31, 2006, 2005, and 2004 and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Shandong Green Foodstuff Co.,
Ltd
as of December 31, 2006, 2005, and 2004 and the results of its operations
and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
|
South
San Francisco, California
March 1, 2007
|
|
|
Samuel
H. Wong & Co., LLP
Certified
Public Accountants
|
|
SHANDONG
GREEN FOODSTUFF CO., LTD
|
|
|
|
BALANCE
SHEETS
|
|
AS
OF DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
511,520
|
|
$
|
5,155,380
|
|
$
|
2,127,107
|
|
|
Pledged
deposits
|
|
|
3
|
|
|
588,617
|
|
|
2,838,067
|
|
|
1,566,638
|
|
|
Trade
accounts receivable
|
|
|
4
|
|
|
5,552,813
|
|
|
2,137,692
|
|
|
4,896,673
|
|
|
Amounts
due from related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
companies
|
|
|
5
|
|
|
10,159,238
|
|
|
11,473,570
|
|
|
8,734,488
|
|
|
Prepayments
for raw materials
|
|
|
|
|
|
2,165,886
|
|
|
1,553,362
|
|
|
698,598
|
|
|
Other
receivables
|
|
|
6
|
|
|
2,569,335
|
|
|
2,641,743
|
|
|
2,803,172
|
|
|
Inventories
|
|
|
7
|
|
|
5,081,421
|
|
|
5,425,698
|
|
|
5,743,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
$
|
26,628,830
|
|
$
|
31,225,512
|
|
$
|
26,570,020
|
|
|
Property,
plant and equipment, net
|
|
|
9
|
|
|
5,129,286
|
|
|
3,720,647
|
|
|
3,603,836
|
|
|
Investment
securities
|
|
|
|
|
|
26,620
|
|
|
16,476
|
|
|
9,654
|
|
|
Leasehold
land, net
|
|
|
10
|
|
|
921,513
|
|
|
469,177
|
|
|
469,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
|
|
$
|
32,706,249
|
|
$
|
35,431,812
|
|
$
|
30,652,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term bank loans
|
|
|
11
|
|
$
|
11,825,958
|
|
$
|
16,427,664
|
|
$
|
13,573,087
|
|
|
Current
maturities of long term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debt
|
|
|
14
|
|
|
5,117
|
|
|
-
|
|
|
-
|
|
|
Accounts
payable
|
|
|
|
|
|
1,152,798
|
|
|
1,237,010
|
|
|
1,025,574
|
|
|
Notes
payable
|
|
|
12
|
|
|
191,877
|
|
|
2,229,544
|
|
|
1,568,817
|
|
|
Customers’
deposits
|
|
|
|
|
|
105,227
|
|
|
78,475
|
|
|
3,657,924
|
|
|
Accrued
expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payables
|
|
|
13
|
|
|
568,229
|
|
|
1,000,696
|
|
|
1,164,878
|
|
|
Income
tax payable
|
|
|
|
|
|
338,609
|
|
|
194,466
|
|
|
199,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
$
|
14,187,815
|
|
$
|
21,167,855
|
|
$
|
21,190,192
|
|
|
Long
term debts
|
|
|
14
|
|
|
1,288,803
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
$
|
15,476,618
|
|
$
|
21,167,855
|
|
$
|
21,190,192
|
|
The
accompanying notes are an integral part of these financial
statements.
|
SHANDONG
GREEN FOODSTUFF CO., LTD
|
|
|
|
BALANCE
SHEETS (Continued)
|
|
AS
OF DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
|
|
$
|
12,467,395
|
|
$
|
12,467,395
|
|
$
|
965,426
|
|
|
Additional
paid-in-capital
|
|
|
|
|
|
266,391
|
|
|
266,391
|
|
|
266,391
|
|
|
Statutory
reserves
|
|
|
|
|
|
1,248,805
|
|
|
915,951
|
|
|
647,605
|
|
|
Retained
earnings
|
|
|
|
|
|
2,588,502
|
|
|
479,225
|
|
|
7,587,614
|
|
|
Accumulated
other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
658,538
|
|
|
134,995
|
|
|
(4,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,229,631
|
|
$
|
14,263,957
|
|
$
|
9,462,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
$
|
32,706,249
|
|
$
|
35,431,812
|
|
$
|
30,652,517
|
|
The
accompanying notes are an integral part of these financial
statements.
|
SHANDONG
GREEN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF INCOME
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
Net
revenues
|
|
|
|
|
$
|
23,151,286
|
|
$
|
18,861,695
|
|
$
|
25,280,603
|
|
|
Cost
of revenues
|
|
|
|
|
|
(17,858,007
|
)
|
|
(14,506,900
|
)
|
|
(21,129,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
$
|
5,293,279
|
|
$
|
4,354,795
|
|
$
|
4,151,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
|
|
|
(788,207
|
)
|
|
(832,674
|
)
|
|
(1,599,215
|
)
|
|
General
and administrative expenses
|
|
|
|
|
|
(949,281
|
)
|
|
(654,916
|
)
|
|
(701,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
$
|
3,555,791
|
|
$
|
2,867,205
|
|
$
|
1,850,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
costs, net
|
|
|
15
|
|
|
(1,096,616
|
)
|
|
(1,018,385
|
)
|
|
(1,163,984
|
)
|
|
Government
grant
|
|
|
|
|
|
481,380
|
|
|
317,701
|
|
|
438,748
|
|
|
Other
income
|
|
|
|
|
|
10,390
|
|
|
69,778
|
|
|
87,726
|
|
|
Other
expenses
|
|
|
|
|
|
(14,425
|
)
|
|
(3,165
|
)
|
|
(2,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxation
|
|
|
|
|
$
|
2,936,520
|
|
$
|
2,233,135
|
|
$
|
1,210,321
|
|
|
Income
tax
|
|
|
8
|
|
|
(494,390
|
)
|
|
(191,386
|
)
|
|
(199,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
$
|
2,442,131
|
|
$
|
2,041,749
|
|
$
|
1,010,426
|
|
The
accompanying notes are an integral part of these financial
statements.
|
SHANDONG
GREEN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
|
|
|
|
Common
|
|
paid-in-
|
|
Statutory
|
|
Retained
|
|
comprehensive
|
|
|
|
|
|
|
stock
|
|
capital
|
|
reserves
|
|
earnings
|
|
income
|
|
Total
|
|
|
Balance,
January 1, 2004
|
|
$
|
965,426
|
|
|
266,391
|
|
|
498,609
|
|
|
6,726,184
|
|
|
-
|
|
|
8,456,610
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
1,010,426
|
|
|
|
|
|
1,010,426
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
|
|
|
148,996
|
|
|
(148,996
|
)
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,711
|
)
|
|
(4,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$
|
965,426
|
|
|
266,391
|
|
|
647,605
|
|
|
7,587,614
|
|
|
(4,711
|
)
|
|
9,462,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2005
|
|
$
|
965,426
|
|
|
266,391
|
|
|
647,605
|
|
|
7,587,614
|
|
|
(4,711
|
)
|
|
9,462,325
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
2,041,749
|
|
|
|
|
|
|
|
|
Issue
of common stock
|
|
|
11,501,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,501,969
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
|
|
|
268,346
|
|
|
(268,346
|
)
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
(8,881,792
|
)
|
|
|
|
|
(8,881,792
|
)
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,706
|
|
|
139,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
$
|
12,467,395
|
|
|
266,391
|
|
|
915,951
|
|
|
479,225
|
|
|
134,995
|
|
|
14,263,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
$
|
12,467,395
|
|
|
266,391
|
|
|
915,951
|
|
|
479,225
|
|
|
134,995
|
|
|
14,263,957
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
2,442,131
|
|
|
|
|
|
2,442,131
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
|
|
|
332,854
|
|
|
(332,854
|
)
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523,543
|
|
|
523,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
$
|
12,467,395
|
|
|
266,391
|
|
|
1,248,805
|
|
|
2,588,502
|
|
|
658,538
|
|
|
17,229,631
|
|
The
accompanying notes are an integral part of these financial
statements.
|
SHANDONG
GREEN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND
2004
|
|
(Stated
in US Dollars)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
329,974
|
|
|
303,106
|
|
|
212,748
|
|
|
Amortization
|
|
|
18,508
|
|
|
12,016
|
|
|
6,820
|
|
|
(Increase)/Decrease
in accounts and other receivables
|
|
|
(3,171,836
|
)
|
|
(4,581,133
|
)
|
|
(11,766,993
|
)
|
|
(Increase)/Decrease
in inventories
|
|
|
511,135
|
|
|
461,812
|
|
|
(2,787,974
|
)
|
|
Increase/(Decrease)
in accounts and other payables
|
|
|
(1,324,978
|
)
|
|
1,334,197
|
|
|
12,157,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in)/provided by operating
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
(1,590,317
|
)
|
|
(351,317
|
)
|
|
(1,590,485
|
)
|
|
Increase
in pledged bank deposits
|
|
|
2,294,111
|
|
|
(1,210,599
|
)
|
|
(311,835
|
)
|
|
Payment
of leasehold land
|
|
|
(446,486
|
)
|
|
(6,492
|
)
|
|
(202,999
|
)
|
|
Investments
in securities
|
|
|
(9,407
|
)
|
|
(6,461
|
)
|
|
(9,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Issue
of common stock
|
|
|
-
|
|
|
11,501,969
|
|
|
-
|
|
|
Dividend
paid
|
|
|
-
|
|
|
(8,881,792
|
)
|
|
-
|
|
|
Bank
borrowings
|
|
|
14,560,283
|
|
|
17,241,146
|
|
|
12,224,322
|
|
|
Bank
repayment
|
|
|
(18,326,617
|
)
|
|
(14,966,498
|
)
|
|
(10,081,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by/(used in) financing
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in
|
|
|
|
|
|
|
|
|
|
|
|
cash
and cash equivalents
|
|
|
(4,713,500
|
)
|
|
2,891,703
|
|
|
(1,140,021
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation on cash
|
|
|
|
|
|
|
|
|
|
|
|
and
cash equivalents
|
|
|
69,640
|
|
|
136,570
|
|
|
(4,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents-beginning of year
|
|
|
5,155,380
|
|
|
2,127,107
|
|
|
3,271,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents-end of year
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
received
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
1,105,761
|
|
|
1,105,761
|
|
|
1,105,761
|
|
The
accompanying notes are an integral part of these financial
statements.
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.ORGANIZATION
AND
PRINCIPAL
ACTIVITIES
Shandong
Green Foodstuff Co., Ltd was established in the People’s Republic of China (the
PRC) as a limited company in July 1994. The Company currently operates and
locates in Junan County, Shandong Province of the People’s Republic of
China.
The
Company is engaged in the development, manufacture and sales of food products
worldwide. The Group produces hundreds of varieties of food categorized into
three divisions: chestnut products, convenient food including Ready-to-Cook
(RTCs), Ready-to-Eat (RTEs) and Meals Ready-to-Eat (MREs), and frozen and
canned
food.
2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and
notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States
of
America and have been consistently applied in the presentation of financial
statements, which are compiled on the accrual basis of accounting.
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management
to
make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the
best
information available at the time the estimates are made; however actual
results
could differ materially from those estimates.
|
(c)
|
Economic
and political risks
|
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced
by the
political, economic and legal environment in the PRC, and by the general
state
of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange.
The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among
other
things.
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Leasehold
land is stated at cost less accumulated amortisation. Amortisation is provided
over the respective useful lives, using the straight-line method. Estimated
useful live is 50 years.
|
(e)
|
Property,
plant and equipment
|
Plant
and
equipment are carried at cost less accumulated depreciation. Depreciation
is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows: -
|
Buildings
|
|
|
20
years
|
|
|
Machinery
and equipment
|
|
|
10
years
|
|
|
Motor
vehicles
|
|
|
10
years
|
|
|
Office
equipment
|
|
|
5
years
|
|
The
cost
and related accumulated depreciation of assets sold or otherwise retired
are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
|
(f)
|
Accounting
for the Impairment of Long-Lived
Assets
|
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
assets may not be recoverable. It is reasonably possible that these assets
could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to
be
generated by the assets.
If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
During
the reporting years, there was no impairment loss.
|
(g)
|
Construction
in progress
|
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction
in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended
use.
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Inventories
consisting of finished goods, materials on hand, packaging materials and
raw
materials are stated at the lower of cost or market value. Finished goods
are
comprised of direct materials, direct labor and an appropriate proportion
of
overhead.
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts
is
made when collection of the full amount is no longer probable. Bad debts
are
written off as incurred.
Customer
deposits were received from customers in connection with orders of products
to
be delivered in future periods.
|
(k)
|
Cash
and cash equivalents
|
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts only in the PRC. The Company does not maintain any bank accounts
in the United States of America.
|
(l)
|
Foreign
currency translation
|
The
accompanying financial statements are presented in United States dollars.
The
functional currency of the Company is the Renminbi (RMB). The financial
statements are translated into United States dollars from RMB at year-end
exchange rates as to assets and liabilities and average exchange rates as
to
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Year
end RMB : US$ exchange rate
|
|
|
7.81750
|
|
|
8.07340
|
|
|
8.28650
|
|
|
Average
yearly RMB : US$ exchange rate
|
|
|
7.98189
|
|
|
8.20329
|
|
|
8.28723
|
|
The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into
US$ at
the rates used in translation.
The
Company's revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist
and collectability is reasonably assured. Payments received before all of
the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
The
Company's revenue consists of invoiced value of goods, net of a value-added
tax
(VAT). No product return or sales discount allowance is made as products
delivered and accepted by customers are normally not returnable and sales
discount is normally not granted after products are delivered.
The
Company expensed all advertising costs as incurred.
|
(o)
|
Shipping
and handling
|
All
shipping and handling are expensed as incurred.
|
(p)
|
Research
and development
|
All
research and development costs are expensed as incurred.
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income
as
incurred.
The
Company accounts for income tax using an asset and liability approach and
allows
for recognition of deferred tax benefits in future years. Under the asset
and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for
financial reporting purposes and the amounts used for income tax purposes.
A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future realization is uncertain.
Statutory
reserves are referring to the amount appropriated from the net income in
accordance with laws or regulations, which can be used to recover losses
and
increase capital, as approved, and are to be used to expand production or
operations.
Comprehensive
income is defined to include all changes in equity except those resulting
from
investments by owners and distributions to owners. Among other disclosures,
all
items that are required to be recognized under current accounting standards
as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. The Company’s current component of other comprehensive income is the
foreign currency translation adjustment.
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(u)
Recent accounting pronouncements
In
July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting
for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change
in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which
defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those
fiscal
year.
In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108,
the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods,
based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values
of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.
The
management of the Company does not anticipate that the adoption of these
three
standards will have a material impact on these consolidated financial
statements.
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
PLEDGE BANK DEPOSITS
Pledged
bank deposits are restricted cash with banks for general banking facilities
and
notes payables.
4.
TRADE ACCOUNTS RECEIVABLE
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Trade
accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
-
unrelated parties
|
|
$
|
5,742,077
|
|
$
|
2,160,496
|
|
$
|
4,913,776
|
|
|
Less:
Allowance for doubtful
|
|
|
|
|
|
|
|
|
|
|
|
accounts
|
|
|
(189,264
|
)
|
|
(22,804
|
)
|
|
(17,103
|
)
|
|
|
|
$
|
5,552,813
|
|
$
|
2,137,692
|
|
$
|
4,896,673
|
|
An
analysis of the allowance for doubtful accounts for the years ended December
31,
2006, 2005, and 2004 is as follows: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Balance
at beginning of year
|
|
$
|
22,804
|
|
$
|
17,103
|
|
$
|
24,938
|
|
|
Addition
of bad debt expense, net
|
|
|
166,460
|
|
|
5,701
|
|
|
(7,835
|
)
|
|
Balance
at end of year
|
|
$
|
189,264
|
|
$
|
22,804
|
|
$
|
17,103
|
|
5.
AMOUNTS DUE FROM RELATED COMPANIES
Amounts
due from related companies are unsecured, interest free and have no fixed
repayment dates.
6.
INVENTORIES
Inventories
at December 31, 2006, 2005, and 2004 consist of the following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Raw
materials
|
|
$
|
2,286,603
|
|
$
|
1,920,243
|
|
$
|
1,775,332
|
|
|
Finished
goods
|
|
|
2,794,818
|
|
|
3,505,455
|
|
|
3,968,012
|
|
|
|
|
$
|
5,081,421
|
|
$
|
5,425,698
|
|
$
|
5,743,344
|
|
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
7.
OTHER RECEIVABLES
Other
receivables at December 31, 2006, 2005, and 2004 consist of the following:
-
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Advances
to suppliers
|
|
$
|
268,151
|
|
$
|
244,524
|
|
$
|
266,907
|
|
|
Turnover
taxes prepayment
|
|
|
-
|
|
|
-
|
|
|
378,707
|
|
|
Purchases
disbursements
|
|
|
|
|
|
|
|
|
|
|
|
advances
|
|
|
2,301,184
|
|
|
2,397,219
|
|
|
2,157,558
|
|
|
|
|
$
|
2,569,335
|
|
$
|
2,641,743
|
|
$
|
2,803,172
|
|
8.
INCOME TAXES
All
of
the Company’s income before income taxes and related tax expenses are from PRC
sources. In accordance with the relevant tax laws and regulations of PRC,
the
corporation income tax rate is 33%. Actual income tax expenses reported in
the
statements of income and comprehensive income differ from the amounts computed
by applying the PRC statutory income tax rate of 33% to income before income
tax
for the three years ended December 31, 2006, 2005, and 2004 for the following
reasons: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Income
before tax
|
|
$
|
2,936,520
|
|
$
|
2,233,135
|
|
$
|
1,210,321
|
|
|
Tax
at the income tax rate
|
|
|
969,052
|
|
|
736,935
|
|
|
399,311
|
|
|
Effect
of tax exemption granted
|
|
|
(474,662
|
)
|
|
(545,549
|
)
|
|
(199,415
|
)
|
|
Income
tax
|
|
$
|
494,390
|
|
|
191,386
|
|
|
199,896
|
|
No
provision for deferred tax (benefit) has been made for the PRC tax jurisdiction
because no significant deferred tax liabilities or assets existed as of either
December 31, 2006, 2005, or 2004.
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
9.
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment at December 31, 2006, 2005, and 2004 consist of the
following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
At
cost:
|
|
|
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
2,259,939
|
|
$
|
1,619,407
|
|
$
|
1,577,762
|
|
|
Landscaping,
plant and tree
|
|
|
814,001
|
|
|
216,513
|
|
|
20,853
|
|
|
Machinery
and equipment
|
|
|
2,872,190
|
|
|
2,652,910
|
|
|
2,461,204
|
|
|
Office
equipment
|
|
|
121,891
|
|
|
107,932
|
|
|
98,125
|
|
|
Motor
vehicles
|
|
|
286,016
|
|
|
247,256
|
|
|
240,313
|
|
|
|
|
$
|
6,354,037
|
|
$
|
4,844,018
|
|
$
|
4,398,257
|
|
|
Less:
accumulated depreciation
|
|
|
(1,497,058
|
)
|
|
(1,123,371
|
)
|
|
(794,421
|
)
|
|
Construction
in progress
|
|
|
272,307
|
|
|
-
|
|
|
-
|
|
|
|
|
$
|
5,129,286
|
|
$
|
3,720,647
|
|
$
|
3,603,836
|
|
Depreciation
and amortization expense is included in the statement of income and
comprehensive income as follows: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Cost
of revenues
|
|
$
|
287,865
|
|
$
|
261,396
|
|
$
|
186,674
|
|
|
Selling
and marketing expenses
|
|
|
18,111
|
|
|
20,384
|
|
|
13,956
|
|
|
General
and administrative expenses
|
|
|
23,997
|
|
|
21,326
|
|
|
12,119
|
|
|
|
|
$
|
329,973
|
|
$
|
303,106
|
|
$
|
212,749
|
|
Construction
in progress mainly comprises capital expenditures for construction of the
Company’s new corporate campus, including offices, factories and staff
dormitories.
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
10.
LEASEHOLD LAND
Leasehold
land at December 31, 2006, 2005, and 2004 consist of the following:
-
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Leasehold
land, at cost
|
|
$
|
960,249
|
|
$
|
488,387
|
|
$
|
475,827
|
|
|
Less:
Accumulated amortization
|
|
|
(38,735
|
)
|
|
(19,210
|
)
|
|
(6,820
|
)
|
|
|
|
$
|
921,513
|
|
$
|
469,177
|
|
$
|
469,007
|
|
Leasehold
land represent the prepaid land use right. The land on which the Company’s new
corporate campus is being constructed is owned by the PRC government.
Amortization
expenses for the above lease prepayments were approximately $18,508, $12,016,
and $6,820 for the years ended December 31, 2006, 2005, and 2004, respectively.
Estimated amortization expense for the next five years is approximately $18,508
each year.
11.
SHORT TERM BANK LOANS
The
followings are the short term bank loans outstanding as at December 31, 2006,
2005, and 2004: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Loans
from Junan County Construction Bank,
|
|
|
|
|
|
|
|
|
|
|
|
interest
rates at 6.264% per annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 1/10/2007 and 9/7/2007
|
|
|
|
|
$
|
|
|
|
|
|
|
Due
between 1/16/2006 and 4/22/2006
|
|
|
|
|
|
7,253,655
|
|
|
|
|
|
Due
between 1/12/2005 and 12/31/2005
|
|
|
|
|
|
|
|
|
6,204,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
from Junan County Agriculture Bank,
|
|
|
|
|
|
|
|
|
|
|
|
interest
rates at 7.6500% to 10.404% per
|
|
|
|
|
|
|
|
|
|
|
|
annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 1/10/2007 and 12/5/2007
|
|
|
5,299,775
|
|
|
|
|
|
|
|
|
Due
between 1/16/2006 and 12/19/2006
|
|
|
|
|
|
5,247,696
|
|
|
|
|
|
Due
between 1/13/2005 and 10/14/2005
|
|
|
|
|
|
|
|
|
3,927,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from Junan County Industrial and
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Bank, interest rates at 4.650% to
|
|
|
|
|
|
|
|
|
|
|
|
6.120%
per annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 1/11/2007 and 12/10/2007
|
|
|
3,004,883
|
|
|
|
|
|
|
|
|
Due
between 2/23/2006 and 12/19/2006
|
|
|
|
|
|
3,926,313
|
|
|
|
|
|
Due
between 1/12/2005 and 9/22/2005
|
|
|
|
|
|
|
|
|
3,440,983
|
|
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
11.
SHORT TERM BANK LOANS (Continued)
|
Loan
from Junan County Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Institution, interest rates at 9.765%
|
|
|
|
|
|
|
|
|
|
|
|
per
annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 1/13/2007 and 5/22/2007
|
|
|
181,644
|
|
|
|
|
|
|
|
|
Due
between 9/10/2006 and 10/20/2006
|
|
|
|
|
|
505,923
|
|
|
|
|
|
Due
between 1/22/2005 and 5/24/2005
|
|
|
|
|
|
|
|
|
70,539
|
|
|
|
|
$
|
11,825,958
|
|
$
|
16,427,664
|
|
$
|
13,573,087
|
|
The
loan
was primarily obtained for general working capital.
Interest
expenses for the loans were $1,142,083, $1,105,761, and $1,110,632 respectively
for the years ended December 31, 2006, 2005, and 2004.
12.
NOTES PAYABLE
The
followings are the notes payable outstanding as at December 31, 2006, 2005,
and
2004: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Linyi Commercial Bank
|
|
|
|
|
|
|
|
|
bank
commission charge at 0.05% ,
|
|
|
|
|
|
|
|
|
Due
5/20/2007
|
|
$
|
191,877
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Junan County Agriculture Bank,
|
|
|
|
|
|
|
|
|
|
|
|
bank
commission charge at 0.05% ,
|
|
|
|
|
|
|
|
|
|
|
|
Due
3/29/2006
|
|
|
|
|
|
1,238,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Junan County Industrial and Commercial Bank
|
|
|
|
|
|
|
|
|
|
|
|
bank
commission charge at 0.05% ,
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 4/30/2006 and 5/19/2006
|
|
|
|
|
|
990,908
|
|
|
|
|
|
Due
3/25/2005
|
|
|
|
|
|
|
|
|
724,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from Junan County Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Institution,
|
|
|
|
|
|
|
|
|
|
|
|
bank
commission charge at 0.05% ,
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 4/5/2005 and 5/26/2005
|
|
|
|
|
|
|
|
|
844,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
191,877
|
|
$
|
2,229,544
|
|
$
|
1,568,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
13.
ACCRUED EXPENSES AND OTHER PAYABLES
Accrued
expenses and other payables at December 31, 2006, 2005, and 2004 consist
of the
following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Accrued
salaries and wages
|
|
$
|
42,854
|
|
$
|
69,842
|
|
$
|
166,513
|
|
|
Accrued
utility expenses
|
|
|
68,288
|
|
|
120,004
|
|
|
75,200
|
|
|
Accrued
Interest expenses
|
|
|
4,419
|
|
|
304,232
|
|
|
204,183
|
|
|
Accrued
transportation expenses
|
|
|
-
|
|
|
6,504
|
|
|
399,564
|
|
|
Business
and other taxes
|
|
|
73,425
|
|
|
200,653
|
|
|
-
|
|
|
Purchases
disbursements payables
|
|
|
379,241
|
|
|
299,459
|
|
|
319,420
|
|
|
|
|
$
|
568,229
|
|
$
|
1,000,696
|
|
$
|
1,164,878
|
|
Customer
deposits were received from customers in connection with orders of products
to
be delivered in future periods.
14.
LONG-TERM DEBTS
Long-term
debts are as follows:
|
Loan
from Bank of China, Junan Branch
|
|
|
|
|
|
interest
rates at 0.67% per annum
|
|
|
|
|
|
Due
5/19/2009
|
|
$
|
14,738
|
|
|
|
|
|
|
|
|
Loan
from International Trust & Investment Co., Ltd,
|
|
|
|
|
|
interest
rates at 0.67% per annum
|
|
|
|
|
|
Due
6/13/2008
|
|
|
1,279,182
|
|
|
|
|
$
|
1,293,920
|
|
|
Less:
Current maturities of long term debts
|
|
|
(5,117
|
)
|
|
|
|
$
|
1,288,803
|
|
Interest
expenses for the loans were $39,500 for the year ended December 31,
2006.
SHANDONG
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
15.
FINANCE COSTS, NET
Details
of finance costs are summarized as follows:
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Total
interest cost incurred
|
|
$
|
1,181,583
|
|
$
|
1,105,761
|
|
$
|
1,110,632
|
|
|
Interest
income
|
|
|
(131,455
|
)
|
|
(111,645
|
)
|
|
(98,150
|
)
|
|
Others
|
|
|
46,488
|
|
|
24,269
|
|
|
151,502
|
|
|
|
|
$
|
1,096,616
|
|
$
|
1,018,385
|
|
$
|
1,163,984
|
|
Junan
Hongrun Foodstuff Co., Ltd
FINANCIAL
STATEMENTS
DECEMBER
31, 2006, 2005, AND 2004
(Stated
in US dollars)
JUNAN
HONGRUN FOODSTUFF CO., LTD
|
CONTENTS
|
|
PAGES
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
|
|
|
|
ACCOUNTING
FIRM
|
|
1
|
|
|
|
|
|
BALANCE
SHEETS
|
|
2
-
3
|
|
|
|
|
|
STATEMENTS
OF INCOME
|
|
4
|
|
|
|
|
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY
|
|
5
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
6
|
|
|
|
|
|
NOTES
TO FINANCIAL STATEMENTS
|
|
7
-
18
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
To:
|
The
Board of Directors and Stockholders of
Junan Hongrun Foodstuff Co.,
Ltd
|
We
have
audited the accompanying balance sheets of Junan Hongrun Foodstuff Co., Ltd
as
of December 31, 2006, 2005, and 2004 and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Junan Hongrun Foodstuff Co.,
Ltd as
of December 31, 2006, 2005, and 2004 and the results of its operations and
its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
|
South
San Francisco, California
|
Samuel
H. Wong & Co., LLP
|
|
March
1, 2007
|
Certified
Public Accountants
|
|
JUNAN
HONGRUN FOODSTUFF CO., LTD
|
|
|
|
BALANCE
SHEETS
|
|
AS
OF DECEMBER 31, 2006, 2005, AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
484,156
|
|
$
|
1,729,469
|
|
$
|
2,426,963
|
|
|
Pledged
deposits
|
|
|
3
|
|
|
1,960,704
|
|
|
-
|
|
|
-
|
|
|
Trade
accounts receivable
|
|
|
4
|
|
|
3,183,750
|
|
|
4,112,198
|
|
|
1,595,047
|
|
|
Prepayments
for raw materials
|
|
|
|
|
|
136,515
|
|
|
220,714
|
|
|
733,290
|
|
|
Amounts
due from related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
companies
|
|
|
5
|
|
|
-
|
|
|
1,545,813
|
|
|
-
|
|
|
Other
receivables
|
|
|
6
|
|
|
1,692,811
|
|
|
1,691,891
|
|
|
2,019,029
|
|
|
Inventories
|
|
|
7
|
|
|
4,024,578
|
|
|
6,013,884
|
|
|
6,073,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
$
|
11,482,514
|
|
$
|
15,313,969
|
|
$
|
12,847,502
|
|
|
Property,
plant and equipment, net
|
|
|
9
|
|
|
2,312,157
|
|
|
2,251,017
|
|
|
1,412,514
|
|
|
Investments
in subsidiaries
|
|
|
|
|
|
8,012,792
|
|
|
-
|
|
|
-
|
|
|
Leasehold
land, net
|
|
|
10
|
|
|
1,298,438
|
|
|
314,324
|
|
|
313,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
|
|
$
|
23,105,901
|
|
$
|
17,879,310
|
|
$
|
14,573,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term bank loans
|
|
|
11
|
|
$
|
6,265,320
|
|
$
|
2,655,322
|
|
$
|
1,559,547
|
|
|
Accounts
payable
|
|
|
|
|
|
648,993
|
|
|
535,468
|
|
|
486,661
|
|
|
Notes
payable
|
|
|
12
|
|
|
3,274,704
|
|
|
1,535,908
|
|
|
-
|
|
|
Amounts
due to related companies
|
|
|
5
|
|
|
6,316,983
|
|
|
7,955,750
|
|
|
7,146,318
|
|
|
Customers’
deposits
|
|
|
|
|
|
24,756
|
|
|
152,958
|
|
|
1,259,418
|
|
|
Accrued
expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payables
|
|
|
13
|
|
|
744,413
|
|
|
608,772
|
|
|
1,553,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
$
|
17,275,169
|
|
$
|
13,444,178
|
|
$
|
12,004,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
$
|
17,275,169
|
|
$
|
13,444,178
|
|
$
|
12,004,981
|
|
The
accompanying notes are an integral part of these financial
statements.
|
JUNAN
HONGRUN FOODSTUFF CO., LTD
|
|
|
|
BALANCE
SHEETS (Continued)
|
|
AS
OF DECEMBER 31, 2006, 2005, AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
|
|
$
|
2,394,230
|
|
$
|
603,376
|
|
$
|
603,376
|
|
|
Statutory
reserves
|
|
|
|
|
|
922,489
|
|
|
490,610
|
|
|
265,863
|
|
|
Retained
earnings
|
|
|
|
|
|
2,283,513
|
|
|
3,244,696
|
|
|
1,699,077
|
|
|
Accumulated
other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
230,500
|
|
|
96,450
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,830,732
|
|
$
|
4,435,132
|
|
$
|
2,568,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
$
|
23,105,901
|
|
$
|
17,879,310
|
|
$
|
14,573,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
JUNAN
HONGRUN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF INCOME
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
|
|
$
|
14,991,955
|
|
$
|
11,091,448
|
|
$
|
8,557,309
|
|
|
Cost
of revenues
|
|
|
|
|
|
(11,048,370
|
)
|
|
(8,792,987
|
)
|
|
(6,574,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
$
|
3,943,585
|
|
$
|
2,298,461
|
|
$
|
1,982,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
|
|
|
(236,346
|
)
|
|
(133,391
|
)
|
|
(26,436
|
)
|
|
General
and administrative expenses
|
|
|
|
|
|
(314,533
|
)
|
|
(189,618
|
)
|
|
(143,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
$
|
3,392,706
|
|
$
|
1,975,452
|
|
$
|
1,813,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
costs, net
|
|
|
14
|
|
|
(412,711
|
)
|
|
(241,152
|
)
|
|
(25,807
|
)
|
|
Other
income
|
|
|
|
|
|
38,909
|
|
|
36,676
|
|
|
22,856
|
|
|
Other
expenses
|
|
|
|
|
|
(24,999
|
)
|
|
(610
|
)
|
|
(37,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxation
|
|
|
|
|
$
|
2,993,905
|
|
$
|
1,770,366
|
|
$
|
1,772,269
|
|
|
Income
tax
|
|
|
8
|
|
|
(310,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
$
|
2,683,724
|
|
$
|
1,770,366
|
|
$
|
1,772,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
JUNAN
HONGRUN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF STOCKHOLDERS
’
EQUITY
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
Common
|
|
Statutory
|
|
Retained
|
|
comprehensive
|
|
|
|
|
|
|
stock
|
|
reserves
|
|
earnings
|
|
income
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2004
|
|
$
|
603,376
|
|
|
-
|
|
|
192,671
|
|
|
-
|
|
|
796,047
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
1,772,269
|
|
|
|
|
|
1,772,269
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
265,863
|
|
|
(265,863
|
)
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
170
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$
|
603,376
|
|
|
265,863
|
|
|
1,699,077
|
|
|
170
|
|
|
2,568,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2005
|
|
$
|
603,376
|
|
|
265,863
|
|
|
1,699,077
|
|
|
170
|
|
|
2,568,486
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
1,770,366
|
|
|
|
|
|
1,770,366
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
224,747
|
|
|
(224,747
|
)
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
96,280
|
|
|
96,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
$
|
603,376
|
|
|
490,610
|
|
|
3,244,696
|
|
|
96,450
|
|
|
4,435,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
$
|
603,376
|
|
|
490,610
|
|
|
3,244,696
|
|
|
96,450
|
|
|
4,435,132
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
2,683,724
|
|
|
|
|
|
2,683,724
|
|
|
Issue
of common stock
|
|
|
1,790,854
|
|
|
|
|
|
|
|
|
|
|
|
1,790,854
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
431,879
|
|
|
(431,879
|
)
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
(3,213,028
|
)
|
|
|
|
|
(3,213,028
|
)
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
134,050
|
|
|
134,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
$
|
2,394,230
|
|
|
922,489
|
|
|
2,283,513
|
|
|
230,500
|
|
|
5,830,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
JUNAN
HONGRUN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005, AND
2004
|
|
(Stated
in US Dollars)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,683,724
|
|
$
|
1,770,366
|
|
$
|
1,772,269
|
|
|
Depreciation
|
|
|
110,584
|
|
|
88,364
|
|
|
58,538
|
|
|
Amortization
|
|
|
21,036
|
|
|
7,284
|
|
|
1,063
|
|
|
(Increase)/Decrease
in accounts and other receivables
|
|
|
1,698,494
|
|
|
(7,800,209
|
)
|
|
(9,565,377
|
)
|
|
(Increase)/Decrease
in inventories
|
|
|
2,141,141
|
|
|
216,115
|
|
|
(2,170,091
|
)
|
|
Increase
in accounts and other payables
|
|
|
919,637
|
|
|
4,807,571
|
|
|
9,604,477
|
|
|
Net
cash (used in)/provided by operating
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
$
|
7,574,616
|
|
$
|
(910,509
|
)
|
$
|
(299,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
(98,297
|
)
|
|
(876,896
|
)
|
|
(405,884
|
)
|
|
Increase
in pledged bank deposits
|
|
|
(1,920,323
|
)
|
|
-
|
|
|
-
|
|
|
Payment
of leasehold land
|
|
|
(974,805
|
)
|
|
-
|
|
|
(276,951
|
)
|
|
Investments
in subsidiaries
|
|
|
(7,847,765
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
$
|
(10,841,190
|
)
|
$
|
(876,896
|
)
|
$
|
(682,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Issue
of common stock
|
|
|
1,790,854
|
|
|
-
|
|
|
-
|
|
|
Dividend
paid
|
|
|
(3,213,028
|
)
|
|
-
|
|
|
-
|
|
|
Bank
borrowings
|
|
|
8,837,033
|
|
|
2,378,799
|
|
|
1,631,817
|
|
|
Bank
repayment
|
|
|
(5,423,398
|
)
|
|
(1,340,889
|
)
|
|
(72,401
|
)
|
|
Net
cash provided by/(used in) financing
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
$
|
1,991,461
|
|
$
|
1,037,910
|
|
$
|
1,559,416
|
|
|
Net
increase/(decrease) in
|
|
|
|
|
|
|
|
|
|
|
|
cash
and cash equivalents
|
|
|
(1,275,113
|
)
|
|
(749,495
|
)
|
|
577,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation on cash
|
|
|
|
|
|
|
|
|
|
|
|
and
cash equivalents
|
|
|
29,799
|
|
|
52,001
|
|
|
93
|
|
|
Cash
and cash equivalents-beginning of year
|
|
|
1,729,469
|
|
|
2,426,963
|
|
|
1,849,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents-end of year
|
|
$
|
484,156
|
|
$
|
1,729,469
|
|
$
|
2,426,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
received
|
|
$
|
8,449
|
|
$
|
5,182
|
|
$
|
6,947
|
|
|
Interest
paid
|
|
|
386,224
|
|
|
199,617
|
|
|
27,111
|
|
The
accompanying notes are an integral part of these financial
statements
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
Junan
Hongrun Foodstuff Co., Ltd was established in the People’s Republic of China
(the PRC) as a limited company in November 2002.
The
Company currently operates and locates in Junan County, Shandong Province
of the
mainland China.
The
Company is engaged in the development, manufacture and sales of food products
worldwide. The Group produces hundreds of varieties of food categorized into
three divisions: chestnut products, convenient food including Ready-to-Cook
(RTCs), Ready-to-Eat (RTEs) and Meals Ready-to-Eat (MREs), and frozen and
canned
food.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Method of Accounting
The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and
notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States
of
America and have been consistently applied in the presentation of financial
statements, which are compiled on the accrual basis of accounting.
(b)
Use of estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management
to
make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the
best
information available at the time the estimates are made; however actual
results
could differ materially from those estimates.
(c)
Economic and political risks
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced
by the
political, economic and legal environment in the PRC, and by the general
state
of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange.
The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among
other
things.
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(d)
Leasehold land
Leasehold
land is stated at cost less accumulated amortisation. Amortisation is provided
over the respective useful lives, using the straight-line method. Estimated
useful live is 50 years.
(e)
Property, plant and equipment
Plant
and
equipment are carried at cost less accumulated depreciation. Depreciation
is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows:
|
Buildings
|
20
years
|
|
Machinery
and equipment
|
10
years
|
|
Motor
vehicles
|
10
years
|
|
Office
equipment
|
5
years
|
The
cost
and related accumulated depreciation of assets sold or otherwise retired
are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
(f)
Accounting for the Impairment of Long-Lived Assets
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
assets may not be recoverable. It is reasonably possible that these assets
could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to
be
generated by the assets.
If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
During
the reporting years, there was no impairment loss.
(g)
Construction in progress
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction
in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended
use.
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(h)
Inventories
Inventories
consisting of finished goods, materials on hand, packaging materials and
raw
materials are stated at the lower of cost or market value. Finished goods
are
comprised of direct materials, direct labor and an appropriate proportion
of
overhead.
(i)
Trade receivables
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts
is
made when collection of the full amount is no longer probable. Bad debts
are
written off as incurred.
(
j
)
Customer deposits
Customer
deposits were received from customers in connection with orders of products
to
be delivered in future periods.
(k)
Cash and cash equivalents
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts only in the PRC. The Company does not maintain any bank accounts
in the United States of America.
(l)
Foreign currency translation
The
accompanying financial statements are presented in United States dollars.
The
functional currency of the Company is the Renminbi (RMB). The financial
statements are translated into United States dollars from RMB at year-end
exchange rates as to assets and liabilities and average exchange rates as
to
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Year
end RMB : US$ exchange rate
|
|
|
7.81750
|
|
|
8.07340
|
|
|
8.28650
|
|
|
Average
yearly RMB : US$ exchange rate
|
|
|
7.98189
|
|
|
8.20329
|
|
|
8.28723
|
|
The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into
US$ at
the rates used in translation.
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(m)
Revenue recognition
The
Company's revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist
and collectibility is reasonably assured. Payments received before all of
the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
The
Company's revenue consists of invoiced value of goods, net of a value-added
tax
(VAT). , No product return or sales discount allowance is made as products
delivered and accepted by customers are normally not returnable and sales
discount is normally not granted after products are delivered.
(n)
Advertising
The
Company expensed all advertising costs as incurred.
(o)
Shipping and handling
All
shipping and handling are expensed as incurred.
(p)
Research and development
All
research and development costs are expensed as incurred.
(q)Retirement
benefits
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income
as
incurred.
(r)
Income taxes
The
Company accounts for income tax using an asset and liability approach and
allows
for recognition of deferred tax benefits in future years. Under the asset
and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for
financial reporting purposes and the amounts used for income tax purposes.
A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future realization is uncertain.
(s)
Statutory
reserve
Statutory
reserves are referring to the amount appropriated from the net income in
accordance with laws or regulations, which can be used to recover losses
and
increase capital, as approved, and are to be used to expand production or
operations.
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Comprehensive
income is defined to include all changes in equity except those resulting
from
investments by owners and distributions to owners. Among other disclosures,
all
items that are required to be recognized under current accounting standards
as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. The Company’s current component of other comprehensive income is the
foreign currency translation adjustment.
|
(u)
|
Recent
accounting pronouncements
|
In
July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting
for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change
in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which
defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those
fiscal
year.
In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108,
the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods,
based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values
of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.
The
management of the Company does not anticipate that the adoption of these
three
standards will have a material impact on these consolidated financial
statements.
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
PLEDGE BANK DEPOSITS
Pledged
bank deposits are restricted cash with banks for general banking facilities
and
notes payables.
4.
TRADE ACCOUNTS RECEIVABLE
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
$
|
3,207,962
|
|
$
|
4,148,314
|
|
$
|
1,608,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Allowance for doubtful
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
|
(24,212
|
)
|
|
(36,116
|
)
|
|
(13,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,183,750
|
|
$
|
4,112,198
|
|
$
|
1,595,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An
analysis of the allowance for doubtful accounts for the years ended December
31,
2006, 2005, and 2004 is as follows: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
36,116
|
|
$
|
13,173
|
|
$
|
87
|
|
|
Addition
of bad debt expense, net
|
|
|
(11,904
|
)
|
|
22,943
|
|
|
13,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
24,212
|
|
$
|
36,116
|
|
$
|
13,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
AMOUNTS DUE FROM RELATED COMPANIES
Amounts
due from related companies are unsecured, interest free and have no fixed
repayment dates.
6.
OTHER RECEIVABLES
Other
receivables at December 31, 2006, 2005, and 2004 consist of the following:
-
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Advances
to related companies
|
|
|
-
|
|
|
|
|
|
-
|
|
|
Advances
to suppliers
|
|
$
|
1,100,916
|
|
$
|
1,118,758
|
|
$
|
|
|
|
Turnover
taxes prepayment
|
|
|
-
|
|
|
-
|
|
|
57,602
|
|
|
Purchases
disbursements
|
|
|
|
|
|
|
|
|
|
|
|
advances
|
|
|
591,895
|
|
|
573,133
|
|
|
1,961,427
|
|
|
|
|
$
|
1,692,811
|
|
$
|
1,691,891
|
|
$
|
2,019,029
|
|
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
7.
INVENTORIES
Inventories
at December 31, 2006, 2005, and 2004 consist of the following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
3,228,446
|
|
$
|
671,609
|
|
$
|
1,495,477
|
|
|
Finished
goods
|
|
|
796,132
|
|
|
5,342,275
|
|
|
4,577,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,024,578
|
|
$
|
6,013,884
|
|
$
|
6,073,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
INCOME TAXES
All
of
the Company’s income before income taxes and related tax expenses are from PRC
sources. In accordance with the relevant tax laws and regulations of PRC,
the
corporation income tax rate is 33%. Actual income tax expenses reported in
the
statements of income and comprehensive income differ from the amounts computed
by applying the PRC statutory income tax rate of 33% to income before income
tax
for the three years ended December 31, 2006, 2005, and 2004 for the following
reasons: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Income
before tax
|
|
$
|
2,993,905
|
|
$
|
1,770,366
|
|
$
|
1,772,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
at the income tax rate
|
|
|
987,989
|
|
|
584,221
|
|
|
584,849
|
|
|
Effect
of tax exemption granted
|
|
|
(677,808
|
)
|
|
(584,221
|
)
|
|
(584,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
$
|
310,181
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No
provision for deferred tax (benefit) has been made for the PRC tax jurisdiction
as no significant deferred tax liabilities or assets existed as of either
December 31, 2004, 2005, or 2006.
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
9.
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment at December 31, 2006, 2005, and 2004 consist of the
following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
At
cost
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
1,790,742
|
|
$
|
1,733,981
|
|
$
|
759,335
|
|
|
Machinery
and equipment
|
|
|
771,776
|
|
|
666,477
|
|
|
517,435
|
|
|
Office
equipment
|
|
|
25,228
|
|
|
20,784
|
|
|
11,807
|
|
|
Motor
vehicles
|
|
|
22,675
|
|
|
9,265
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,610,421
|
|
$
|
2,430,507
|
|
$
|
1,288,577
|
|
|
Less:
accumulated depreciation
|
|
|
(298,264
|
)
|
|
(179,490
|
)
|
|
(87,398
|
)
|
|
Construction
in progress
|
|
|
-
|
|
|
-
|
|
|
211,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,312,157
|
|
$
|
2,251,017
|
|
$
|
1,412,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense is included in the statement of income and
comprehensive income as follows: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
$
|
103,392
|
|
$
|
83,500
|
|
$
|
55,679
|
|
|
Selling
and marketing expenses
|
|
|
1,410
|
|
|
1,372
|
|
|
1,358
|
|
|
General
and administrative expenses
|
|
|
5,782
|
|
|
3,492
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,584
|
|
$
|
88,364
|
|
$
|
58,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
in progress mainly comprises capital expenditures for construction of the
Company’s new corporate campus, including offices, factories and staff
dormitories.
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
10.
LEASEHOLD LAND, NET
Leasehold
land at December 31, 2006, 2005, and 2004 consist of the following:
-
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold
land, at cost
|
|
$
|
1,331,645
|
|
$
|
324,718
|
|
$
|
315,507
|
|
|
Accumulated
amortization
|
|
|
(33,207
|
)
|
|
(10,394
|
)
|
|
(2,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,298,438
|
|
$
|
314,324
|
|
$
|
313,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold
land represents the prepaid land use right. The land on which the Company’s new
corporate campus is being constructed is owned by the PRC government.
Amortization
expenses for the above lease prepayments were approximately $21,036, $7,284
and
$1,063 for the years ended December 31, 2006, 2005, and 2004 respectively.
Estimated amortization expense for the next five years is approximately $21,036
each year.
11.
SHORT TERM BANK LOANS
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Loans
from Junan County Construction Bank,
|
|
|
|
|
|
|
|
|
|
|
|
interest
rates at 6.264% per annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
5/3/2007
|
|
|
312,922
|
|
|
|
|
|
|
|
|
Due
5/3/2006
|
|
|
|
|
|
302,816
|
|
|
|
|
|
Due
5/3/2005
|
|
|
|
|
|
|
|
|
147,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
from Junan County Agriculture Bank, interest rates at 7.6500% to
10.404%
per annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 1/11/2007 and 7/20/2007
|
|
|
1,441,879
|
|
|
|
|
|
|
|
|
Due
between 1/3/2006 and 12/21/2006
|
|
|
|
|
|
916,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from Junan County Industrial and Commercial Bank, interest rates
at 4.650%
to 6.120% per annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 4/26/2007 and 12/22/2007
|
|
|
1,542,817
|
|
|
|
|
|
|
|
|
Due
5/3/2006
|
|
|
|
|
|
61,252
|
|
|
|
|
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
12.
SHORT TERM BANK LOANS (Continued)
|
Loan
from Linyi Commercial Bank, interest rates at 9.765% to 10.4715%
per
annum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 1/9/2007 and 11/29/2007
|
|
|
1,688,520
|
|
|
|
|
|
|
|
|
Due
between 1/9/2006 and 4/21/2006
|
|
|
|
|
|
1,374,885
|
|
|
|
|
|
Due
between 2/28/2005 and 4/26/2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,411,935
|
|
|
Loan
from Junan Agricultural Development Bank, interest rate at 5.3625%
to
6.435% per annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 7/19/2007 and 9/4/2007
|
|
|
1,279,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,265,320
|
|
$
|
2,655,322
|
|
$
|
1,559,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
loan
was primarily obtained for general working capital.
Interest
expenses for the loans were $
386,234
,
$
199,617
,
and
$
27,111
respectively for the years ended December 31, 2006, 2005, and 2004.
13.
NOTES PAYABLE
Notes
payable at December 31, 2006, 2005, and 2004 consist of the following:
-
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Notes
to Junan County Industrial and
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Bank
|
|
|
|
|
|
|
|
|
|
|
|
bank
commission charge at 0.05% ,
|
|
|
|
|
|
|
|
|
|
|
|
Due
6/1/2007
|
|
|
3,274,704
|
|
|
|
|
|
|
|
|
Loan
from Junan County Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Institution,
|
|
|
|
|
|
|
|
|
|
|
|
bank
commission charge at 0.05% ,
|
|
|
|
|
|
|
|
|
|
|
|
Due
11/25/2006
|
|
|
|
|
|
297,273
|
|
|
|
|
|
Notes
to Junan County Agriculture Bank,
|
|
|
|
|
|
|
|
|
|
|
|
bank
commission charge at 0.05% ,
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 3/22/2006 and 3/30/2006
|
|
|
|
|
|
1,238,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,274,704
|
|
$
|
1,535,908
|
|
$
|
-
|
|
JUNAN
HONGRUN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
14.
ACCRUED EXPENSES AND OTHER PAYABLES
Accrued
expenses and other payables at December 31, 2006, 2005, and 2004 consist
of the
following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
salaries and wages
|
|
$
|
225,855
|
|
$
|
42,254
|
|
$
|
98,576
|
|
|
Accrued
utility expenses
|
|
|
6,931
|
|
|
17,098
|
|
|
39,505
|
|
|
Dividend
payable
|
|
|
136,872
|
|
|
-
|
|
|
-
|
|
|
Business
and other taxes
|
|
|
145,768
|
|
|
190,083
|
|
|
-
|
|
|
Purchases
disbursements payables
|
|
|
228,987
|
|
|
359,337
|
|
|
1,414,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
744,413
|
|
$
|
608,772
|
|
$
|
1,553,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
FINANCE COSTS, NET
Details
of finance costs are summarized as follows: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest cost incurred
|
|
$
|
386,234
|
|
$
|
199,617
|
|
$
|
27,111
|
|
|
Interest
income
|
|
|
(8,449
|
)
|
|
(5,182
|
)
|
|
(6,947
|
)
|
|
Others
|
|
|
34,926
|
|
|
46,717
|
|
|
5,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
412,711
|
|
$
|
241,152
|
|
$
|
25,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beijing
Green Foodstuff Co., Ltd
FINANCIAL
STATEMENTS
AS
OF DECEMBER 31, 2006, 2005 AND 2004
(Stated
in US dollars)
BEIJING
GREEN FOODSTUFF CO., LTD
|
CONTENTS
|
|
PAGES
|
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
|
|
|
|
ACCOUNTING
FIRM
|
|
1
|
|
|
|
|
|
BALANCE
SHEETS
|
|
2
-
3
|
|
|
|
|
|
STATEMENTS
OF INCOME
|
|
4
|
|
|
|
|
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY
|
|
5
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
6
|
|
|
|
|
|
NOTES
TO FINANCIAL STATEMENTS
|
|
7
-
16
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
To:
|
The
board of directors and stockholders of
Beijing
Green Foodstuff Co., Ltd
|
We
have
audited the accompanying balance sheets of Beijing Green Foodstuff Co., Ltd
as
of December 31, 2006, 2005, and 2004 and the related statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Beijing Green Foodstuff Co.,
Ltd as
of December 31, 2006, 2005, and 2004 and the results of its operations and
its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
|
South
San Francisco, California
|
|
|
Samuel
H. Wong & Co., LLP
|
|
March 1, 2007
|
|
|
Certified Public
Accountants
|
|
BEIJING
GREEN FOODSTUFF CO., LTD
|
|
|
|
BALANCE
SHEETS
|
|
AS
OF DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
886,799
|
|
$
|
361,622
|
|
$
|
87,799
|
|
|
Trade
accounts receivable
|
|
|
3
|
|
|
1,287,812
|
|
|
695,828
|
|
|
274,525
|
|
|
Prepayments
for raw materials
|
|
|
|
|
|
96,353
|
|
|
1,030,169
|
|
|
629,327
|
|
|
Other
receivables
|
|
|
5
|
|
|
259,509
|
|
|
389,102
|
|
|
128,986
|
|
|
Inventories
|
|
|
4
|
|
|
1,956,324
|
|
|
2,483,678
|
|
|
1,042,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
$
|
4,486,797
|
|
$
|
4,960,399
|
|
$
|
2,163,221
|
|
|
Property,
plant and equipment, net
|
|
|
7
|
|
|
4,398,768
|
|
|
2,645,649
|
|
|
2,510,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
|
|
$
|
8,885,565
|
|
$
|
7,606,048
|
|
$
|
4,673,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term bank loans
|
|
|
9
|
|
$
|
2,795,011
|
|
$
|
2,477,271
|
|
$
|
2,051,530
|
|
|
Accounts
payables
|
|
|
|
|
|
478,424
|
|
|
1,407,074
|
|
|
884,195
|
|
|
Amounts
due to related companies
|
|
|
8
|
|
|
1,949,252
|
|
|
1,699,886
|
|
|
474,364
|
|
|
Customers’
deposits
|
|
|
|
|
|
633,735
|
|
|
185,795
|
|
|
59,111
|
|
|
Accrued
expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payables
|
|
|
10
|
|
|
827,435
|
|
|
381,173
|
|
|
100,852
|
|
|
Income
tax payable
|
|
|
|
|
|
63,607
|
|
|
99,170
|
|
|
4,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
$
|
6,747,464
|
|
$
|
6,250,369
|
|
$
|
3,574,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
$
|
6,747,464
|
|
$
|
6,250,369
|
|
$
|
3,574,172
|
|
The
accompanying notes are an integral part of these financial
statements.
|
BEIJING
GREEN FOODSTUFF CO., LTD
|
|
|
|
BALANCE
SHEETS (Continued)
|
|
AS
OF DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
|
|
$
|
1,206,753
|
|
$
|
1,206,753
|
|
$
|
1,206,753
|
|
|
Statutory
reserves
|
|
|
|
|
|
142,093
|
|
|
30,391
|
|
|
|
|
|
Retained
earnings
|
|
|
|
|
|
697,038
|
|
|
85,894
|
|
|
(107,494
|
)
|
|
Accumulated
other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
92,217
|
|
|
32,641
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,138,101
|
|
$
|
1,355,679
|
|
$
|
1,099,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
$
|
8,885,565
|
|
$
|
7,606,048
|
|
$
|
4,673,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
BEIJING
GREEN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF INCOME
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
|
|
$
|
9,034,694
|
|
$
|
3,515,481
|
|
$
|
1,785,538
|
|
|
Cost
of revenues
|
|
|
|
|
|
(7,071,404
|
)
|
|
(2,717,527
|
)
|
|
(1,538,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
$
|
1,963,290
|
|
$
|
797,954
|
|
$
|
246,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
|
|
|
(374,370
|
)
|
|
(103,885
|
)
|
|
(5,435
|
)
|
|
General
and administrative expenses
|
|
|
|
|
|
(341,788
|
)
|
|
(203,228
|
)
|
|
(198,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
$
|
1,247,132
|
|
$
|
490,841
|
|
$
|
43,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
costs, net
|
|
|
11
|
|
|
(270,062
|
)
|
|
(172,397
|
)
|
|
(108,513
|
)
|
|
Government
grant
|
|
|
|
|
|
23
|
|
|
1,829
|
|
|
48,267
|
|
|
Other
income
|
|
|
|
|
|
13,536
|
|
|
1,816
|
|
|
9,654
|
|
|
Other
expenses
|
|
|
|
|
|
(7,975
|
)
|
|
(710
|
)
|
|
(3,741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxation
|
|
|
|
|
$
|
982,654
|
|
$
|
321,379
|
|
$
|
(11,190
|
)
|
|
Income
tax
|
|
|
6
|
|
|
(259,808
|
)
|
|
(97,600
|
)
|
|
(5,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
$
|
722,846
|
|
$
|
223,779
|
|
$
|
(16,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
BEIJING
GREEN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF STOCKHOLDERS
’
EQUITY
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
Common
|
|
Statutory
|
|
Retained
|
|
comprehensive
|
|
|
|
|
|
|
stock
|
|
reserves
|
|
earnings
|
|
income
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2004
|
|
$
|
1,206,753
|
|
|
-
|
|
|
(90,537
|
)
|
|
-
|
|
|
1,116,216
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
(16,957
|
)
|
|
|
|
|
(16,957
|
)
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$
|
1,206,753
|
|
|
-
|
|
|
(107,494
|
)
|
|
25
|
|
|
1,099,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2005
|
|
$
|
1,206,753
|
|
|
-
|
|
|
(107,494
|
)
|
|
25
|
|
|
1,099,284
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
223,779
|
|
|
|
|
|
223,779
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
30,391
|
|
|
(30,391
|
)
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
32,616
|
|
|
32,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
$
|
1,206,753
|
|
|
30,391
|
|
|
85,894
|
|
|
32,641
|
|
|
1,355,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
$
|
1,206,753
|
|
|
30,391
|
|
|
85,894
|
|
|
32,641
|
|
|
1,355,679
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
722,846
|
|
|
|
|
|
722,846
|
|
|
Issue
of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
111,702
|
|
|
(111,702
|
)
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
59,576
|
|
|
59,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
$
|
1,206,753
|
|
|
142,093
|
|
|
697,038
|
|
|
92,217
|
|
|
2,138,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
BEIJING
GREEN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND
2004
|
|
(Stated
in US Dollars)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
722,844
|
|
$
|
223,779
|
|
$
|
(16,957
|
)
|
|
Depreciation
|
|
|
95,880
|
|
|
84,588
|
|
|
25,853
|
|
|
(Increase)/decrease
in accounts and other
receivables
|
|
|
583,227
|
|
|
(1,021,245
|
)
|
|
253,024
|
|
|
(Increase)/decrease
in inventories
|
|
|
596,120
|
|
|
(1,391,191
|
)
|
|
(155,261
|
)
|
|
Increase/(decrease)
in accounts and other payables
|
|
|
994
|
|
|
2,158,217
|
|
|
1,072,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in)/provided by operating
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
$
|
1,999,065
|
|
$
|
54,148
|
|
$
|
1,178,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
(1,728,073
|
)
|
|
(153,513
|
)
|
|
(1,426,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
$
|
(1,728,073
|
)
|
$
|
(153,513
|
)
|
$
|
(1,426,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Bank
borrowings
|
|
|
250,567
|
|
|
2,803,750
|
|
|
2,051,356
|
|
|
Bank
repayment
|
|
|
(18,792
|
)
|
|
(2,438,044
|
)
|
|
(1,810,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by/(used in) financing
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
$
|
231,775
|
|
$
|
365,706
|
|
$
|
241,336
|
|
|
Net
increase/(decrease) in
|
|
|
|
|
|
|
|
|
|
|
|
cash
and cash equivalents
|
|
|
502,767
|
|
|
266,341
|
|
|
(5,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation on cash
|
|
|
|
|
|
|
|
|
|
|
|
and
cash equivalents
|
|
|
22,410
|
|
|
7,482
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents-beginning of year
|
|
|
361,622
|
|
|
87,799
|
|
|
93,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents-end of year
|
|
$
|
886,799
|
|
$
|
361,622
|
|
$
|
87,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
received
|
|
|
25,306
|
|
|
4,983
|
|
|
1,722
|
|
|
Interest
paid
|
|
$
|
244,757
|
|
$
|
167,414
|
|
$
|
106,791
|
|
The
accompanying notes are an integral part of these financial
statements.
BEIJING
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
Beijing
Green Foodstuff Co., Ltd was established in the People’s Republic of China (the
PRC) as a limited company in July, 2003.
The
Company currently operates and locates in Miyun County, Beijing in the People’s
Republic of China.
The
Company is engaged in the development, manufacture and sales of food products
worldwide. The Group produces hundreds of varieties of food categorized into
three divisions: chestnut products, convenient food including Ready-to-Cook
(RTCs), Ready-to-Eat (RTEs) and Meals Ready-to-Eat (MREs), and frozen and
canned
food.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Method of Accounting
The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and
notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States
of
America and have been consistently applied in the presentation of financial
statements, which are compiled on the accrual basis of accounting.
(b)
Use of estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management
to
make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the
best
information available at the time the estimates are made; however actual
results
could differ materially from those estimates.
(c)
Economic and political risks
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced
by the
political, economic and legal environment in the PRC, and by the general
state
of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange.
The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among
other
things.
BEIJING
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
(d)
Property, plant and equipment
Plant
and
equipment are carried at cost less accumulated depreciation. Depreciation
is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows:
|
Buildings
|
20
years
|
|
Machinery
and equipment
|
10
years
|
|
Motor
vehicles
|
10
years
|
|
Office
equipment
|
5
years
|
The
cost
and related accumulated depreciation of assets sold or otherwise retired
are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
(e)
Accounting for the Impairment of Long-Lived Assets
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
assets may not be recoverable. It is reasonably possible that these assets
could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to
be
generated by the assets.
If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
During
the reporting years, there was no impairment loss.
(f)
Construction in progress
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction
in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended
use.
(g)
Inventories
Inventories
consisting of finished goods, materials on hand, packaging materials and
raw
materials are stated at the lower of cost or market value. Finished goods
are
comprised of direct materials, direct labor and an appropriate proportion
of
overhead.
BEIJING
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(h)
Trade receivables
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts
is
made when collection of the full amount is no longer probable. Bad debts
are
written off as incurred.
(
i
)
Customer deposits
Customer
deposits were received from customers in connection with orders of products
to
be delivered in future periods.
(j)
Cash and cash equivalents
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts only in the PRC. The Company does not maintain any bank accounts
in the United States of America.
(k)
Foreign currency translation
The
accompanying financial statements are presented in United States dollars.
The
functional currency of the Company is the Renminbi (RMB). The financial
statements are translated into United States dollars from RMB at year-end
exchange rates as to assets and liabilities and average exchange rates as
to
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Year
end RMB : US$ exchange rate
|
|
|
7.81750
|
|
|
8.07340
|
|
|
8.28650
|
|
|
Average
yearly RMB : US$ exchange rate
|
|
|
7.98189
|
|
|
8.20329
|
|
|
8.28723
|
|
The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into
US$ at
the rates used in translation.
(l)Revenue
recognition
The
Company's revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist
and collectibles is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
The
Company's revenue consists of invoiced value of goods, net of a value-added
tax
(VAT). , No product return or sales discount allowance is made as products
delivered and accepted by customers are normally not returnable and sales
discount is normally not granted after products are delivered.
BEIJING
GREEN FOODSTUFF CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(m)
Advertising
The
Company expensed all advertising costs as incurred.
(n)
Shipping and handling
All
shipping and handling are expensed as incurred.
(o)
Research and development
All
research and development costs are expensed as incurred.
(p)
Retirement benefits
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income
as
incurred.
(q)
Income taxes
The
Company accounts for income tax using an asset and liability approach and
allows
for recognition of deferred tax benefits in future years. Under the asset
and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for
financial reporting purposes and the amounts used for income tax purposes.
A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future realization is uncertain.
Statutory
reserves are referring to the amount appropriated from the net income in
accordance with laws or regulations, which can be used to recover losses
and
increase capital, as approved, and are to be used to expand production or
operations.
Comprehensive
income is defined to include all changes in equity except those resulting
from
investments by owners and distributions to owners. Among other disclosures,
all
items that are required to be recognized under current accounting standards
as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. The Company’s current component of other comprehensive income is the
foreign currency translation adjustment.
BEIJING
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
|
(t)
|
Recent
accounting pronouncements
|
In
July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting
for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change
in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which
defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those
fiscal
year.
In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108,
the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods,
based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values
of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.
The
management of the Company does not anticipate that the adoption of these
three
standards will have a material impact on these consolidated financial
statements.
BEIJING
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
TRADE
ACCOUNTS RECEIVABLE
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
$
|
1,295,722
|
|
$
|
700,627
|
|
$
|
274,947
|
|
|
Less:
Allowance for doubtful
|
|
|
|
|
|
|
|
|
|
|
|
accounts
|
|
|
(7,910
|
)
|
|
(4,799
|
)
|
|
(422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,287,812
|
|
$
|
695,828
|
|
$
|
274,525
|
|
An
analysis of the allowance for doubtful accounts for the years ended December
31,
2006, 2005, and 2004 is as follows: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
4,799
|
|
$
|
422
|
|
$
|
-
|
|
|
Addition
of bad debt expense, net
|
|
|
3,111
|
|
|
4,377
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
7,910
|
|
$
|
4,799
|
|
$
|
422
|
|
4.
INVENTORIES
Inventories
at December 31, 2006, 2005, and 2004 consist of the following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,538,547
|
|
$
|
1,733,509
|
|
$
|
258,453
|
|
|
Finished
goods
|
|
|
417,777
|
|
|
750,169
|
|
|
784,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,956,324
|
|
$
|
2,483,678
|
|
$
|
1,042,584
|
|
BEIJING
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
5.
OTHER
RECEIVABLES
Other
receivables at December 31, 2006, 2005, and 2004 consist of the following:
-
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Sundry
deposits
|
|
$
|
30,717
|
|
$
|
-
|
|
$
|
-
|
|
|
Turnover
taxes prepayment
|
|
|
144,168
|
|
|
11,864
|
|
|
-
|
|
|
Purchases
disbursements
|
|
|
|
|
|
|
|
|
|
|
|
advances
|
|
|
84,624
|
|
|
377,238
|
|
|
128,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
259,509
|
|
$
|
389,102
|
|
$
|
128,986
|
|
6.
INCOME
TAXES
All
of
the Company’s income before income taxes and related tax expenses are from PRC
sources. In accordance with the relevant tax laws and regulations of PRC,
the
corporation income tax rate is 33%. Actual income tax expenses reported in
the
statements of income and comprehensive income differ from the amounts computed
by applying the PRC statutory income tax rate of 33% to income before income
tax
for the three years ended December 31, 2006, 2005, and 2004 for the following
reasons: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Income
before tax
|
|
$
|
982,654
|
|
$
|
321,379
|
|
$
|
(11,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
at the income tax rate
|
|
|
324,275
|
|
|
106,055
|
|
|
(3,693
|
)
|
|
Effect
of tax exemption granted
|
|
|
(64,467
|
)
|
|
(8,455
|
)
|
|
9,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
$
|
259,808
|
|
$
|
97,600
|
|
$
|
5,767
|
|
No
provision for deferred tax (benefit) has been made for the PRC tax jurisdiction
because no significant deferred tax liabilities or assets existed as of either
December 31, 2006, 2005, or 2004.
BEIJING
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
7.
PROPERTY,
PLANT AND EQUIPMENT, NET
Property,
plant and equipment at December 31, 2006, 2005, and 2004 consist of the
following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
At
cost:
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
3,309,826
|
|
$
|
2,294,886
|
|
$
|
2,235,869
|
|
|
Landscaping,
plant and tree
|
|
|
191,877
|
|
|
-
|
|
|
-
|
|
|
Machinery
and equipment
|
|
|
519,296
|
|
|
430,689
|
|
|
276,530
|
|
|
Office
equipment
|
|
|
48,579
|
|
|
38,245
|
|
|
34,730
|
|
|
Motor
vehicles
|
|
|
12,241
|
|
|
11,853
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,081,819
|
|
$
|
2,775,673
|
|
$
|
2,547,129
|
|
|
Less:
accumulated depreciation
|
|
|
(239,495
|
)
|
|
(130,024
|
)
|
|
(36,894
|
)
|
|
Construction
in progress
|
|
|
556,444
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,398,768
|
|
$
|
2,645,649
|
|
$
|
2,510,235
|
|
Depreciation
and amortization expense is included in the statement of income and
comprehensive income as follows: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
$
|
95,880
|
|
$
|
84,588
|
|
$
|
25,853
|
|
Construction
in progress mainly comprises capital expenditures for construction of the
Company’s new corporate campus, including offices, factories and staff
dormitories.
8.
AMOUNTS
DUE TO RELATED COMPANIES
Amounts
due to related companies are unsecured, interest free and have no fixed
repayment date.
BEIJING
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
9.
SHORT
TERM BANK LOANS
The
followings are the short term bank loans outstanding as at December 31, 2006,
2005, and 2004.
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Loan
from Beijing Miyun County Shilipu
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
Rural
Financial Institution, interest rates at
|
|
|
|
|
|
|
|
|
|
|
|
0.6600%
to 0.7650% per annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
between 3/30/2007 and 5/27/2007
|
|
|
2,539,175
|
|
|
|
|
|
|
|
|
Due
between 3/30/2006 and 5/30/2006
|
|
|
|
|
|
2,477,271
|
|
|
|
|
|
Due
between 5/27/2005 and 9/27/2005
|
|
|
|
|
|
|
|
|
2,051,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
from Junan County Agriculture Bank, interest rates at 0.5850%
per
annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
7/18/2007
|
|
|
255,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,795,011
|
|
$
|
2,477,271
|
|
$
|
2,051,530
|
|
The
loan
was primarily obtained for general working capital.
Interest
expenses for the loans were $244,756, $167,414, and $106,791 respectively
for
the years ended December 31, 2006, 2005, and 2004.
10.
ACCRUED
EXPENSES AND OTHER PAYABLES
Accrued
expenses and other payables at December 31, 2006, 2005, and 2004 consist
of the
following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
salaries and wages
|
|
$
|
8,014
|
|
$
|
4,986
|
|
$
|
19,878
|
|
|
Accrued
utility expenses
|
|
|
37,333
|
|
|
42,396
|
|
|
39,416
|
|
|
Interest
payable
|
|
|
5,513
|
|
|
590
|
|
|
12,128
|
|
|
Accrued
staff welfare
|
|
|
100,089
|
|
|
28,871
|
|
|
21,188
|
|
|
Business
and other taxes
|
|
|
11,715
|
|
|
11,715
|
|
|
1
|
|
|
Purchases
disbursements payables
|
|
|
664,771
|
|
|
292,615
|
|
|
8,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
827,435
|
|
$
|
381,173
|
|
$
|
100,852
|
|
BEIJING
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
11.
FINANCE
COSTS, NET
Details
of finance costs are summarized as follows: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest cost incurred
|
|
$
|
244,756
|
|
$
|
167,414
|
|
$
|
106,791
|
|
|
Others
|
|
|
25,306
|
|
|
4,983
|
|
|
1,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
270,062
|
|
$
|
172,397
|
|
$
|
108,513
|
|
Luotian
Green Foodstuff Co., Ltd
FINANCIAL
STATEMENTS
AS
OF DECEMBER 31, 2006, 2005 AND 2004
(Stated
in US dollars)
LUOTIAN
GREEN FOODSTUFF CO., LTD
|
CONTENTS
|
|
PAGES
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
|
|
|
|
ACCOUNTING
FIRM
|
|
2
|
|
|
|
|
|
BALANCE
SHEETS
|
|
3
-
4
|
|
|
|
|
|
STATEMENTS
OF INCOME
|
|
5
|
|
|
|
|
|
STATEMENTS
OF STOCKHOLDERS’ EQUITY
|
|
6
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
7
|
|
|
|
|
|
NOTES
TO FINANCIAL STATEMENTS
|
|
8
-
17
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To:
The
board of directors and stockholders of
Luotian
Green Foodstuff Co., Ltd
We
have
audited the accompanying balance sheets of Luotian Green Foodstuff Co., Ltd
as
of December 31, 2006, 2005, and 2004 and the related statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Luotian Green Foodstuff Co.,
Ltd as
of December 31, 2006, 2005, and 2004 and the results of its operations and
its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
|
South
San Francisco, California
March 1, 2007
|
|
|
Samuel
H. Wong & Co., LLP
Certified
Public Accountants
|
|
LUOTIAN
GREEN FOODSTUFF CO., LTD
|
|
|
|
BALANCE
SHEETS
|
|
AS
OF DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
408,201
|
|
$
|
182,567
|
|
$
|
110,269
|
|
|
Trade
accounts receivable
|
|
|
3
|
|
|
1,780,856
|
|
|
1,047,205
|
|
|
845,286
|
|
|
Prepayments
for raw materials
|
|
|
|
|
|
7,406
|
|
|
3,716
|
|
|
304,712
|
|
|
Income
tax prepayment
|
|
|
|
|
|
38,375
|
|
|
-
|
|
|
-
|
|
|
Other
receivables
|
|
|
4
|
|
|
161,975
|
|
|
67,510
|
|
|
185,962
|
|
|
Inventories
|
|
|
5
|
|
|
1,232,031
|
|
|
1,528,494
|
|
|
1,417,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
$
|
3,628,844
|
|
$
|
2,829,492
|
|
$
|
2,863,277
|
|
|
Property,
plant and equipment, net
|
|
|
7
|
|
|
1,677,697
|
|
|
1,672,020
|
|
|
1,262,173
|
|
|
Leasehold
land, net
|
|
|
8
|
|
|
557,524
|
|
|
548,250
|
|
|
548,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
|
|
$
|
5,864,065
|
|
$
|
5,049,762
|
|
$
|
4,673,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term bank loans
|
|
|
9
|
|
$
|
972,178
|
|
$
|
1,114,772
|
|
$
|
1,206,782
|
|
|
Accounts
payable
|
|
|
|
|
|
47,405
|
|
|
96,413
|
|
|
119,181
|
|
|
Amounts
due to related companies
|
|
|
10
|
|
|
1,893,004
|
|
|
1,817,937
|
|
|
1,113,805
|
|
|
Customers’
deposits
|
|
|
|
|
|
79,372
|
|
|
72,448
|
|
|
10,867
|
|
|
Accrued
expenses and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
payables
|
|
|
11
|
|
|
357,835
|
|
|
774,608
|
|
|
1,040,580
|
|
|
Income
tax payable
|
|
|
|
|
|
-
|
|
|
11,385
|
|
|
8,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
$
|
3,349,794
|
|
$
|
3,887,563
|
|
$
|
3,499,634
|
|
|
Long
term debt
|
|
|
12
|
|
|
95,939
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
$
|
3,445,733
|
|
$
|
3,887,563
|
|
$
|
3,499,634
|
|
The
accompanying notes are an integral part of these financial
statements.
|
LUOTIAN
GREEN FOODSTUFF CO., LTD
|
|
|
|
BALANCE
SHEETS (Continued)
|
|
AS
OF DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
|
|
$
|
1,245,928
|
|
$
|
181,017
|
|
$
|
181,017
|
|
|
Additional
paid-in-capital
|
|
|
|
|
|
974,188
|
|
|
906,563
|
|
|
906,563
|
|
|
Statutory
reserves
|
|
|
|
|
|
120,683
|
|
|
44,046
|
|
|
12,962
|
|
|
Retained
earnings
|
|
|
|
|
|
52,594
|
|
|
257
|
|
|
73,446
|
|
|
Accumulated
other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
24,939
|
|
|
30,316
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,418,332
|
|
$
|
1,162,199
|
|
$
|
1,173,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
$
|
5,864,065
|
|
$
|
5,049,762
|
|
$
|
4,673,627
|
|
The
accompanying notes are an integral part of these financial
statements.
|
LUOTIAN
GREEN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF INCOME
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
Notes
|
|
2006
|
|
2005
|
|
2004
|
|
|
Net
revenues
|
|
|
|
|
$
|
3,434,466
|
|
$
|
2,614,646
|
|
$
|
1,458,371
|
|
|
Cost
of revenues
|
|
|
|
|
|
(2,606,923
|
)
|
|
(2,121,044
|
)
|
|
(1,185,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
|
|
$
|
827,543
|
|
$
|
493,602
|
|
$
|
272,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
|
|
|
(42,018
|
)
|
|
(19,473
|
)
|
|
(31,421
|
)
|
|
General
and administrative expenses
|
|
|
|
|
|
(256,267
|
)
|
|
(150,200
|
)
|
|
(110,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
$
|
529,258
|
|
$
|
323,929
|
|
$
|
130,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
costs, net
|
|
|
13
|
|
|
(54,857
|
)
|
|
(86,584
|
)
|
|
(80,155
|
)
|
|
Other
income
|
|
|
|
|
|
26,462
|
|
|
3,465
|
|
|
5,740
|
|
|
Other
expenses
|
|
|
|
|
|
(9,885
|
)
|
|
(3,517
|
)
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxation
|
|
|
|
|
$
|
490,978
|
|
$
|
237,293
|
|
$
|
56,122
|
|
|
Income
tax
|
|
|
6
|
|
|
-
|
|
|
(35,594
|
)
|
|
(8,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
$
|
490,978
|
|
$
|
201,699
|
|
$
|
47,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements.
|
LUOTIAN
GREEN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF STOCKHOLDERS
’
EQUITY
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
|
|
(Stated
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
|
|
|
|
Common
|
|
paid-in-
|
|
Statutory
|
|
Retained
|
|
comprehensive
|
|
|
|
|
|
|
stock
|
|
capital
|
|
reserves
|
|
earnings
|
|
income
|
|
Total
|
|
|
Balance,
January 1, 2004
|
|
$
|
181,017
|
|
|
906,563
|
|
|
5,806
|
|
|
32,898
|
|
|
-
|
|
|
1,126,284
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
47,704
|
|
|
|
|
|
47,704
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
|
|
|
7,156
|
|
|
(7,156
|
)
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
$
|
181,017
|
|
|
906,563
|
|
|
12,962
|
|
|
73,446
|
|
|
5
|
|
|
1,173,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2005
|
|
$
|
181,017
|
|
|
906,563
|
|
|
12,962
|
|
|
73,446
|
|
|
5
|
|
|
1,173,993
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
201,699
|
|
|
|
|
|
201,699
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
|
|
|
31,084
|
|
|
(31,084
|
)
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
(243,804
|
)
|
|
|
|
|
(243,804
|
)
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,311
|
|
|
30,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
$
|
181,017
|
|
|
906,563
|
|
|
44,046
|
|
|
257
|
|
|
30,316
|
|
|
1,162,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
$
|
181,017
|
|
|
906,563
|
|
|
44,046
|
|
|
257
|
|
|
30,316
|
|
|
1,162,199
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
490,978
|
|
|
|
|
|
490,978
|
|
|
Issue
of common stock
|
|
|
1,064,911
|
|
|
67,625
|
|
|
|
|
|
|
|
|
|
|
|
1,132,536
|
|
|
Appropriations
to statutory
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves
|
|
|
|
|
|
|
|
|
76,637
|
|
|
(76,637
|
)
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
(362,004
|
)
|
|
|
|
|
(362,004
|
)
|
|
Foreign
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,377
|
)
|
|
(5,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
$
|
1,245,928
|
|
|
974,188
|
|
|
120,683
|
|
|
52,594
|
|
|
24,939
|
|
|
2,418,332
|
|
The
accompanying notes are an integral part of these financial
statements.
|
LUOTIAN
GREEN FOODSTUFF CO., LTD
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
FOR
THE YEARS ENDED DECEMBER 31, 2006, 2005 AND
2004
|
|
(Stated
in US Dollars)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
43,298
|
|
|
39,437
|
|
|
28,918
|
|
|
Amortization
|
|
|
8,494
|
|
|
14,168
|
|
|
12,856
|
|
|
(Increase)/Decrease
in accounts and other
|
|
|
|
|
|
|
|
|
|
|
|
receivables
|
|
|
(950,354
|
)
|
|
132,446
|
|
|
(561,379
|
)
|
|
(Increase)/Decrease
in inventories
|
|
|
339,361
|
|
|
(72,869
|
)
|
|
(1,146,587
|
)
|
|
Increase/(Decrease)
in accounts and other payables
|
|
|
(341,980
|
)
|
|
529,120
|
|
|
1,971,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used in)/provided by operating
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of plant and equipment
|
|
|
|
|
|
(410,005
|
)
|
|
(429,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Issue
of common stock
|
|
|
1,064,911
|
|
|
-
|
|
|
112,221
|
|
|
Dividend
paid
|
|
|
(362,004
|
)
|
|
(243,804
|
)
|
|
-
|
|
|
Bank
borrowings
|
|
|
1,096,232
|
|
|
36,571
|
|
|
|
|
|
Bank
repayment
|
|
|
(1,177,666
|
)
|
|
(158,473
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by/(used in) financing
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in
|
|
|
|
|
|
|
|
|
|
|
|
cash
and cash equivalents
|
|
|
206,318
|
|
|
68,290
|
|
|
35,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation on cash
|
|
|
|
|
|
|
|
|
|
|
|
and
cash equivalents
|
|
|
19,316
|
|
|
4,008
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents-beginning of year
|
|
|
182,567
|
|
|
110,269
|
|
|
75,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents-end of year
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
received
|
|
$
|
438
|
|
$
|
267
|
|
$
|
572
|
|
|
Interest
paid
|
|
|
54,530
|
|
|
86,608
|
|
|
79,917
|
|
The
accompanying notes are an integral part of these financial
statements.
LUOTIAN
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
Luotian
Green Foodstuff Co., Ltd was established in the People’s Republic of China (the
PRC) as a limited company in June 2003. The Company currently operates and
locates in Luotian County, Hubei Province of the People’s Republic of
China.
The
Company is engaged in the development, manufacture and sales of food products
worldwide. The Group produces hundreds of varieties of food categorized into
three divisions: chestnut products, convenient food including Ready-to-Cook
(RTCs), Ready-to-Eat (RTEs) and Meals Ready-to-Eat (MREs), and frozen and
canned
food.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Method of Accounting
The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and
notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States
of
America and have been consistently applied in the presentation of financial
statements, which are compiled on the accrual basis of accounting.
(b)
Use of estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management
to
make estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the
best
information available at the time the estimates are made; however actual
results
could differ materially from those estimates.
(c
)
Economic and political risks
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced
by the
political, economic and legal environment in the PRC, and by the general
state
of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange.
The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among
other
things.
LUOTIAN
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(d)
Leasehold land
Leasehold
land is stated at cost less accumulated amortisation. Amortisation is provided
over the respective useful lives, using the straight-line method. Estimated
useful live is 50 years.
(e)
Property, plant and equipment
Plant
and
equipment are carried at cost less accumulated depreciation. Depreciation
is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows:
|
Buildings
|
|
|
20
years
|
|
|
Machinery
and equipment
|
|
|
10
years
|
|
|
Motor
vehicles
|
|
|
10
years
|
|
|
Office
equipment
|
|
|
5
years
|
|
The
cost
and related accumulated depreciation of assets sold or otherwise retired
are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
(f)
Accounting for the Impairment of Long-Lived Assets
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
assets may not be recoverable. It is reasonably possible that these assets
could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to
be
generated by the assets.
If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
During
the reporting years, there was no impairment loss.
(g)
Construction in progress
Construction
in progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the construction
in
progress is transferred to plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are completed.
No depreciation is provided until it is completed and ready for intended
use.
LUOTIAN
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(h)
Inventories
Inventories
consisting of finished goods, materials on hand, packaging materials and
raw
materials
are stated at the lower of cost or market value. Finished goods are comprised
of
direct
materials, direct labor and an appropriate proportion of overhead.
(i)
Trade receivables
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts
is
made when collection of the full amount is no longer probable. Bad debts
are
written off as incurred.
(
j
)
Customer deposits
Customer
deposits were received from customers in connection with orders of products
to
be delivered in future periods.
(k)
Cash and cash equivalents
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts only in the PRC. The Company does not maintain any bank accounts
in the United States of America.
(l)
Foreign currency translation
The
accompanying financial statements are presented in United States dollars.
The
functional currency of the Company is the Renminbi (RMB). The financial
statements are translated into United States dollars from RMB at year-end
exchange rates as to assets and liabilities and average exchange rates as
to
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Year
end RMB : US$ exchange rate
|
|
|
7.81750
|
|
|
8.07340
|
|
|
8.28650
|
|
|
Average
yearly RMB : US$ exchange rate
|
|
|
7.98189
|
|
|
8.20329
|
|
|
8.28723
|
|
The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into
US$ at
the rates used in translation.
(m)
Revenue recognition
The
Company's revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist
and collectability is reasonably assured. Payments received before all of
the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
LUOTIAN
GREEN FOODSTUFF CO., LTD
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
The
Company's revenue consists of invoiced value of goods, net of a value-added
tax
(VAT). , No product return or sales discount allowance is made as products
delivered and accepted by customers are normally not returnable and sales
discount is normally not granted after products are delivered.
(n)
Advertising
The
Company expensed all advertising costs as incurred.
(o)
Shipping and handling
All
shipping and handling are expensed as incurred.
(p)
Research and development
All
research and development costs are expensed as incurred.
(q)
Retirement benefits
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income
as
incurred.
(r)Income
taxes
The
Company accounts for income tax using an asset and liability approach and
allows
for recognition of deferred tax benefits in future years. Under the asset
and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for
financial reporting purposes and the amounts used for income tax purposes.
A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future realization is uncertain.
(s)
Statutory reserves
Statutory
reserves are referring o the amount appropriated from the net income in
accordance with laws or regulations, which can be used to recover losses
and
increase capital, as approved, and are to be used to expand production or
operations.
(t)
Comprehensive income
Comprehensive
income is defined to include all changes in equity except those resulting
from
investments by owners and distributions to owners. Among other disclosures,
all
items that are required to be recognized under current accounting standards
as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. The Company’s current component of other comprehensive income is the
foreign currency translation adjustment.
LUOTIAN
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
4.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(u)
Recent accounting pronouncements
In
July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting
for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change
in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which
defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those
fiscal
year.
In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108,
the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods,
based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values
of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.
The
management of the Company does not anticipate that the adoption of these
three
standards will have a material impact on these consolidated financial
statements.
LUOTIAN
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
TRADE ACCOUNTS RECEIVABLE
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Trade
accounts receivable
|
|
$
|
1,786,350
|
|
$
|
1,048,448
|
|
$
|
847,599
|
|
|
Less:
Allowance for doubtful
|
|
|
|
|
|
|
|
|
|
|
|
accounts
|
|
|
(5,494
|
)
|
|
(1,243
|
)
|
|
(2,313
|
)
|
|
|
|
$
|
1,780,856
|
|
$
|
1,047,205
|
|
$
|
845,286
|
|
An
analysis of the allowance for doubtful accounts for the years ended December
31,
2006, 2005, and 2004 is as follows: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Balance
at beginning of year
|
|
$
|
1,243
|
|
$
|
2,313
|
|
$
|
6,439
|
|
|
Addition
of bad debt expense, net
|
|
|
4,251
|
|
|
(1,070
|
)
|
|
(4,126
|
)
|
|
Balance
at end of year
|
|
$
|
5,494
|
|
$
|
1,243
|
|
$
|
2,313
|
|
4.
OTHER RECEIVABLES
Other
receivables at December 31, 2006, 2005, and 2004 consist of the following:
-
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Sundry
deposits
|
|
$
|
72,949
|
|
$
|
8,519
|
|
$
|
-
|
|
|
Turnover
taxes prepayment
|
|
|
14,968
|
|
|
18,002
|
|
|
89,701
|
|
|
Purchases
disbursements
|
|
|
|
|
|
|
|
|
|
|
|
advances
|
|
|
74,058
|
|
|
40,989
|
|
|
96,261
|
|
|
|
|
$
|
161,975
|
|
$
|
67,510
|
|
$
|
185,962
|
|
LUOTIAN
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
5.
INVENTORIES
Inventories
at December 31, 2006, 2005, and 2004 consist of the following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Raw
materials
|
|
$
|
732,330
|
|
$
|
1,259,195
|
|
$
|
1,174,135
|
|
|
Finished
goods
|
|
|
499,701
|
|
|
269,299
|
|
|
242,913
|
|
|
|
|
$
|
1,232,031
|
|
$
|
1,528,494
|
|
$
|
1,417,048
|
|
6.
INCOME TAXES
All
of
the Company’s income before income taxes and related tax expenses are from PRC
sources. In accordance with the relevant tax laws and regulations of PRC,
the
corporation income tax rate is 33%. Actual income tax expenses reported in
the
statements of income and comprehensive income differ from the amounts computed
by applying the PRC statutory income tax rate of 33% to income before income
tax
for the three years ended December 31, 2006, 2005, and 2004 for the following
reasons: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Income
before tax
|
|
$
|
490,978
|
|
$
|
237,293
|
|
$
|
56,122
|
|
|
Tax
at the income tax rate
|
|
|
162,023
|
|
|
78,307
|
|
|
18,520
|
|
|
Effect
of tax exemption granted
|
|
|
(162,023
|
)
|
|
(42,713
|
)
|
|
(10,102
|
)
|
|
Income
tax
|
|
$
|
-
|
|
$
|
35,594
|
|
$
|
8,418
|
|
No
provision for deferred tax (benefit) has been made for the PRC tax jurisdiction
as no significant deferred tax liabilities or assets existed as of either
December 31, 2006, 2005 or 2004.
LUOTIAN
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
7.
PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment at December 31, 2006, 2005, and 2004 consist of the
following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
At
cost:
|
|
|
|
|
|
|
|
|
|
|
|
Building
|
|
$
|
1,607,027
|
|
$
|
1,556,090
|
|
$
|
556,112
|
|
|
Machinery
and equipment
|
|
|
199,383
|
|
|
189,117
|
|
|
184,253
|
|
|
Office
equipment
|
|
|
17,829
|
|
|
16,314
|
|
|
14,881
|
|
|
|
|
$
|
1,824,239
|
|
$
|
1,761,521
|
|
$
|
755,246
|
|
|
Less:
accumulated depreciation
|
|
|
(149,356
|
)
|
|
(89,501
|
)
|
|
(37,336
|
)
|
|
Construction
in progress
|
|
|
2,814
|
|
|
-
|
|
|
544,263
|
|
|
|
|
$
|
1,677,697
|
|
$
|
1,672,020
|
|
$
|
1,262,173
|
|
Depreciation
and amortization expense is included in the statement of income and
comprehensive income as follows: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Cost
of revenues
|
|
$
|
41,268
|
|
$
|
37,462
|
|
$
|
26,963
|
|
|
Selling
and marketing expenses
|
|
|
2,030
|
|
|
1,975
|
|
|
1,955
|
|
|
|
|
$
|
43,298
|
|
$
|
39,437
|
|
$
|
28,918
|
|
Construction
in progress mainly comprises capital expenditures for construction of the
Company’s new corporate campus, including offices, factories and staff
dormitories.
LUOTIAN
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
8.
LEASEHOLD LAND, NET
Leasehold
land at December 31, 2006, 2005, and 2004 consist of the following:
-
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Leasehold
land, at cost
|
|
$
|
594,692
|
|
$
|
575,842
|
|
$
|
561,034
|
|
|
Less:
Accumulated amortization
|
|
|
(37,168
|
)
|
|
(27,592
|
)
|
|
(12,857
|
)
|
|
|
|
$
|
557,524
|
|
$
|
548,250
|
|
$
|
548,177
|
|
Leasehold
land represent the prepaid land use right. The land on which the Company’s new
corporate campus is being constructed is owned by the PRC government.
Amortization
expenses for the above lease prepayments were approximately $8,494, $14,168,
and
$12,856 for the years ended December 31, 2006, 2005, and 2004 respectively.
Estimated amortization expense for the next five years is approximately $8,494
each year.
9.
SHORT TERM BANK LOANS
The
following is the short term bank loan outstanding as at December 31, 2006,
2005,
and 2004.
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Loan
from China Agricultural Bank,
|
|
|
|
|
|
|
|
|
|
|
|
Luotian
Square Branch interest rates
|
|
|
|
|
|
|
|
|
|
|
|
at
7.605% to 7.950% per annum
|
|
|
|
|
|
|
|
|
|
|
|
Due
6/30/2007 and 9/5/2007
|
|
$
|
972,178
|
|
|
|
|
|
|
|
|
Due
9/5/2006
|
|
|
|
|
$
|
1,114,772
|
|
|
|
|
|
Due
9/5/2005
|
|
|
|
|
|
|
|
$
|
1,206,782
|
|
|
|
|
$
|
972,178
|
|
$
|
1,114,772
|
|
$
|
1,206,782
|
|
The
loan
was primarily obtained for general working capital.
Interest
expenses for the loans were $54,530, $86,608, and $79,917 respectively for
the
years ended December 31, 2006, 2005, and 2004.
LUOTIAN
GREEN FOODSTUFF CO., LTD
NOTES
TO FINANCIAL STATEMENTS
(Stated
in US Dollars)
10.
AMOUNTS DUE TO RELATED COMPANIES
Amounts
due to related companies are unsecured, interest free and have no fixed
repayment date.
11.
ACCRUED EXPENSES AND OTHER PAYABLES
Accrued
expenses and other payables at December 31, 2006, 2005, and 2004 consist
of the
following: -
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Accrued
salaries and wages
|
|
$
|
70,015
|
|
$
|
-
|
|
$
|
-
|
|
|
Accrued
utility expenses
|
|
|
2,304
|
|
|
38,605
|
|
|
18,139
|
|
|
Interest
payable
|
|
|
1,246
|
|
|
22,865
|
|
|
6,823
|
|
|
Business
and other taxes
|
|
|
99,748
|
|
|
-
|
|
|
-
|
|
|
Purchases
disbursements payables
|
|
|
184,522
|
|
|
713,138
|
|
|
1,015,618
|
|
|
|
|
$
|
357,835
|
|
$
|
774,608
|
|
$
|
1,040,580
|
|
12.
LONG-TERM
DEBT
Long-term
debt is as follows:
|
Loan
from Agricultural Development Department of
|
|
|
|
|
|
Luotian
Government, interest rates at 0.67% per
|
|
|
|
|
|
annum
|
|
|
|
|
|
Due
12/11/2010
|
|
|
95,939
|
|
Interest
expenses for the loans were immaterial to be accrued for the year ended December
31, 2006.
13.
FINANCE
COSTS, NET
Details
of finance costs are summarized as follows:
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
Total
interest cost incurred
|
|
$
|
54,530
|
|
$
|
86,608
|
|
$
|
79,917
|
|
|
Interest
income
|
|
|
(438
|
)
|
|
(267
|
)
|
|
(572
|
)
|
|
Others
|
|
|
765
|
|
|
243
|
|
|
810
|
|
|
|
|
$
|
54,857
|
|
$
|
86,584
|
|
$
|
80,155
|
|
EXHIBIT
INDEX
|
Exhibit
No.
|
|
Description
|
|
2.1
|
|
Share
Exchange Agreement, dated May 3, 2007, by and among the registrant,
International Lorain Holding, Inc. and Hisashi Akazawa.
|
|
|
|
|
|
3.1
|
|
Restated
Certificate of Incorporation of the registrant, as amended.
|
|
|
|
|
|
3.2
|
|
By-Laws
of the registrant, adopted on March 31, 2000. [incorporated by reference
to Exhibit 3.2 to the registrant’s Registration Statement on Form 10SB12G
filed on October 19, 2001, in commission file number
0-31619].
|
|
|
|
|
|
4.1
|
|
Certificate
of Designation of Series A Voting Convertible Preferred Stock of
the
registrant as filed with the Secretary of State of Delaware on April
9,
2007. [incorporated by reference to Exhibit 4.1 to the registrant’s Annual
Report on Form 10-KSB filed on April 9, 2007].
|
|
|
|
|
|
4.2
|
|
Certificate
of Designation of Series B Voting Convertible Preferred Stock of
the
registrant as filed with the Secretary of State of Delaware on April
30,
2007.
|
|
|
|
|
|
4.3
|
|
Option
Agreement, dated May 3, 2007, between Mr. Si Chen and Mr. Hisashi
Akazawa.
|
|
|
|
|
|
4.4
|
|
Form
of Registration Rights Agreement, dated May 3, 2007.
|
|
|
|
|
|
4.5
|
|
Form
of Common Stock Purchase Warrant issued to Investors dated May 3,
2007.
|
|
|
|
|
|
4.6
|
|
Form
of Common Stock Purchase Warrant issued to Sterne Agee & Leach, Inc.,
and its designee.
|
|
|
|
|
|
10.1
|
|
Form
of the Securities Purchase Agreement, dated May 3, 2007.
|
|
|
|
|
|
10.2
|
|
Make
Good Escrow Agreement, dated May 3, 2007, by and among the registrant,
Sterne Agee & Leach, Inc., Mr. Hisashi Akazawa, Mr. Si Chen and
Securities Transfer Corporation.
|
|
|
|
|
|
10.3
|
|
Closing
Escrow Agreement, dated May 3, 2007, by and among the registrant,
Sterne
Agee & Leach, Inc. and Thelen Reid Brown Raysman & Steiner LLP.
|
|
|
|
|
|
10.4
|
|
Cancellation
and Escrow Agreement, dated May 3, 2007, by and among the registrant,
Halter Financial Investments, L.P., Halter Financial Group, L.P.
and
Security Transfer Corporation.
|
|
|
|
|
|
10.5
|
|
Employment
Agreement, dated March 2, 2005, by and between Shandong Green Foodstuff
CO., LTD and Si Chen.
|
|
|
|
|
|
10.6
|
|
Employment
Agreement, dated July 2, 2002, by and between Shandong Green Foodstuff
CO., LTD and Xiaodong Zhou.
|
|
|
|
|
|
10.7
|
|
Employment
Agreement, dated December 7, 2004, by and between Shandong Green
Foodstuff
CO., LTD and Huanxiang Sheng.
|
|
10.8
|
|
Cooperation
Agreement, dated May 18, 2006, by and between Beijing
Green Foodstuff Co., Ltd. and the Chestnut Cooperation of Zhenzhai
Village, Gaoling town, Miyun County.
|
|
|
|
|
|
10.9
|
|
Equity
Transfer Agreement, dated August 15, 2006, by and between International
Lorain Co., Ltd and International Lorain Holding, Inc.
|
|
|
|
|
|
10.10
|
|
Credit
Facility Agreement, dated September 28, 2006, by and between Beijing
Green Foodstuff Co., Ltd. and the
Shilibao
Branch of Beijing Rural Commercial Bank Co., Ltd.
|
|
|
|
|
|
10.11
|
|
Sales
contract, dated May 13, 2006, by and between
Shandong Green Foodstuff Co., Ltd. and the Shandong Lu An
Import & Export Co., Ltd.
|
|
|
|
|
|
10.12
|
|
Sales
contract, dated September 5, 2006, by and between
Shandong Green Foodstuff Co., Ltd. and the Shinsei Foods
Co., Ltd.
|
|
|
|
|
|
10.13
|
|
Sales
Contract, dated September 10, 2006, by and between Junan
Hongrun Foodstuff Co., Ltd. and the Shinsei Foods Co.,
Ltd.
|
|
|
|
|
|
10.14
|
|
Financial
Advisory Agreement, dated February 14, 2007, by and between HFG
International, Limited and Shandong Green Foodstuff Co.,
Ltd.
|
|
|
|
|
|
10.15
|
|
Consulting
Agreement, dated March 8, 2007, by and between Heritage Management
Consultants, Inc. and International Lorain Holding, Inc.
|
|
|
|
|
|
14
|
|
Business
Ethics Policy and Code of Conduct, adopted on April 30,
2007.
|
|
|
|
|
|
21
|
|
List
of subsidiaries of the registrant.
|
|
|
|
|
|
99.1
|
|
Press
Release, dated May 3, 2007
|
Exhibit
2.1
SHARE
EXCHANGE AGREEMENT
This
SHARE EXCHANGE AGREEMENT (this “
Agreement
”),
dated
as of
May
3
,
2007,
is by and among Millennium Quest, Inc., a Delaware corporation (the
“
Parent
”),
International
Lorain Holding, Inc., a Cayman Islands company (the “
Company
”),
and
Mr. Hisashi Akazawa, the sole stockholder of the Company signatory hereto (the
“
Stockholder
”).
Each
of the parties to this Agreement are individually referred to herein as a
“
Party
”
and
collectively, as the “
Parties
.”
BACKGROUND
The
Company has
5,099,503
common
shares
(including any future shares acquired by the Stockholder and any purchase
option, call option, right of first refusal, preemptive right, subscription
right or any similar right granted to the Stockholder relating to transactions
on or before the date hereof, the “
Company
Stock
”)
issued
and outstanding, all of which are held by the Stockholder. The Stockholder
is
the record and beneficial owner of the number of shares of Company Stock set
forth opposite such person’s name on Exhibit A. The Stockholder has agreed to
transfer all of his shares of Company Stock in exchange for a number of newly
issued shares of the Series B Voting Convertible Preferred Stock, par value
$.001 per share, of the Parent (the “
Parent
Stock
”)
that
will, in the aggregate, if converted into common stock of the Parent at the
available conversion rate for conversion of Parent Stock into common stock
of
the Parent and if all Series A Voting Convertible Preferred Stock of the Parent
is converted into common stock of the Parent at the available conversion rate
for converting Series A Voting Convertible Preferred Stock of the Parent into
common stock of the Parent, constitute approximately
65.43
%
of the
issued and outstanding common stock of the Parent on a fully-diluted basis
as of
and immediately after the Closing, and after giving effect to the Financing
(as
defined in Section 7.11 hereof). The number of shares of Parent Stock to be
received by the Stockholder is listed opposite such Stockholder’s name on
Exhibit A attached to this Agreement. The aggregate number of shares of Parent
Stock that is reflected on Exhibit A is referred to herein as the
“Shares”.
The
exchange of Company Stock for Parent Stock is intended to constitute a
reorganization within the meaning of Section 368(a)(1)(B) of the Internal
Revenue Code of 1986 (the “
Code
”),
as
amended or such other tax free reorganization exemptions that may be available
under the Code.
The
Board
of Directors of the Parent and the Company have determined that it is desirable
to effect this plan of reorganization and share exchange.
AGREEMENT
NOW
THEREFORE, the parties agree as follows:
ARTICLE
I
Exchange
of Shares
SECTION
1.01.
Exchange
by Stockholder
.
At the
Closing (as defined in Section 1.02), the Stockholder shall sell, transfer,
convey, assign and deliver to the Parent its Company Stock free and clear of
all
Liens (as defined below) in exchange for the Parent Stock listed on
Exhibit
A
opposite
such Stockholder’s name.
SECTION
1.02.
Closing
.
The
closing (the “
Closing
”)
of the
transactions contemplated hereby (the “
Transactions
”)
shall
take place at the offices of Thelen Reid Brown Raysman & Steiner LLP in
Washington, DC commencing at 9:00 a.m. local time on the second business day
following the satisfaction or waiver of all conditions to the obligations of
the
parties to consummate the Transactions contemplated hereby (other than
conditions with respect to actions the respective parties will take at the
Closing itself), or such other date and time as the parties may mutually
determine (the “
Closing
Date
”).
ARTICLE
II
Representations
and Warranties of Stockholders
The
Stockholder hereby represents and warrants to the Parent with respect to
himself, as follows:
SECTION
2.01.
Good
Title
.
The
Stockholder is the record and beneficial owner, and has good title to its
Company Stock, with the right and authority to sell and deliver such Company
Stock. Upon registering of the Parent as the new owner of such Company Stock
in
the share register of members of the Company, the Parent will receive good
title
to such Company Stock, free and clear of all liens, security interests, pledges,
equities and claims of any kind, voting trusts, stockholder agreements and
other
encumbrances (collectively, “
Liens
”).
SECTION
2.02.
Power
and Authority
.
This
Agreement constitutes a legal, valid and binding obligation of the Stockholder,
enforceable against such Stockholder in accordance with the terms
hereof.
SECTION
2.03.
No
Conflicts
.
The
execution and delivery of this Agreement by the Stockholder and the performance
by the Stockholder of his obligations hereunder in accordance with the terms
hereof: (i) will not require the consent of any third party or any federal,
state, local or foreign government or any court of competent jurisdiction,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign (“
Governmental
Entity
”)
under
any statutes, laws, ordinances, rules, regulations, orders, writs, injunctions,
judgments, or decrees (collectively, “
Laws
”);
(ii)
will not violate any Laws applicable to such Stockholder and (iii) will not
violate or breach any contractual obligation to which such Stockholder is a
party.
SECTION
2.04.
No
Finder’s Fee
.
The
Stockholder has not created any obligation for any finder’s, investment banker’s
or broker’s fee in connection with the Transactions.
SECTION
2.05.
Purchase
Entirely for Own Account.
The
Parent Stock proposed to be acquired by the Stockholder hereunder will be
acquired for investment for his own account, and not with a view to the resale
or distribution of any part thereof, and the Stockholder has no present
intention of selling or otherwise distributing the Parent Stock, except in
compliance with applicable securities laws.
SECTION
2.06.
Available
Information
.
The
Stockholder has such knowledge and experience in financial and business matters
that he is capable of evaluating the merits and risks of investment in the
Parent.
SECTION
2.07.
Lock-up
and Registration Rights
.
The
Stockholder hereby undertakes that he will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any Parent Stock, enter
into a transaction that would have the same effect, or enter into any swap,
hedge or other arrangement that transfers, in whole or in part, any of the
economic consequences of ownership of such Parent Stock, whether any of these
transactions are to be settled by delivery of any such Parent Stock, in cash
or
otherwise, or publicly disclose the intention to make any offer, sale, pledge
or
disposition, or to enter into any transaction, swap, hedge or other arrangement,
for a period of 12 months from the date of issuance of such Parent Stock. After
12-month period described above, the Stockholder shall be entitled to effect
the
registration under the Securities Act of such Parent Stock.
SECTION
2.08.
Restricted
Securities
.
The
Stockholder understands that the Parent Stock is characterized as “restricted
securities” under the Securities Act inasmuch as this Agreement contemplates
that, if acquired by the Stockholder pursuant hereto, the Parent Stock would
be
acquired in a transaction not involving a public offering. The Stockholder
further acknowledges that if the Parent Stock is issued to the Stockholder
in
accordance with the provisions of this Agreement, such Parent Stock may not
be
resold without registration under the Securities Act or the existence of an
exemption therefrom. The Stockholder represents that it is familiar with Rule
144 promulgated under the Securities Act, as presently in effect, and
understands the resale limitations imposed thereby and by the Securities
Act.
SECTION
2.09.
Legends.
It is
understood that the Parent Stock will bear the following legend or one that
is
substantially similar to the following legend:
NEITHER
THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED
BY SUCH SECURITIES.
SECTION
2.10.
Accredited
Investor
.
The
Stockholder is an “accredited investor” within the meaning of Rule 501
under the Securities Act.
ARTICLE
III
Representations
and Warranties of the Company
The
Company represents and warrants to the Parent that, except as set forth in
the
Company Disclosure Letter (as defined below, and regardless of whether or not
the Company Disclosure Letter is referenced below with respect to any particular
representation or warranty), which will be delivered by the Company to the
Parent concurrently herewith (the “
Company
Disclosure Letter
”):
SECTION
3.01.
Organization,
Standing and Power
.
Each of
the Company and its subsidiaries (the “
Company
Subsidiaries
”)
is
duly organized, validly existing and in good standing under the laws of the
jurisdiction in which it is organized and has the corporate power and authority
and possesses all governmental franchises, licenses, permits, authorizations
and
approvals necessary to enable it to own, lease or otherwise hold its properties
and assets and to conduct its businesses as presently conducted, other than
such
franchises, licenses, permits, authorizations and approvals the lack of which,
individually or in the aggregate, has not had and would not reasonably be
expected to have a material adverse effect on the Company, a material adverse
effect on the ability of the Company to perform its obligations under this
Agreement or on the ability of the Company to consummate the Transactions (a
“
Company
Material Adverse Effect
”).
The
Company and each Company Subsidiary is duly qualified to do business in each
jurisdiction where the nature of its business or its ownership or leasing of
its
properties make such qualification necessary except where the failure to so
qualify would not reasonably be expected to have a Company Material Adverse
Effect. The Company has delivered to the Parent true and complete copies of
the
memorandum and articles of association of the Company and such other constituent
instruments of the Company as may exist, each as amended to the date of this
Agreement (as so amended, the “
Company
Constituent Instruments
”),
and
the comparable charter, organizational documents and other constituent
instruments of each Company Subsidiary, in each case as amended through the
date
of this Agreement.
SECTION
3.02.
Company
Subsidiaries; Equity Interests
.
(a)
The
Company Disclosure Letter lists each Company Subsidiary and its jurisdiction
of
organization. Except as specified in the Company Disclosure Letter, all the
outstanding shares of capital stock or equity investments of each Company
Subsidiary have been validly issued and are fully paid and nonassessable and
are
as of the date of this Agreement owned by the Company, by another Company
Subsidiary or by the Company and another Company Subsidiary, free and clear
of
all Liens.
(b)
Except
for its interests in the Company Subsidiaries, the Company does not as of the
date of this Agreement own, directly or indirectly, any capital stock,
membership interest, partnership interest, joint venture interest or other
equity interest in any person.
SECTION
3.03.
Capital
Structure
.
The
authorized share capital of the Company U.S. $21,000 divided into 6,000,000
common shares of U.S. $0.001 par value each and 1,500,000 preferred shares
of
U.S. $0.01 par value each. As of the date of this Agreement,
5,099,503
ordinary
shares are issued and outstanding and none of the preferred shares are issued
and outstanding. Except as set forth above, no shares or other voting securities
of the Company are issued, reserved for issuance or outstanding. Except as
specified in the Company Disclosure Letter, the Company is the sole record
and
beneficial owner of all of the issued and outstanding capital stock of each
Company Subsidiary. All outstanding shares of the capital stock of the Company
and each Company Subsidiary are duly authorized, validly issued, fully paid
and
nonassessable and not subject to or issued in violation of any purchase option,
call option, right of first refusal, preemptive right, subscription right or
any
similar right under any provision of the applicable corporate laws of the Cayman
Islands, the Company Constituent Instruments or any Contract (as defined in
Section 3.05) to which the Company is a party or otherwise bound. Except as
set
forth in this section 3.03 and in the Company Disclosure Letter, there are
not
any bonds, debentures, notes or other indebtedness of Company or any Company
Subsidiary having the right to vote (or convertible into, or exchangeable for,
securities having the right to vote) on any matters on which holders of Company
Stock or the common stock of any Company Subsidiary may vote (“
Voting
Company Debt
”).
Except as set forth above, as of the date of this Agreement, there are not
any
options, warrants, rights, convertible or exchangeable securities, “phantom”
stock rights, stock appreciation rights, stock-based performance units,
commitments, Contracts, arrangements or undertakings of any kind to which the
Company or any Company Subsidiary is a party or by which any of them is bound
(i) obligating the Company or any Company Subsidiary to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital stock
or
other equity interests in, or any security convertible or exercisable for or
exchangeable into any capital stock of or other equity interest in, the Company
or any Company Subsidiary or any Voting Company Debt, (ii) obligating the
Company or any Company Subsidiary to issue, grant, extend or enter into any
such
option, warrant, call, right, security, commitment, Contract, arrangement or
undertaking or (iii) that give any person the right to receive any economic
benefit or right similar to or derived from the economic benefits and rights
occurring to holders of the capital stock of the Company or of any Company
Subsidiary. Except as set forth in the Company Disclosure Letter, as of the
date
of this Agreement, there are not any outstanding contractual obligations of
the
Company to repurchase, redeem or otherwise acquire any shares of capital stock
of Parent.
SECTION
3.04.
Authority;
Execution and Delivery; Enforceability
.
The
Company has all requisite corporate power and authority to execute and deliver
this Agreement and to consummate the Transactions. The execution and delivery
by
the Company of this Agreement and the consummation by the Company of the
Transactions have been duly authorized and approved by the Board of Directors
of
the Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement and the Transactions. When executed and
delivered, this Agreement will be enforceable against the Company in accordance
with its terms.
SECTION
3.05.
No
Conflicts; Consents
.
(a)
Except
as
set forth in the Company Disclosure Letter, the execution and delivery by the
Company of this Agreement does not, and the consummation of the Transactions
and
compliance with the terms hereof and thereof will not, conflict with, or result
in any violation of or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under, or result
in the creation of any Lien upon any of the properties or assets of the Company
or any Company Subsidiary under, any provision of (i) the Company Constituent
Instruments or the comparable charter or organizational documents of any Company
Subsidiary, (ii) any material contract, lease, license, indenture, note, bond,
agreement, permit, concession, franchise or other instrument (a “
Contract
”)
to
which the Company or any Company Subsidiary is a party or by which any of their
respective properties or assets is bound or (iii) subject to the filings and
other matters referred to in Section 3.05(b), any material judgment, order
or
decree (“
Judgment
”)
or
material Law applicable to the Company or any Company Subsidiary or their
respective properties or assets, other than, in the case of clauses (ii) and
(iii) above, any such items that, individually or in the aggregate, have not
had
and would not reasonably be expected to have a Company Material Adverse
Effect.
(b)
Except
as
set forth in the Company Disclosure Letter and except for required filings
with
the Securities and Exchange Commission (the “
SEC
”)
and
applicable “Blue Sky” or state securities commissions,
no
material consent, approval, license, permit, order or authorization
(“
Consent
”)
of, or
registration, declaration or filing with, or permit from, any Governmental
Entity is required to be obtained or made by or with respect to the Company
or
any Company Subsidiary in connection with the execution, delivery and
performance of this Agreement or the consummation of the
Transactions.
SECTION
3.06.
Taxes
.
(a)
Each
of
the Company and each Company Subsidiary has timely filed, or has caused to
be
timely filed on its behalf, all Tax Returns required to be filed by it, and
all
such Tax Returns are true, complete and accurate, except to the extent any
failure to file or any inaccuracies in any filed Tax Returns, individually
or in
the aggregate, have not had and would not reasonably be expected to have a
Company Material Adverse Effect. All Taxes shown to be due on such Tax Returns,
or otherwise owed, have been timely paid, except to the extent that any failure
to pay, individually or in the aggregate, has not had and would not reasonably
be expected to have a Company Material Adverse Effect. There are no unpaid
taxes
in any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such
claim.
(b)
The
Company Financial Statements (as defined in Section 3.15) reflect an adequate
reserve for all Taxes payable by the Company and the Company Subsidiaries (in
addition to any reserve for deferred Taxes to reflect timing differences between
book and Tax items) for all Taxable periods and portions thereof through the
date of such financial statements. No deficiency with respect to any Taxes
has
been proposed, asserted or assessed against the Company or any Company
Subsidiary, and no requests for waivers of the time to assess any such Taxes
are
pending, except to the extent any such deficiency or request for waiver,
individually or in the aggregate, has not had and would not reasonably be
expected to have a Company Material Adverse Effect.
(c)
For
purposes of this Agreement:
“
Taxes
”
includes all forms of taxation, whenever created or imposed, and whether of
the
United States or elsewhere, and whether imposed by a local, municipal,
governmental, state, foreign, federal or other Governmental Entity, or in
connection with any agreement with respect to Taxes, including all interest,
penalties and additions imposed with respect to such amounts.
“
Tax
Return
”
means
all federal, state, local, provincial and foreign Tax returns, declarations,
statements, reports, schedules, forms and information returns and any amended
Tax return relating to Taxes.
SECTION
3.07.
Benefit
Plans
.
(a)
Except
as
set forth in the Company Disclosure Letter, the Company does not have or
maintain any collective bargaining agreement or any bonus, pension, profit
sharing, deferred compensation, incentive compensation, stock ownership, stock
purchase, stock option, phantom stock, retirement, vacation, severance,
disability, death benefit, hospitalization, medical or other plan, arrangement
or understanding (whether or not legally binding) providing benefits to any
current or former employee, officer or director of the Company or any Company
Subsidiary (collectively, “
Company
Benefit Plans
”).
Except as set forth in the Company Disclosure Letter, as of the date of this
Agreement there are not any severance or termination agreements or arrangements
between the Company or any Company Subsidiary and any current or former
employee, officer or director of the Company or any Company Subsidiary, nor
does
the Company or any Company Subsidiary have any general severance plan or
policy.
(b)
Since
December 31, 2006, there has not been any adoption or amendment in any material
respect by the Company or any Company Subsidiary of any Company Benefit
Plan.
SECTION
3.08.
Litigation
.
There
is no action, suit, inquiry, notice of violation, proceeding (including any
partial proceeding such as a deposition) or investigation pending or threatened
in writing against or affecting the Company, any subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or
administrative agency, regulatory authority (federal, state, county, local
or
foreign), stock market, stock exchange or trading facility (“
Action
”)
which
(i) adversely affects or challenges the legality, validity or enforceability
of
any of this Agreement or the Shares or (ii) could, if there were an unfavorable
decision, individually or in the aggregate, have or reasonably be expected
to
result in a Company Material Adverse Effect. Neither the Company nor any
subsidiary, nor any director or officer thereof (in his or her capacity as
such), is or has been the subject of any Action involving a claim or violation
of or liability under federal or state securities laws or a claim of breach
of
fiduciary duty.
SECTION
3.09.
Compliance
with Applicable Laws
.
The
Company and the Company Subsidiaries are in compliance with all applicable
Laws,
including those relating to occupational, health and safety and the environment,
except for instances of noncompliance that, individually and in the aggregate,
have not had and would not reasonably be expected to have a Company Material
Adverse Effect. Except as set forth in the Company Disclosure Letter, the
Company has not received any written communication during the past two years
from a Governmental Entity that alleges that the Company is not in compliance
in
any material respect with any applicable Law. This Section 3.09 does not relate
to matters with respect to Taxes, which are the subject of Section
3.06.
SECTION
3.10.
Brokers;
Schedule of Fees and Expenses
.
No
broker, investment banker, financial advisor or other person is entitled to
any
broker’s, finder’s, financial advisor’s or other similar fee or commission in
connection with the Transactions based upon arrangements made by or on behalf
of
the Company.
SECTION
3.11.
Contracts
.
Except
as disclosed in the Company Disclosure Letter, there are no Contracts that
are
material to the business, properties, assets, condition (financial or
otherwise), results of operations or prospects of the Company and its
subsidiaries taken as a whole. Neither the Company nor any Company Subsidiary
is
in violation of or in default under (nor does there exist any condition which
upon the passage of time or the giving of notice would cause such a violation
of
or default under) any Contract to which it is a party or by which it or any
of
its properties or assets is bound, except for violations or defaults that would
not, individually or in the aggregate, reasonably be expected to result in
a
Company Material Adverse Effect.
SECTION
3.12.
Title
to Properties
.
Except
as set forth in the Disclosure Letter, the Company and the Company Subsidiaries
do not own any real property. Each of the Company and the Company Subsidiaries
has sufficient title to, or valid leasehold interests in, all of its properties
and assets used in the conduct of its businesses. All such assets and
properties, other than assets and properties in which the Company or any of
the
Company Subsidiaries has leasehold interests, are free and clear of all Liens
other than those set forth in the Company Disclosure Letter and except for
Liens
that, in the aggregate, do not and will not materially interfere with the
ability of the Company and the Company Subsidiaries to conduct business as
currently conducted.
SECTION
3.13.
Intellectual
Property
.
The
Company and the Company Subsidiaries own, or are validly licensed or otherwise
have the right to use, all patents, patent rights, trademarks, trademark rights,
trade names, trade name rights, service marks, service mark rights, copyrights
and other proprietary intellectual property rights and computer programs
(collectively, “
Intellectual
Property Rights
”)
which
are material to the conduct of the business of the Company and the Company
Subsidiaries taken as a whole. The Company Disclosure Letter sets forth a
description of all Intellectual Property Rights which are material to the
conduct of the business of the Company and the Company Subsidiaries taken as
a
whole. There are no claims pending or, to the knowledge of the Company,
threatened that the Company or any of the Company Subsidiaries is infringing
or
otherwise adversely affecting the rights of any person with regard to any
Intellectual Property Right. To the knowledge of the Company, no person is
infringing the rights of the Company or any of the Company Subsidiaries with
respect to any Intellectual Property Right.
SECTION
3.14.
Labor
Matters
.
Except
as set forth in the Company Disclosure Letter, there are no collective
bargaining or other labor union agreements to which the Company or any of the
Company Subsidiaries is a party or by which any of them is bound. No material
labor dispute exists or, to the knowledge of the Company, is imminent with
respect to any of the employees of the Company.
SECTION
3.15.
Financial
Statements
.
Prior
to the Closing the Company will deliver to the Parent its audited consolidated
financial statements for the fiscal years ended December 31, 2006, 2005 and
2004
(collectively, the “
Company
Financial Statements
”).
Upon
delivery, the Company Financial Statements will have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods indicated. The Company Financial Statements will fairly
present in all material respects the financial condition and operating results
of the Company, as of the dates, and for the periods, indicated therein. The
Company will not have any material liabilities or obligations, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to December 31, 2006, and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in
the
Company Financial Statements, which, in both cases, individually and in the
aggregate would not be reasonably expected to result in a Company Material
Adverse Effect.
SECTION
3.16.
Insurance
.
Except
as set forth in the Company Disclosure Letter, the Company and its subsidiaries
are insured by insurers of recognized financial responsibility against such
losses and risks in accordance with any applicable laws under their respective
jurisdictions of organization and in such amounts as are customary in the
businesses in which the Company and its subsidiaries are engaged and in the
geographic areas where they engage in such businesses. The Company has no reason
to believe that it will not be able to renew its and its subsidiaries’ existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
on
terms consistent with market for the Company’s and such subsidiaries’ respective
lines of business.
SECTION
3.17.
Transactions
With Affiliates and Employees
.
Except
as set forth in the Company Disclosure Letter and Company Financial Statements,
none of the officers or directors of the Company and, to the knowledge of the
Company, none of the employees of the Company is presently a party to any
transaction with the Company or any subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Company, any entity in which any officer, director, or any such employee has
a
substantial interest or is an officer, director, trustee or
partner.
SECTION
3.18.
Internal
Accounting Controls
.
The
Company and its subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in
accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures
for
the Company and designed such disclosure controls and procedures to ensure
that
material information relating to the Company, including its subsidiaries, is
made known to the officers by others within those entities. The Company’s
officers have evaluated the effectiveness of the Company’s controls and
procedures. Since December 31, 2006, there have been no significant changes
in
the Company’s internal controls or, to the Company’s knowledge, in other factors
that could significantly affect the Company’s internal controls.
SECTION
3.19.
Solvency
.
Based
on the financial condition of the Company as of the closing date (and assuming
that the closing shall have occurred), (i) the Company’s fair saleable value of
its assets exceeds the amount that will be required to be paid on or in respect
of the Company’s existing debts and other liabilities (including known
contingent liabilities) as they mature, (ii) the Company’s assets do not
constitute unreasonably small capital to carry on its business for the current
fiscal year as now conducted and as proposed to be conducted including its
capital needs taking into account the particular capital requirements of the
business conducted by the Company, and projected capital requirements and
capital availability thereof, and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to liquidate
all
of its assets, after taking into account all anticipated uses of the cash,
would
be sufficient to pay all amounts on or in respect of its debt when such amounts
are required to be paid. The Company does not intend to incur debts beyond
its
ability to pay such debts as they mature (taking into account the timing and
amounts of cash to be payable on or in respect of its debt).
SECTION
3.20.
Application
of Takeover Protections
.
The
Company has taken all necessary action, if any, in order to render inapplicable
any control share acquisition, business combination, poison pill (including
any
distribution under a rights agreement) or other similar anti-takeover provision
under the Company’s charter documents or the laws of the Cayman Islands that is
or could become applicable to the Stockholder as a result of the Stockholder
and
the Company fulfilling their obligations or exercising their rights under this
Agreement, including, without limitation, the issuance of the Shares and the
Stockholder’s ownership of the Shares.
SECTION
3.21.
No
Additional Agreements
.
The
Company does not have any agreement or understanding with the Stockholder with
respect to the transactions contemplated by this Agreement other than as
specified in this Agreement.
SECTION
3.22.
Investment
Company
.
The
Company is not, and is not an affiliate of, and immediately following the
Closing will not have become, an “investment company” within the meaning of the
Investment Company Act of 1940, as amended.
SECTION
3.23.
Disclosure
.
All
disclosure provided to the Stockholder regarding the Company, its business
and
the transactions contemplated hereby, furnished by or on behalf of the Company
(including the Company’s representations and warranties set forth in this
Agreement) are true and correct and do not contain any untrue statement of
a
material fact or omit to state any material fact necessary in order to make
the
statements made therein, in light of the circumstances under which they were
made, not misleading.
SECTION
3.24.
Information
Supplied
.
None of
the information supplied or to be supplied by the Company for inclusion or
incorporation by reference in the notice that is required to be sent to the
stockholders of the Parent pursuant to Rule 14f-1 (the “
14f-1
Notice
”)
promulgated under the Securities Exchange Act of 1934 (the “
Exchange
Act
”)
will,
at the date it is first mailed to the Parent’s stockholders, contain any untrue
statement of a material fact or omit to state any material fact required to
be
stated therein or necessary in order to make the statements therein, in light
of
the circumstances under which they are made, not misleading.
SECTION
3.25.
Absence
of Certain Changes or Events
.
Except
as disclosed in the Company Financial Statements or in the Company Disclosure
Letter, from December 31, 2006 to the date of this Agreement, the Company has
conducted its business only in the ordinary course, and during such period
there
has not been:
(a)
any
change in the assets, liabilities, financial condition or operating results
of
the Company or any Company Subsidiary, except changes in the ordinary course
of
business that have not caused, in the aggregate, a Company Material Adverse
Effect;
(b)
any
damage, destruction or loss, whether or not covered by insurance, that would
have a Company Material Adverse Effect;
(c)
any
waiver or compromise by the Company or any Company Subsidiary of a valuable
right or of a material debt owed to it;
(d)
any
satisfaction or discharge of any lien, claim, or encumbrance or payment of
any
obligation by the Company or any Company Subsidiary, except in the ordinary
course of business and the satisfaction or discharge of which would not have
a
Company Material Adverse Effect;
(e)
any
material change to a material Contract by which the Company or any Company
Subsidiary or any of its respective assets is bound or subject;
(f)
any
mortgage, pledge, transfer of a security interest in, or lien, created by the
Company or any Company Subsidiary, with respect to any of its material
properties or assets, except liens for taxes not yet due or payable and liens
that arise in the ordinary course of business and do not materially impair
the
Company’s or such Company Subsidiary’s ownership or use of such property or
assets;
(g)
any
loans
or guarantees made by the Company or any Company Subsidiary to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(h)
any
alteration of the Company’s method of accounting or the identity of its
auditors;
(i)
any
declaration or payment of dividend or distribution of cash or other property
to
Stockholders or any purchase, redemption or agreements to purchase or redeem
any
shares of Company Stock;
(j)
any
issuance of equity securities to any officer, director or affiliate, except
pursuant to existing Company stock option plans; or
(k)
any
arrangement or commitment by the Company or any Company Subsidiary to do any
of
the things described in this Section 3.25.
SECTION
3.26.
No
Undisclosed Events, Liabilities, Developments or Circumstances
.
No
event, liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.
SECTION
3.27.
Compliance
with PRC Anti-Corruption Laws
.
Neither
the Company, nor any of its subsidiaries, nor, to the Company’s knowledge, any
director, officer, agent, employee or other person acting on behalf of the
Company or any of its subsidiaries has, in the course of its actions for, or
on
behalf of, the Company (i) used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; (ii) made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds; (iii)
violated or is in violation of applicable PRC laws; or (iv) made any unlawful
bribe, rebate, payoff, influence payment, kickback or other unlawful payment
to
any foreign or domestic government official or employee.
ARTICLE
IV
Representations
and Warranties of the Parent
The
Parent represents and warrants to the Stockholder and the Company that, except
as set forth in the reports, schedules, forms, statements and other documents
filed by Parent with the SEC and publicly available prior to the date of the
Agreement (the “
Filed
Parent SEC Documents
”)
or in
the letter, which will be delivered by the Parent to the Company and the
Stockholder concurrently herewith (the “
Parent
Disclosure Letter
”):
SECTION
4.01.
Organization,
Standing and Power
.
Parent
is duly incorporated, validly existing and in good standing under the laws
of
the State of Delaware and has full corporate power and authority and possesses
all governmental franchises, licenses, permits, authorizations and approvals
necessary to enable it to own, lease or otherwise hold its properties and assets
and to conduct its businesses as presently conducted, other than such
franchises, licenses, permits, authorizations and approvals the lack of which,
individually or in the aggregate, has not had and would not reasonably be
expected to have a material adverse effect on Parent, a material adverse effect
on the ability of Parent to perform its obligations under this Agreement or
on
the ability of Parent to consummate the Transactions (a “
Parent
Material Adverse Effect
”).
Parent is duly qualified to do business in each jurisdiction where the nature
of
its business or their ownership or leasing of its properties make such
qualification necessary and where the failure to so qualify would reasonably
be
expected to have a Parent Material Adverse Effect. Parent has delivered to
the
Company true and complete copies of the certificate of incorporation of Parent,
as amended to the date of this Agreement (as so amended, the “
Parent
Charter
”),
and
the Bylaws of Parent, as amended to the date of this Agreement (as so amended,
the “
Parent
Bylaws
”).
SECTION
4.02.
Subsidiaries;
Equity Interests
.
Parent
does not own, directly or indirectly, any capital stock, membership interest,
partnership interest, joint venture interest or other equity interest in any
person.
SECTION
4.03.
Capital
Structure
.
The
authorized capital stock of the Parent consists of Twenty-Five Million
(25,000,000) shares of Parent Common Stock, par value $0.001 per share, and
Five
Million (5,000,000) shares of preferred stock, par value $0.001 per share,
of
which 100,000 shares have been designated as “Series A Voting Convertible
Preferred Stock” (the “
Series
A Preferred Stock
”)
and
1,000,000 shares have been designated as “Series B Voting Convertible Preferred
Stock” (the “
Series
B Preferred Stock
”).
As of
the date hereof, (i) 10,508,643 shares of Parent Common Stock are issued and
outstanding, (ii) 100,000 shares of Series A Preferred Stock are issued and
outstanding, (iii) no shares of Series B Preferred Stock are issued and
outstanding, (iv) all of the shares of the Parent’s authorized, but unissued
Common Stock (14,491,357 shares) are reserved for issuance upon issuance and
conversion of the Series A Preferred Stock and the Series B Preferred Stock,
and
(v) no shares of Parent Common Stock or preferred stock are held by the Parent
in its treasury. Except as set forth above, no shares of capital stock or other
voting securities of Parent were issued, reserved for issuance or
outstanding.
All
outstanding shares of the capital stock of Parent are, and all such shares
that
may be issued prior to the date hereof will be when issued, duly authorized,
validly issued, fully paid and nonassessable and not subject to or issued in
violation of any purchase option, call option, right of first refusal,
preemptive right, subscription right or any similar right under any provision
of
the General Corporation Law of the State of Delaware, the Parent Charter, the
Parent Bylaws or any Contract to which Parent is a party or otherwise bound.
There are not any bonds, debentures, notes or other indebtedness of Parent
having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which holders of Parent Common
Stock
may vote (“
Voting
Parent Debt
”).
Except as set forth above, as of the date of this Agreement, there are not
any
options, warrants, rights, convertible or exchangeable securities, “phantom”
stock rights, stock appreciation rights, stock-based performance units,
commitments, Contracts, arrangements or undertakings of any kind to which Parent
is a party or by which it is bound (i) obligating Parent to issue, deliver
or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other equity interests in, or any security convertible or exercisable
for or exchangeable into any capital stock of or other equity interest in,
Parent or any Voting Parent Debt, (ii) obligating Parent to issue, grant, extend
or enter into any such option, warrant, call, right, security, commitment,
Contract, arrangement or undertaking or (iii) that give any person the right
to
receive any economic benefit or right similar to or derived from the economic
benefits and rights occurring to holders of the capital stock of the Parent.
As
of the date of this Agreement, there are not any outstanding contractual
obligations of Parent to repurchase, redeem or otherwise acquire any shares
of
capital stock of Parent. Except as set forth in
Schedule
4.03
,
the
Parent is not a party to any agreement granting any securityholder of the Parent
the right to cause the Parent to register shares of the capital stock or other
securities of the Parent held by such securityholder under the Securities Act.
The stockholder list to be provided at closing to the Company shall be a current
shareholder list generated by its stock transfer agent, and such list shall
accurately reflect all of the issued and outstanding shares of the Parent’s
Common Stock.
SECTION
4.04.
Authority;
Execution and Delivery; Enforceability
.
The
execution and delivery by the Parent of this Agreement and the consummation
by
the Parent of the Transactions have been duly authorized and approved by the
Board of Directors of the Parent and no other corporate proceedings on the
part
of the Parent, except for the filing of a Certificate of Completion (as
hereinafter defined), are necessary to authorize this Agreement and the
Transactions. This Agreement constitutes a legal, valid and binding obligation
of the Parent, enforceable against the Parent in accordance with the terms
hereof.
SECTION
4.05.
No
Conflicts; Consents
.
(a)
Except
as
set forth in the Parent Disclosure Letter, the execution and delivery by Parent
of this Agreement, does not, and the consummation of Transactions and compliance
with the terms hereof and thereof will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration
of
any obligation or to loss of a material benefit under, or to increased,
additional, accelerated or guaranteed rights or entitlements of any person
under, or result in the creation of any Lien upon any of the properties or
assets of Parent under, any provision of (i) Parent Charter or Parent Bylaws,
(ii) any material Contract to which Parent is a party or by which any of its
properties or assets is bound or (iii) subject to the filings and other matters
referred to in Section 4.05(b), any material Judgment or material Law applicable
to Parent or its properties or assets, other than, in the case of clauses (ii)
and (iii) above, any such items that, individually or in the aggregate, have
not
had and would not reasonably be expected to have a Parent Material Adverse
Effect.
(b)
No
Consent of, or registration, declaration or filing with, or permit from, any
Governmental Entity is required to be obtained or made by or with respect to
Parent in connection with the execution, delivery and performance of this
Agreement or the consummation of the Transactions, other than the (A) filing
with the SEC of a 14f-1 Notice and (B) filing with the SEC of reports under
Sections 13 and 16 of the Exchange Act, and (C) filings under state “blue sky”
laws, as may be required in connection with this Agreement and the
Transactions.
SECTION
4.06.
SEC
Documents; Undisclosed Liabilities
.
(a)
Parent
has filed all reports, schedules, forms, statements and other documents required
to be filed by Parent with the SEC since April 12, 2006, pursuant to Sections
13(a), 14 (a) and 15(d) of the Exchange Act (the “
Parent
SEC Documents
”).
(b)
As
of its
respective filing date, each Parent SEC Document complied in all material
respects with the requirements of the Exchange Act and the rules and regulations
of the SEC promulgated thereunder applicable to such Parent SEC Document, and
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Except to the extent that information contained in any Parent
SEC Document has been revised or superseded by a later filed Parent SEC
Document, none of the Parent SEC Documents contains any untrue statement of
a
material fact or omits to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of Parent included in the Parent SEC Documents comply
as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with the U.S. generally accepted accounting principals
(“
GAAP
”)
(except, in the case of unaudited statements, as permitted by the rules and
regulations of the SEC) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly present
the consolidated financial position of Parent and its consolidated subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for the periods shown (subject, in the case of unaudited statements,
to normal year-end audit adjustments).
(c)
Except
as
set forth in the Filed Parent SEC Documents, Parent has no liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
required by GAAP to be set forth on a balance sheet of Parent or in the notes
thereto. The Parent Disclosure Letter sets forth all financial and contractual
obligations and liabilities (including any obligations to issue capital stock
or
other securities of the parent) due after the date hereof. As of the date hereof
the Parent has total liabilities of less than $30,000, all of which liabilities
shall be paid off at or prior to the Closing and shall in no event remain
liabilities of the Parent, the Company or the Stockholder following the
Closing.
SECTION
4.07.
Information
Supplied
.
None of
the information supplied or to be supplied by Parent for inclusion or
incorporation by reference in the 14f-1 Notice will, at the date it is first
mailed to the Parent’s stockholders, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading.
SECTION
4.08.
Absence
of Certain Changes or Events
.
Except
as disclosed in the Filed Parent SEC Documents or in the Parent Disclosure
Letter, from the date of the most recent audited financial statements included
in the Filed Parent SEC Documents to the date of this Agreement, Parent has
conducted its business only in the ordinary course, and during such period
there
has not been:
(a)
any
change in the assets, liabilities, financial condition or operating results
of
the Parent from that reflected in the Parent SEC Documents, except changes
in
the ordinary course of business that have not caused, in the aggregate, a Parent
Material Adverse Effect;
(b)
any
damage, destruction or loss, whether or not covered by insurance, that would
have a Parent Material Adverse Effect;
(c)
any
waiver or compromise by the Parent of a valuable right or of a material debt
owed to it;
(d)
any
satisfaction or discharge of any lien, claim, or encumbrance or payment of
any
obligation by the Parent, except in the ordinary course of business and the
satisfaction or discharge of which would not have a Parent Material Adverse
Effect;
(e)
any
material change to a material Contract by which the Parent or any of its assets
is bound or subject;
(f)
any
material change in any compensation arrangement or agreement with any employee,
officer, director or stockholder;
(g)
any
resignation or termination of employment of any officer of the Parent;
(h)
any
mortgage, pledge, transfer of a security interest in, or lien, created by the
Parent, with respect to any of its material properties or assets, except liens
for taxes not yet due or payable and liens that arise in the ordinary course
of
business and do not materially impair the Parent’s ownership or use of such
property or assets;
(i)
any
loans
or guarantees made by the Parent to or for the benefit of its employees,
officers or directors, or any members of their immediate families, other than
travel advances and other advances made in the ordinary course of its
business;
(j)
any
declaration, setting aside or payment or other distribution in respect of any
of
the Parent’s capital stock, or any direct or indirect redemption, purchase, or
other acquisition of any of such stock by the Parent;
(k)
any
alteration of the Parent’s method of accounting or the identity of its auditors;
(l)
any
issuance of equity securities to any officer, director or affiliate, except
pursuant to existing Parent stock option plans; or
(m)
any
arrangement or commitment by the Parent to do any of the things described in
this Section 4.08.
SECTION
4.09.
Taxes
.
(a)
Parent
has timely filed, or has caused to be timely filed on its behalf, all Tax
Returns required to be filed by it, and all such Tax Returns are true, complete
and accurate, except to the extent any failure to file or any inaccuracies
in
any filed Tax Returns, individually or in the aggregate, have not had and would
not reasonably be expected to have a Parent Material Adverse Effect. All Taxes
shown to be due on such Tax Returns, or otherwise owed, has been timely paid,
except to the extent that any failure to pay, individually or in the aggregate,
has not had and would not reasonably be expected to have a Parent Material
Adverse Effect.
(b)
The
most
recent financial statements contained in the Filed Parent SEC Documents reflect
an adequate reserve for all Taxes payable by Parent (in addition to any reserve
for deferred Taxes to reflect timing differences between book and Tax items)
for
all Taxable periods and portions thereof through the date of such financial
statements. No deficiency with respect to any Taxes has been proposed, asserted
or assessed against Parent, and no requests for waivers of the time to assess
any such Taxes are pending, except to the extent any such deficiency or request
for waiver, individually or in the aggregate, has not had and would not
reasonably be expected to have a Parent Material Adverse Effect.
(c)
There
are
no Liens for Taxes (other than for current Taxes not yet due and payable) on
the
assets of Parent. Parent is not bound by any agreement with respect to
Taxes.
SECTION
4.10.
Absence
of Changes in Benefit Plans
.
From
the date of the most recent audited financial statements included in the Filed
Parent SEC Documents to the date of this Agreement, there has not been any
adoption or amendment in any material respect by Parent of any collective
bargaining agreement or any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, medical or other plan, arrangement or understanding
(whether or not legally binding) providing benefits to any current or former
employee, officer or director of Parent (collectively, “
Parent
Benefit Plans
”).
As of
the date of this Agreement there are not any employment, consulting,
indemnification, severance or termination agreements or arrangements between
the
Parent and any current or former employee, officer or director of the Parent,
nor does the Parent have any general severance plan or policy.
SECTION
4.11.
ERISA
Compliance; Excess Parachute Payments
.
The
Parent does not, and since its inception never has, maintained, or contributed
to any “employee pension benefit plans” (as defined in Section 3(2) of ERISA),
“employee welfare benefit plans” (as defined in Section 3(1) of ERISA) or any
other Parent Benefit Plan for the benefit of any current or former employees,
consultants, officers or directors of Parent.
SECTION
4.12.
Litigation
.
There
is no Action which (i) adversely affects or challenges the legality, validity
or
enforceability of any of this Agreement or the Shares or (ii) could, if there
were an unfavorable decision, individually or in the aggregate, have or
reasonably be expected to result in a Parent Material Adverse Effect. Neither
the Parent nor any subsidiary, nor any director or officer thereof (in his
or
her capacity as such), is or has been the subject of any Action involving a
claim or violation of or liability under federal or state securities laws or
a
claim of breach of fiduciary duty.
SECTION
4.13.
Compliance
with Applicable Laws
.
Parent
is in compliance with all applicable Laws, including those relating to
occupational health and safety and the environment, except for instances of
noncompliance that, individually and in the aggregate, have not had and would
not reasonably be expected to have a Parent Material Adverse Effect. Except
as
set forth in the Filed Parent SEC Documents or in the Parent Disclosure Letter,
Parent has not received any written communication during the past two years
from
a Governmental Entity that alleges that Parent is not in compliance in any
material respect with any applicable Law. The Parent is in compliance with
all
effective requirements of the Sarbanes-Oxley Act of 2002, as amended, and the
rules and regulations thereunder, that are applicable to it, except where such
noncompliance could not have or reasonably be expected to result in a Parent
Material Adverse Effect. This Section 4.13 does not relate to matters with
respect to Taxes, which are the subject of Section 4.09.
SECTION
4.14.
Contracts
.
Except
as disclosed in the Parent Filed SEC Documents, there are no Contracts that
are
material to the business, properties, assets, condition (financial or
otherwise), results of operations or prospects of the Parent taken as a whole.
Parent is not in violation of or in default under (nor does there exist any
condition which upon the passage of time or the giving of notice would cause
such a violation of or default under) any Contract to which it is a party or
by
which it or any of its properties or assets is bound, except for violations
or
defaults that would not, individually or in the aggregate, reasonably be
expected to result in a Parent Material Adverse Effect.
SECTION
4.15.
Title
to Properties
.
Parent
has good title to, or valid leasehold interests in, all of its properties and
assets used in the conduct of its businesses. All such assets and properties,
other than assets and properties in which the Parent has leasehold interests,
are free and clear of all Liens other than those set forth in the Parent
Disclosure Letter and except for Liens that, in the aggregate, do not and will
not materially interfere with the ability of the Parent to conduct business
as
currently conducted. Parent has complied in all material respects with the
terms
of all material leases to which it is a party and under which it is in
occupancy, and all such leases are in full force and effect. Parent enjoys
peaceful and undisturbed possession under all such material leases.
SECTION
4.16.
Intellectual
Property
.
Parent
owns, or is validly licensed or otherwise has the right to use, all Intellectual
Property Rights which are material to the conduct of the business of the Parent
taken as a whole. The Parent Disclosure Letter sets forth a description of
all
Intellectual Property Rights which are material to the conduct of the business
of the Parent taken as a whole. Except as set forth in the Parent Disclosure
Letter no claims are pending or, to the knowledge of the Parent, threatened
that
the Parent is infringing or otherwise adversely affecting the rights of any
person with regard to any Intellectual Property Right. To the knowledge of
the
Parent, no person is infringing the rights of the Parent with respect to any
Intellectual Property Right.
SECTION
4.17.
Labor
Matters
.
There
are no collective bargaining or other labor union agreements to which the Parent
is a party or by which it is bound. No material labor dispute exists or, to
the
knowledge of the
Parent
,
is
imminent with respect to any of the employees of the Parent.
SECTION
4.18.
Market
Makers
.
The
Parent has at least two market makers for its common shares and such market
makers have obtained all permits and made all filings necessary in order for
such market makers to continue as market makers of the Parent.
SECTION
4.19.
Transactions
With Affiliates and Employees
.
Except
as set forth in the Filed Parent SEC Documents and Parent Disclosure Letter,
none of the officers or directors of the Parent and, to the knowledge of the
Parent, none of the employees of the Parent is presently a party to any
transaction with the Parent or any subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Parent, any entity in which any officer, director, or any such employee has
a
substantial interest or is an officer, director, trustee or
partner.
SECTION
4.20.
Internal
Accounting Controls
.
The
Parent maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management’s general
or specific authorization, and (iv) the recorded accountability for assets
is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences. The Parent has established disclosure
controls and procedures for the Parent and designed such disclosure controls
and
procedures to ensure that material information relating to the Parent is made
known to the officers by others within those entities. The Parent’s officers
have evaluated the effectiveness of the Parent’s controls and procedures. Since
December 31, 2006, there have been no significant changes in the Parent’s
internal controls or, to the Parent’s knowledge, in other factors that could
significantly affect the Parent’s internal controls.
SECTION
4.21.
Solvency
.
Based
on the financial condition of the
Parent
as of
the closing date (and assuming that the closing shall have occurred), (i) the
Parent’s fair saleable value of its assets exceeds the amount that will be
required to be paid on or in respect of the Parent’s existing debts and other
liabilities (including known contingent liabilities) as they mature, (ii) the
Parent’s assets do not constitute unreasonably small capital to carry on its
business for the current fiscal year as now conducted and as proposed to be
conducted including its capital needs taking into account the particular capital
requirements of the business conducted by the Parent, and projected capital
requirements and capital availability thereof, and (iii) the current cash flow
of the Parent, together with the proceeds the Parent would receive, were it
to
liquidate all of its assets, after taking into account all anticipated uses
of
the cash, would be sufficient to pay all amounts on or in respect of its debt
when such amounts are required to be paid. The Parent does not intend to incur
debts beyond its ability to pay such debts as they mature (taking into account
the timing and amounts of cash to be payable on or in respect of its
debt).
SECTION
4.22.
Application
of Takeover Protections
.
The
Parent has taken all necessary action, if any, in order to render inapplicable
any control share acquisition, business combination, poison pill (including
any
distribution under a rights agreement) or other similar anti-takeover provision
under the Parent’s charter documents or the laws of its state of incorporation
that is or could become applicable to the Stockholder as a result of the
Stockholder and the Parent fulfilling their obligations or exercising their
rights under this Agreement, including, without limitation, the issuance of
the
Shares and the Stockholder’s ownership of the Shares.
SECTION
4.23.
No
Additional Agreements
.
The
Parent does not have any agreement or understanding with the Stockholder with
respect to the transactions contemplated by this Agreement other than as
specified in this Agreement.
SECTION
4.24.
Investment
Company
.
The
Parent is not, and is not an affiliate of, and immediately following the Closing
will not have become, an “investment company” within the meaning of the
Investment Company Act of 1940, as amended.
SECTION
4.25.
Disclosure
.
All
disclosure provided to the Stockholder regarding the Parent, its business and
the transactions contemplated hereby, furnished by or on behalf of the Parent
(including the Parent’s representations and warranties set forth in this
Agreement) are true and correct and do not contain any untrue statement of
a
material fact or omit to state any material fact necessary in order to make
the
statements made therein, in light of the circumstances under which they were
made, not misleading.
SECTION
4.26.
Certain
Registration Matters
.
Except
as specified in the Parent Disclosure Letter and Filed Parent SEC Documents,
the
Parent has not granted or agreed to grant to any person any rights (including
“piggy-back” registration rights) to have any securities of the Parent
registered with the SEC or any other governmental authority that have not been
satisfied.
SECTION
4.27.
Listing
and Maintenance Requirements
.
The
Parent is, and has no reason to believe that it will not in the foreseeable
future continue to be, in compliance with the listing and maintenance
requirements for continued listing of the Parent Stock on the trading market
on
which the
Parent
Stock
are
currently listed or quoted. The issuance and sale of the Shares under this
Agreement does not contravene the rules and regulations of the trading market
on
which the Parent Stock are currently listed or quoted, and no approval of the
stockholders of the Parent is required for the Parent to issue and deliver
to
the Stockholder the Shares contemplated by this Agreement.
SECTION
4.28.
No
Undisclosed Events, Liabilities, Developments or Circumstances
.
No
event, liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Parent, its subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Parent under applicable securities
laws on a registration statement on Form S-1 filed with the SEC relating to
an
issuance and sale by the Parent of its Common Stock and which has not been
publicly announced.
SECTION
4.29.
Foreign
Corrupt Practices
.
Neither
the Parent, nor any of its subsidiaries, nor, to the Parent’s knowledge, any
director, officer, agent, employee or other person acting on behalf of the
Parent or any of its subsidiaries has, in the course of its actions for, or
on
behalf of, the Parent (i) used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; (ii) made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds; (iii)
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign
or
domestic government official or employee.
ARTICLE
V
Deliveries
SECTION
5.01.
Deliveries
of the Stockholder
.
(a)
Concurrently
herewith the Stockholder is delivering to the Parent this Agreement executed
by
the Stockholder.
(b)
On
Closing date, the Stockholder shall deliver to the Parent:
|
(i)
|
certificates
representing its Company Stock; and
|
|
(ii)
|
duly
executed instruments of transfer by the Stockholder of its Company
Stock
to the Parent.
|
SECTION
5.02.
Deliveries
of the Parent
.
(a)
Concurrently
herewith, the Parent is delivering:
|
(i)
|
to
each Stockholder and to the Company, a copy of this Agreement executed
by
Parent;
|
|
(ii)
|
to
the Company, a certificate from the Parent, signed by its Secretary
or
Assistant Secretary certifying that the attached copies of the Parent
Charter, Parent Bylaws and resolutions of the Board of Directors of
the
Parent approving the Agreement and the Transactions, are all true,
complete and correct and remain in full force and
effect;
|
(b)
At
or
prior to the Closing, the Parent shall deliver:
|
(i)
|
to
the Company, a letter of resignation of Timothy Halter from all offices
he
holds with the Parent effective upon the Closing and from his position
as
a director of the Parent that will become effective upon the 10th day
following the mailing by the Parent to its stockholders of the 14f-1
Notice;
|
|
(ii)
|
to
the Company, evidence of the election (A) of Mr. Si Chen as a director
of
the Parent and (B) of the executive officers of the Company as executive
officers of the Parent effective upon the
Closing;
|
|
(iii)
|
to
the Company, such pay-off letters and releases relating to liabilities
as
the Company shall request and such pay-off letters and releases shall
be
in form and substance satisfactory to the Company;
and
|
|
(iv)
|
to
the Company the results of UCC, judgment lien and tax lien searches
with
respect to the Parent, the results of which indicate no liens on the
assets of the Parent.
|
(c)
On
Closing date, the Parent shall deliver:
|
(i)
|
to
each Stockholder, certificates representing the new shares of Parent
Series B Preferred Stock issued to such Stockholder as set forth on
Exhibit
A
;
and
|
|
(ii)
|
to
the Company, consent letters of the accounting firms of Parent confirming
each such firm’s respective consent to the use by the Parent of reports
prepared by such firm regarding the financial statements of the Parent
in
all future registration statements filed with the
SEC.
|
SECTION
5.03.
Deliveries
of the Company
.
Concurrently
herewith, the Company is delivering to the Parent:
|
|
(a)
|
this
Agreement executed by Company; and
|
|
|
(b)
|
a
certificate from the Company, signed by its authorized officer
certifying
that the attached copies of the Company Constituent
Instruments
and resolutions of the Board of Directors of the Company
approving
the Agreement and the Transactions are all true, complete
and
correct and remain in full force and
effect.
|
ARTICLE
VI
Conditions
to Closing
SECTION
6.01.
Stockholder
and Company Conditions Precedent
.
The
obligations of the Stockholder and the Company to enter into and complete the
Closing is subject, at the option of the Stockholder and the Company, to the
fulfillment on or prior to the Closing Date of the following conditions:
(a)
Representations
and Covenants
.
The
representations and warranties of the Parent contained in this Agreement shall
be true in all material respects on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date. The Parent shall
have performed and complied in all material respects with all covenants and
agreements required by this Agreement to be performed or complied with by the
Parent on or prior to the Closing Date. The Parent shall have delivered to
the
Stockholder and the Company, a certificate, dated the Closing Date, to the
foregoing effect.
(b)
Litigation
.
No
action, suit or proceeding shall have been instituted before any court or
governmental or regulatory body or instituted or threatened by any governmental
or regulatory body to restrain, modify or prevent the carrying out of the
Transactions or to seek damages or a discovery order in connection with such
Transactions, or which has or may have, in the reasonable opinion of the Company
or the Stockholder, a materially adverse effect on the assets, properties,
business, operations or condition (financial or otherwise) of the Parent or
the
Company.
(c)
No
Material Adverse Change
.
There
shall not have been any occurrence, event, incident, action, failure to act,
or
transaction since December 31, 2006 which has had or is reasonably likely to
cause a Parent Material Adverse Effect.
(d)
Post-Closing
Capitalization
.
At, and
immediately after, the Closing, the authorized capitalization, and the number
of
issued and outstanding shares of the capital stock of the Company and the
Parent, on a fully-diluted basis, as indicated on a schedule to be delivered
by
the Parties at or prior to the Closing, shall be acceptable to the Stockholder
in their sole and absolute discretion.
(e)
SEC
Reports
.
The
Parent shall have filed all reports and other documents required to be filed
by
Parent under the U.S. federal securities laws through the Closing
Date.
(f)
OTCBB
Quotation
.
The
Parent shall have maintained its status as a Company whose common stock is
quoted on the Over-the-Counter Bulletin Board and no reason shall exist as
to
why such status shall not continue immediately following the
Closing.
(g)
Deliveries
.
The
deliveries specified in Section 5.02 shall have been made by the Parent.
(h)
No
Suspensions of Trading in Parent Stock; Listing
.
Trading
in the Parent Stock shall not have been suspended by the SEC or any trading
market (except for any suspensions of trading of not more than one trading
day
solely to permit dissemination of material information regarding the Parent)
at
any time since the date of execution of this Agreement, and the Parent Stock
shall have been at all times since such date listed for trading on a trading
market.
(i)
Satisfactory
Completion of Due Diligence
.
The
Company and the Stockholder shall have completed their legal, accounting and
business due diligence of the Parent and the results thereof shall be
satisfactory to the Company and the Stockholder in their sole and absolute
discretion.
(j)
Delivery
of Audit Report and Financial Statements
.
The
Company shall have completed the Company Financial Statements and shall have
received an audit report from an independent audit firm that is registered
with
the Public Company Accounting Oversight Board relating to the fiscal years
ended
December 31, 2006, 2005 and 2004.
(k)
Completion
of Financing
.
The
Financing (as defined in Section 7.11 below) shall have been completed or shall
be completed simultaneously with the Closing.
(l)
Delivery
of US Legal Opinion
.
The
Company shall have received an opinion from its legal counsel in the US that
discusses the Company’s entering into documents in connection with the
Transactions and certain other matters, under New York law and the Delaware
General Corporation Law and that is otherwise satisfactory to the Company,
the
Stockholder, the Parent and the investors investing in the
Financing.
(m)
Delivery
of PRC Legal Opinion
.
The
Company shall have received an opinion from its legal counsel in People’s
Republic of China that confirms the legality under Chinese laws of the
restructuring being effected by the Company in connection with the Transactions
and that is otherwise satisfactory to the Company, the Stockholder, the Parent
and the investors investing in the Financing.
(n)
Delivery
of Cayman Island Legal Opinion
.
The
Parent shall have received an opinion from the Company’s legal counsel in the
Cayman Islands that confirms the legality under the laws of the Cayman Islands
of the restructuring being effected by the Company in connection with the
Transactions and that is otherwise satisfactory to the Company, the Stockholder,
the Parent and the investors investing in the Financing.
(o)
Filing
of Certificate of Designation
.
The
Parent shall have filed with the Secretary of State of the State of Delaware
a
Certificate of Designation setting forth the voting powers, designations,
preferences and relative, participating, optional or other rights and the
qualifications, limitations and restrictions of the Series B Preferred Stock,
in
form and substance mutually agreed upon by the Parties.
SECTION
6.02.
Parent
Conditions Precedent
.
The
obligations of the Parent to enter into and complete the Closing is subject,
at
the option of the Parent, to the fulfillment on or prior to the Closing Date
of
the following conditions, any one or more of which may be waived by the Parent
in writing.
(a)
Representations
and Covenants
.
The
representations and warranties of the Stockholder and the Company contained
in
this Agreement shall be true in all material respects on and as of the Closing
Date with the same force and effect as though made on and as of the Closing
Date. The Stockholder and the Company shall have performed and complied in
all
material respects with all covenants and agreements required by this Agreement
to be performed or complied with by the Stockholder and the Company on or prior
to the Closing Date. The Company shall have delivered to the Parent, if
requested, a certificate, dated the Closing Date, to the foregoing effect.
(b)
Litigation
.
No
action, suit or proceeding shall have been instituted before any court or
governmental or regulatory body or instituted or threatened by any governmental
or regulatory body to restrain, modify or prevent the carrying out of the
Transactions or to seek damages or a discovery order in connection with such
Transactions, or which has or may have, in the reasonable opinion of the Parent,
a materially adverse effect on the assets, properties, business, operations
or
condition (financial or otherwise) of the Parent.
(c)
No
Material Adverse Change
.
There
shall not have been any occurrence, event, incident, action, failure to act,
or
transaction since December 31, 2006 which has had or is reasonably likely to
cause a Company Material Adverse Effect.
(d)
Deliveries
.
The
deliveries specified in Section 5.01 and Section 5.03 shall have been made
by
the Stockholder and the Company, respectively.
(e)
Post-Closing
Capitalization
.
At, and
immediately after, the Closing, the authorized capitalization, and the number
of
issued and outstanding shares of the capital stock of the Company and the
Parent, on a fully-diluted basis, as indicated on a schedule to be delivered
by
the Parties at or prior to the Closing, shall be acceptable to the Parent in
its
sole and absolute discretion.
(f)
Satisfactory
Completion of Due Diligence
.
The
Parent shall have completed its legal, accounting and business due diligence
of
the Company and the Stockholder and the results thereof shall be satisfactory
to
the Parent in its sole and absolute discretion.
(g)
Delivery
of Audit Report and Financial Statements
.
The
Company shall have completed the Company Financial Statements and shall have
received an audit report from an independent audit firm that is registered
with
the Public Company Accounting Oversight Board relating to the fiscal years
ended
December 31, 2006, 2005 and 2004. The form and substance of the Financial
Statements shall be satisfactory to the Parent in its sole and absolute
discretion.
(h)
Completion
of Financing
.
The
Financing (as defined in Section 7.11 below) shall have been completed or shall
be completed simultaneously with the Closing.
(i)
Delivery
of PRC Legal Opinion
.
The
Parent shall have received an opinion from the Company’s legal counsel in the
People’s Republic of China that confirms the legality under Chinese law of the
restructuring being effected by the Company in connection with the Transactions
and that is otherwise satisfactory to the Company, the Stockholder, the Parent
and the investors investing in the Financing.
(j)
Delivery
of Cayman Island Legal Opinion
.
The
Parent shall have received an opinion from the Company’s legal counsel in the
Cayman Islands that confirms the legality under the laws of the Cayman Islands
of the restructuring being effected by the Company in connection with the
Transactions and that is otherwise satisfactory to the Company, the Stockholder,
the Parent and the investors investing in the Financing.
(k)
Registration
Rights Agreement
.
The
Company shall have entered into a registration rights agreement with such
parties as indicated by the Parent and the form and substance of such
registration rights agreement shall be reasonably satisfactory to the
Parent.
ARTICLE
VII
Covenants
SECTION
7.01.
Preparation
of the 14f-1 Notice; Blue Sky Laws
.
(a)
As
soon
as possible following the Closing and in any event, within four business days
thereafter, the Company and Parent shall prepare and file with the SEC the
14f-1
Notice in connection with the consummation of this Agreement. The Parent shall
cause the 14f-1 Notice to be mailed to the Parent’s stockholders as promptly as
practicable thereafter.
(b)
Parent
shall take any action (other than qualifying to do business in any jurisdiction
in which it is not now so qualified) required to be taken under any applicable
state securities laws in connection with the issuance of Parent Stock in
connection with this Agreement.
SECTION
7.02.
Public
Announcements
.
Parent
and the Company will consult with each other before issuing, and provide each
other the opportunity to review and comment upon, any press release or other
public statements with respect to the Agreement and the Transactions and shall
not issue any such press release or make any such public statement prior to
such
consultation, except as may be required by applicable Law, court process or
by
obligations pursuant to any listing agreement with any national securities
exchange.
SECTION
7.03.
Fees
and Expenses
.
All
fees and expenses incurred in connection with this Agreement shall be paid
by
the Party incurring such fees or expenses, whether or not this Agreement is
consummated.
SECTION
7.04.
Continued
Efforts
.
Each
Party shall use commercially reasonable efforts to (a) take all action
reasonably necessary to consummate the Transactions, and (b) take such
steps and do such acts as may be necessary to keep all of its representations
and warranties true and correct as of the Closing Date with the same effect
as
if the same had been made, and this Agreement had been dated, as of the Closing
Date.
SECTION
7.05.
Conduct
of Business
.
During
the period from the date hereof through the Closing Date, Parent and the Company
shall carry on their respective businesses in the ordinary and usual course
consistent with past practice.
SECTION
7.06.
Exclusivity
.
The
Parent shall not (i) solicit, initiate, or encourage the submission of any
proposal or offer from any person relating to the acquisition of any capital
stock or other voting securities of the Parent, or any assets of the Parent
(including any acquisition structured as a merger, consolidation, share exchange
or other business combination), (ii) participate in any discussions or
negotiations regarding, furnish any information with respect to, assist or
participate in, or facilitate in any other manner any effort or attempt by
any
person to do or seek any of the foregoing, or (iii) take any other action that
is inconsistent with the Transactions and that has the effect of avoiding the
Closing contemplated hereby. The Parent shall notify the Company immediately
if
any person makes any proposal, offer, inquiry, or contact with respect to any
of
the foregoing.
SECTION
7.07.
Filing
of 8-K and Press Release
.
As soon
as practicable following the Closing Date, the Company shall provide the Parent
and the Stockholder with a draft of the current report on Form 8-K that is
reasonably acceptable to the Parent and the Stockholder that the Parent shall
file, within four business days of the Closing Date and attaching as exhibits
all relevant agreements with the SEC disclosing the terms of this Agreement
and
other requisite disclosure regarding the Transactions and including the
requisite audited consolidated financial statements of the Company and the
requisite Form 10 disclosure regarding the Company. In addition, the Parent
shall issue a press release prior to 9:30 a.m. (New York Time) on the business
day following the Closing Date, announcing the closing of the
transaction.
SECTION
7.08.
Furnishing
of Information
.
As long
as any Stockholder owns the Shares, the Parent covenants to timely file (or
obtain extensions in respect thereof and file within the applicable grace
period) all reports required to be filed by the Parent after the date hereof
pursuant to the Exchange Act. As long as any Stockholder owns Shares, if the
Parent is not required to file reports pursuant to such laws, it will prepare
and furnish to the Stockholder and make publicly available in accordance with
Rule 144(c) promulgated by the SEC pursuant to the Securities Act, such
information as is required for the Stockholder to sell the Shares under Rule
144. The Parent further covenants that it will take such further action as
any
holder of Shares may reasonably request, all to the extent required from time
to
time to enable such person to sell the Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule
144.
SECTION
7.09.
Access
.
Each
Party shall permit representatives of each other Party to have full access
to
all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to such Party.
SECTION
7.10.
Preservation
of Business
.
From the
date of this Agreement until the Closing Date, each of the Company and the
Parent shall operate only in the ordinary and usual course of business
consistent with past practice (provided, however, that Parent shall not issue
any securities without the prior written consent of the Company), and shall
use
reasonable commercial efforts to (a) preserve intact its respective business
organization, (b) preserve the good will and advantageous relationships with
customers, suppliers, independent contractors, employees and other Persons
material to the operation of its respective business, and (c) not permit any
action or omission which would cause any of its respective representations
or
warranties contained herein to become inaccurate or any of its respective
covenants to be breached in any material respect.
SECTION
7.11.
Financing
.
Parent
shall use commercially reasonable efforts to raise up to $20 million in an
equity financing transaction on terms that are satisfactory to the Company
and
the Stockholder (the “
Financing
”),
which
Financing shall be consummated simultaneously with the Closing.
ARTICLE
VIII
Miscellaneous
SECTION
8.01.
Notices
.
All
notices, requests, claims, demands and other communications under this Agreement
shall be in writing and shall be deemed given upon receipt by the Parties at
the
following addresses (or at such other address for a Party as shall be specified
by like notice):
If
to the
Parent, to:
MILLENNIUM
QUEST, INC.
12890
Hilltop Road
Argyle,
TX 76226
Attention:
Timothy P. Halter
Facsimile:
(940) 455-7337
If
to the
Company, to:
INTERNATIONAL
LORAIN HOLDING, INC.
Beihuan
Road
Junan
County
Shandong,
China
Attention:
Mr. Hisashi Akazawa
Facsimile:
(0086539) 7314886 7311026
If
to the
Stockholder at the addresses set forth in Exhibit A hereto.
with
a
copy to:
King
& Wood
40th
Floor, Office Tower A, Beijing Fortune Plaza 7 Dongsanhuan Zhonglu, Chaoyang
District Beijing 100020, China.
Attention:
Charles Law
Tel:
8610-58785588
Fax:8610-58785599
and
Thelen,
Reid Brown Raysman & Steiner, LLP
701
Eighth Street, N.W.
Washington,
D.C. 20001
Attention:
Louis A. Bevilacqua, Esq.
Facsimile:
(202) 654-1804
SECTION
8.02.
Amendments;
Waivers; No Additional Consideration
.
No
provision of this Agreement may be waived or amended except in a written
instrument signed by the Company, Parent and the Stockholder holding a majority
of the Shares. No waiver of any default with respect to any provision, condition
or requirement of this Agreement shall be deemed to be a continuing waiver
in
the future or a waiver of any subsequent default or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission
of
either Party to exercise any right hereunder in any manner impair the exercise
of any such right. No consideration shall be offered or paid to the Stockholder
to amend or consent to a waiver or modification of any provision of any
transaction document unless the same consideration is also offered to all
Stockholders who then hold Shares.
SECTION
8.03.
Termination
.
(a)
Termination
of Agreement
.
The
Parties may terminate this Agreement as provided below:
|
(i)
|
The
Company, the Stockholder and the Parent may terminate this Agreement
by
mutual written consent at any time prior to the
Closing;
|
|
(ii)
|
The
Parent may terminate this Agreement by giving written notice to the
Company and the Stockholder at any time prior to the Closing (A) in
the
event the Company or any of the Stockholder have breached any material
representation, warranty, or covenant contained in this Agreement in
any
material respect, the Parent has notified the Company and/or the
Stockholder of the breach, and the breach has continued without cure
for a
period of twenty days after the notice of breach, or (B) if the Closing
shall not have occurred on or before
May
31
,
2007 by reason of the failure of any condition precedent under Section
6.02 hereof (unless the failure results primarily from the Parent itself
breaching any representation, warranty, or covenant contained in this
Agreement); and
|
|
(iii)
|
The
Company may terminate this Agreement by giving written notice to the
Parent at any time prior to the Closing (A) in the event the Parent
has
breached any material representation, warranty, or covenant contained
in
this Agreement in any material respect, the Company has notified the
Parent of the breach, and the breach has continued without cure for
a
period of twenty days after the notice of breach or (B) if the Closing
shall not have occurred on or before
May
31
,
2007, by reason of the failure of any condition precedent under Section
6.01 hereof (unless the failure results primarily from the Company
or the
Stockholder themselves breaching any representation, warranty, or covenant
contained in this Agreement).
|
(b)
Effect
of Termination
.
If any
Party terminates this Agreement pursuant to Section 8.03(a) above, all rights
and obligations of the Parties hereunder shall terminate without any Liability
of any Party to any other Party to consummate its obligations hereunder or
to
complete the transactions contemplated by this Agreement, except for any
Liability of any Party then in breach.
SECTION
8.04.
Power
of Attorney
.
The
Stockholder hereby irrevocably constitutes and appoints the Company and any
officer or agent of the Company, with full power of substitution, as its true
and lawful attorneys-in-fact with full irrevocable power and authority in the
place and stead of the Stockholder or in the Company’s own name, for the purpose
of carrying out the terms of this Agreement, to take any and all appropriate
action and to execute any and all documents and instruments that may be
necessary or useful to accomplish the purposes of this Agreement and, without
limiting the generality of the foregoing, hereby gives said attorneys the power
and right, on behalf of the Stockholder, without notice to or assent by the
Stockholder to transfer any future shares acquired by the Stockholder and any
purchase option, call option, right of first refusal, preemptive right,
subscription right or any similar right granted to the Stockholder relating
to
transactions on or before the date hereof.
SECTION
8.05.
Replacement
of Securities
.
If any
certificate or instrument evidencing any Shares is mutilated, lost, stolen
or
destroyed, the Parent shall issue or cause to be issued in exchange and
substitution for and upon cancellation thereof, or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Parent of such loss, theft or destruction and
customary and reasonable indemnity, if requested. The applicants for a new
certificate or instrument under such circumstances shall also pay any reasonable
third-party costs associated with the issuance of such replacement Shares.
If a
replacement certificate or instrument evidencing any Shares is requested due
to
a mutilation thereof, the Parent may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a
replacement.
SECTION
8.06.
Remedies
.
In
addition to being entitled to exercise all rights provided herein or granted
by
law, including recovery of damages, the Stockholder, Parent and the Company
will
be entitled to specific performance under this Agreement. The Parties agree
that
monetary damages may not be adequate compensation for any loss incurred by
reason of any breach of obligations described in the foregoing sentence and
hereby agrees to waive in any action for specific performance of any such
obligation the defense that a remedy at law would be adequate.
SECTION
8.07.
Independent
Nature of Stockholders’ Obligations and Rights
.
The
obligations of each Stockholder under this Agreement are several and not joint
with the obligations of any other Stockholder, and no Stockholder shall be
responsible in any way for the performance of the obligations of any other
Stockholder under this Agreement. The decision of each Stockholder to acquire
Shares pursuant to this Agreement has been made by such Stockholder
independently of any other Stockholder. Nothing contained herein, and no action
taken by any Stockholder pursuant hereto, shall be deemed to constitute the
Stockholder as a partnership, an association, a joint venture or any other
kind
of entity, or create a presumption that the Stockholder are in any way acting
in
concert or as a group with respect to such obligations or the transactions
contemplated herein. Each Stockholder acknowledges that no other Stockholder
has
acted as agent for such Stockholder in connection with making its investment
hereunder and that no Stockholder will be acting as agent of such Stockholder
in
connection with monitoring its investment in the Shares or enforcing its rights
under this Agreement. Each Stockholder shall be entitled to independently
protect and enforce its rights, including without limitation the rights arising
out of this Agreement, and it shall not be necessary for any other Stockholder
to be joined as an additional party in any proceeding for such purpose. Each
of
the Company and Parent acknowledge that the Stockholder has been provided with
this same Agreement for the purpose of closing a transaction with multiple
Stockholders and not because it was required or requested to do so by any
Stockholder.
SECTION
8.08.
Limitation
of Liability
.
Notwithstanding anything herein to the contrary, each of the Parent and the
Company acknowledge and agree that the liability of a Stockholder arising
directly or indirectly, under any transaction document of any and every nature
whatsoever shall be satisfied solely out of the assets of such Stockholder,
and
that no trustee, officer, other investment vehicle or any other affiliate of
such Stockholder or any investor, shareholder or holder of shares of beneficial
interest of such Stockholder shall be personally liable for any liabilities
of
such Stockholder.
SECTION
8.09.
Interpretation
.
When a
reference is made in this Agreement to a Section, such reference shall be to
a
Section of this Agreement unless otherwise indicated. Whenever the words
“include”, “includes” or “including” are used in this Agreement, they shall be
deemed to be followed by the words “without limitation”.
SECTION
8.10.
Severability
.
If any
term or other provision of this Agreement is invalid, illegal or incapable
of
being enforced by any rule or Law, or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full force and effect
so long as the economic or legal substance of the Transactions contemplated
hereby is not affected in any manner materially adverse to any Party. Upon
such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the Parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the Parties as closely as
possible in an acceptable manner to the end that Transactions contemplated
hereby are fulfilled to the extent possible.
SECTION
8.11.
Counterparts;
Facsimile Execution
.
This
Agreement may be executed in one or more counterparts, all of which shall be
considered one and the same agreement and shall become effective when one or
more counterparts have been signed by each of the Parties and delivered to
the
other Parties. Facsimile execution and delivery of this Agreement is legal,
valid and binding for all purposes.
SECTION
8.12.
Entire
Agreement; Third Party Beneficiaries
.
This
Agreement, taken together with the Company Disclosure Letter and the Parent
Disclosure Letter, (a) constitute the entire agreement, and supersede all prior
agreements and understandings, both written and oral, among the Parties with
respect to the Transactions and (b) are not intended to confer upon any person
other than the Parties any rights or remedies.
SECTION
8.13.
Governing
Law
.
This
Agreement shall be governed by, and construed in accordance with, the laws
of
the State of Delaware, regardless of the laws that might otherwise govern under
applicable principles of conflicts of laws thereof. Each of the parties hereto
agrees (a) that this Agreement involves at least $100,000.00, and (b) that
this
Agreement has been entered into by the parties hereto in express reliance upon
6
Del.
C.
§
2708.
Each of the parties hereto hereby irrevocably and unconditionally agrees (i)
that it is and shall continue to be subject to the jurisdiction of the courts
of
the State of Delaware and of the federal courts sitting in the State of
Delaware, and (ii)(A) to the extent that such party is not otherwise subject
to
service of process in the State of Delaware, to appoint and maintain an agent
in
the State of Delaware as such party’s agent for acceptance of legal process and
notify the other parties hereto of the name and address of such agent, and
(B)
to the fullest extent permitted by law, that service of process may also be
made
on such party by prepaid certified mail with a proof of mailing receipt
validated by the U.S. Postal Service constituting evidence of valid service,
and
that, to the fullest extent permitted by applicable law, service made pursuant
to (ii)(A) or (B) above shall have the same legal force and effect as if served
upon such party personally within the State of Delaware.
SECTION
8.14.
Assignment
.
To the
fullest extent permitted by law, neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or
in
part, by operation of law or otherwise by any of the Parties without the prior
written consent of the other Parties. Any purported assignment without such
consent shall be void. Subject to the preceding sentences, this Agreement will
be binding upon, inure to the benefit of, and be enforceable by, the Parties
and
their respective successors and assigns.
[
Signature
Page Follows
]
The
Parties hereto have executed and delivered this Share Exchange Agreement as
of
the date first above written.
The
Parent:
MILLENNIUM
QUEST, INC.
By:
/s/Timothy
P. Halter
Name:
Timothy P. Halter
Title:
President
The
Company:
INTERNATIONAL
LORAIN HOLDING, INC.
By:
/s/Hisashi
Akazawa
Name:
Hisashi Akazawa
Title:
Director
The
Stockholder:
/s/Hisashi
Akazawa
Hisashi
Akazawa
[
Signature
Page to Share Exchange Agreement
]
EXHIBIT
A
Stockholders
of International Lorain Holding, Inc.
|
Name
and Address of Stockholder
|
Tax
ID Number of Stockholder (if Applicable)
|
Number
of Shares of Company Stock Being Exchanged
|
Percentage
of Total Company Shares Represented By Shares Being
Exchanged
|
Number
of Shares of Parent Stock to be Received by
Stockholder
|
|
Mr.
Hisashi
Akazawa
Beihuan
Zhong Road
Junan
County
Shandong,
China
276600
|
N/A
|
5,099,503
|
100
%
|
697,663
|
Exhibit
4.3
THE
SECURITIES REPRESENTED BY THIS AGREEMENT AND ISSUABLE UPON THE EXERCISE OF
THE
OPTION EVIDENCED HEREBY (COLLECTIVELY, THE “SECURITIES”) HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE
STATE SECURITIES LAWS AND THE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT AND THE RULES AND REGULATIONS THEREUNDER
AND AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS
NOT
REQUIRED AND IN THE ABSENCE OF REGISTRATION OR AN EXEMPTION FROM REGISTRATION
UNDER ANY APPLICABLE STATE SECURITIES LAWS WITH AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY REGARDING COMPLIANCE WITH AND THE AVAILABILITY
OF
ANY SUCH STATE SECURITIES LAWS.
OPTION
AGREEMENT
OPTION
AGREEMENT, dated as of May 3, 2007 (this “
Agreement
”),
by
and among Mr. Si Chen, a resident and citizen of the People's Republic of
China
(the “
Optionee
”),
and
Mr. Hisashi Akazawa, a resident and citizen of Japan (the “
Option
Grantor
”)
relating to shares of stock of Millennium Quest, Inc., a Delaware corporation
(the “
Company
”).
BACKGROUND
The
Optionee and Option Grantor are each parties to a Share Exchange Agreement,
dated May 3, 2007 (the “
Share
Exchange Agreement
”),
pursuant to which the Option Grantor is exchanging all of his interests in
International Lorain Holding, Inc., a Cayman Islands company, for Series
B
Voting Convertible Preferred Stock of the Company.
In
order
to close the transactions contemplated by the Share Exchange Agreement the
Optionee and the Option Grantor are entering into this Agreement to document
their mutual understanding regarding the Optionee's rights with respect to
certain shares of the Series B Voting Convertible Preferred Stock of the
Company
owned by the Option Grantor.
NOW,
THEREFORE, in consideration of the premises, mutual covenants herein set
forth
and other good and valuable consideration, subject to the terms and conditions
herein, the Option Grantor and the Optionee hereby agree as
follows:
1.
Grant
of Option
.
Subject
to the terms and conditions herein, the Option Grantor hereby grants to
the
Optionee an option (the “
Option
”)
to
purchase
627,897
shares
of the Company’s Series B Voting Convertible Preferred Stock along with any of
the Company's Common Stock that such Series B Voting Convertible Stock
may be
converted into (the “
Option
Shares
”)
for an
exercise price equal to $66.15 per share. The number of Series B Voting
Convertible Preferred Stock and Common Stock that such Series B Voting
Convertible Preferred Stock will be converted into will be adjusted for
an
splits, reverse splits, stock dividends or any other adjustments to the
capital
structure of the Company. Specifically, the Company contemplates completing
a 1
for 32.84 reverse split and the number of Common Shares covered by this
Agreement will be reduced to reflect such 1 for 32.84 reverse split. The
Optionee, may exercise the option in this Agreement for all of the Option
Shares
or a portion of the Option Shares, at his sole discretion.
2.
Exercise
of the Option
.
The
Optionee may exercise the option described in this Agreement at any time
at the
Optinonee's discretion, but in no event may the option be exercised on any
date
after the seventh anniversary of the date hereof.
3.
Rights
of Optionee
.
The
Optionee shall not have any rights to dividends or any other rights of a
stockholder with respect to any Option Shares until such Option Shares shall
have been issued to Optionee (as evidenced by the appropriate entry on the
transfer books of the Company) upon purchase of such Option Shares upon exercise
of the Option.
4.
Exercise
Procedure
.
(a)
The
Optionee may only exercise this Option for the purchase of all of the Option
Shares. This Option may not be exercised in part. The Optionee may exercise
this
Option by delivering to the Option Grantor a written notice duly signed by
the
Optionee indicating that the Optionee is exercising the Option accompanied
by
payment in an amount equal to the full purchase price for the Option Shares.
(b)
Following
receipt by the Option Grantor of such notice of exercise and full payment
of the
Exercise Price, the Option Grantor shall issue, as soon as practicable, a
duly
executed stock power for the Option Shares transferring the Option Shares
as
designated by the Optionee and deliver the underlying stock certificate and
the
executed stock power as directed by the Optionee.
(c)
In
order to exercise the option under this Agreement, the Optionee must comply
with
all applicable law. The Optionee must provide satisfactory assuance that
all PRC
law and other applicable laws related to the transfer of the Shares to the
Optionee have been satisified.
5.
Lock-up
.
If
the
Optionee exercises the Option in accordance with Section 4 above, then
the
Optionee shall be bound to the lock-up provisions of Section 2.07 of the
Share
Exchange Agreement to the same extent to which the Option Grantor is bound
as if
the Optionee had been an original party to the Share Exchange
Agreement.
6.
Legend
.
If
the
Option Shares are not then covered by a registration statement, each certificate
for the Option Shares shall bear a legend that is substantially similar
to the
following:
“THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS
AMENDED. SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS THE REGISTRATION PROVISIONS OF SAID ACT HAVE BEEN COMPLIED WITH
OR UNLESS
THE COMPANY HAS RECEIVED AN OPINION OF ITS COUNSEL THAT SUCH REGISTRATION
IS NOT
REQUIRED.”
7.
Notices
.
Each
notice relating to this Agreement shall be in writing and delivered in
person or
by facsimile or certified mail to the addresses of the respective parties
hereto
as specified on the signature page hereto, or to such other address as
either
party hereto may hereinafter duly give to the other.
8.
Binding
.
This
Agreement shall be binding upon and inure to the benefit of the parties
hereto,
and their successors, assigns.
9.
Entire
Agreement
.
This
Agreement constitutes the entire agreement between the parties hereto with
respect to the matters herein, and cannot be amended, modified or terminated
except by an agreement in writing executed by the parties hereto.
10.
Governing
Law; Jursidiction
.
This
Agreement shall be construed in accordance with and governed by the laws
of the
State of New York without regard to the conflicts of law principles thereof.
Each party agrees that all proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement
may
be commenced in the state and federal courts sitting in the City of New
York,
Borough of Manhattan (“New York Courts”). Each party hereto hereby irrevocably
submits to the jurisdiction of the New York Courts for the adjudication
of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not
to
assert in any proceeding, any claim that it is not personally subject to
the
jurisdiction of any such New York Court, or that such proceeding has been
commenced in an improper or inconvenient forum.
11.
Remedies
.
In
addition to being entitled to exercise all rights provided herein or granted
by
law, including recovery of damages, each of the parties will, to the fullest
extent permitted by law, be entitled to specific performance under this
Agreement. The parties agree that monetary damages may not be adequate
compensation for any loss incurred by reason of any breach by Option Grantor
of
its obligations under Section 4b and Option Grantor hereby agrees, to the
fullest extent permitted by law, to waive in any action for specific performance
of any such obligation the defense that a remedy at law would be
adequate.
[
Signature
Page Follows
]
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date
first set forth above.
|
/s/
Si Chen
Optionee:
Si Chen
Address:
Beihuan
Zhong Road
Junan
County
Shandong,
China
276600
|
/s/
Hisashi Akazawa
Option
Grantor: Hisashi Akazawa
Address:
Beihuan
Zhong Road
Junan
County
Shandong,
China
276600
|
REGISTRATION
RIGHTS AGREEMENT
This
Registration Rights Agreement (this
"Agreement"
)
is made
and entered into as of May 3, 2007, by and among Millennium Quest, Inc., a
Delaware corporation (the
"Company"
),
and
the investors signatory hereto (each an
"Investor"
and
collectively, the
"Investors"
).
This
Agreement is made pursuant to the Securities Purchase Agreement, dated as of
the
date hereof among the Company and the Investors (the
"Purchase
Agreement"
).
The
Company and the Investors hereby agree as follows:
1.
Definitions
.
Capitalized terms used and not otherwise defined herein that are defined in
the
Purchase Agreement will have the meanings given such terms in the Purchase
Agreement. As used in this Agreement, the following terms have the respective
meanings set forth in this Section 1:
“2007
Delivery Date”
means
the date on which the 2007 Make Good Shares are required to be delivered to
the
Investors by the Beneficial Owners
pursuant
to Section 5.2(a) of the Purchase Agreement.
“2008
Delivery Date”
means
the date on which the 2008 Make Good Shares are required to be delivered to
the
Investors by the Beneficial Owners
pursuant
to Section 5.2(b) of the Purchase Agreement.
“Advice”
has
the
meaning set forth in Section 6(c).
"Effective
Date"
means,
as to a Registration Statement, the date on which such Registration Statement
is
first declared effective by the Commission.
“Effectiveness
Date”
means
(a)
with
respect to
the
Registration Statement required to be filed under Section 2(a)
,
the
earlier of
(i)
the
120
th
day
following the date Stockholder Approval is obtained, and
(ii)
the
fifth
Trading Day following the date on which the Company is notified by the
Commission that such Registration Statement will not be reviewed or is no longer
subject to further review and comments,
(b)
with
respect to a Registration Statement required to be filed under Section 2(b),
the
earlier of:
(i)
the
60
th
day
following the date on which the Company becomes eligible to utilize Form S-3
to
register the resale of Common Stock;
provided
,
that,
if the Commission reviews and has written comments to such filed Registration
Statement that would require the filing of a pre-effective amendment thereto
with the Commission, then the Effectiveness Date under this clause (b)(i) shall
be the 90
th
day
following the date on which the Company becomes eligible to utilize Form S-3
to
register the resale of Common Stock, and
(ii)
the
fifth
Trading Day following the date on which the Company is notified by the
Commission that the Registration Statement will not be reviewed or is no longer
subject to further review and comments,
(c)
with
respect to a Registration Statement required to be filed under Section 2(c),
the
earlier of:
(i)
the
60
th
day
following the 2007 Delivery Date;
provided
,
that,
if the Commission reviews and has written comments to such filed Registration
Statement that would require the filing of a pre-effective amendment thereto
with the Commission, then the Effectiveness Date under this clause (c)(i) shall
be the 90
th
day
following the 2007 Delivery Date, and
(ii)
the
fifth
Trading Day following the date on which the Company is notified by the
Commission that the Registration Statement will not be reviewed or is no longer
subject to further review and comments and
(d)
with
respect to a Registration Statement required to be filed under Section 2(d),
the
earlier of:
(i)
the
60
th
day
following the 2008 Delivery Date;
provided
,
that,
if the Commission reviews and has written comments to such filed Registration
Statement that would require the filing of a pre-effective amendment thereto
with the Commission, then the Effectiveness Date under this clause (d)(i) shall
be the 90
th
day
following the 2008 Delivery Date, and
(ii)
the
fifth
Trading Day following the date on which the Company is notified by the
Commission that the Registration Statement will not be reviewed or is no longer
subject to further review and comments.
"Effectiveness
Period"
has the
meaning set forth in Section 2(a).
"
Filing
Date"
means
(a)
with
respect to the Registration Statement required to be filed under Section 2(a),
the fifth Trading Day following the date Stockholder Approval is
obtained,
(b)
with
respect to a Registration Statement required to be filed under Section 2(b),
the
30
th
day
following the date on which the Company becomes eligible to utilize Form S-3
to
register the resale of Common Stock,
(c)
with
respect to the Registration Statement required to be filed under Section 2(c),
the 30
th
day
following the 2007 Delivery Date (provided that if the Company is then eligible
to utilize Form S-3 to register the resale of Common Stock, the Filing Date
under this clause (c) shall be 15 days following the 2007 Delivery Date)
and
(d)
with
respect to the Registration Statement required to be filed under Section 2(d),
the 30
th
day
following the 2008 Delivery Date (provided that if the Company is then eligible
to utilize Form S-3 to register the resale of Common Stock, the Filing Date
under this clause (d) shall be 15 days following the 2008 Delivery
Date).
"Holder"
or
"Holders"
means
the holder or holders, as the case may be, from time to time of Registrable
Securities.
“Indemnified
Party”
has the
meaning set forth in Section 5(c).
“Indemnifying
Party”
has the
meaning set forth in Section 5(c).
“Losses”
has the
meaning set forth in Section 5(a).
“Prospectus”
means
the prospectus included in a Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a
prospectus filed as part of an effective registration statement in reliance
upon
Rule 430A promulgated under the Securities Act), as amended or supplemented
by
any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by a Registration Statement,
and
all other amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
“Registrable
Securities”
means:
(i) the Underlying Shares, (ii) the Warrant Shares, (iii) the 2007 Make Good
Shares, as applicable, (iv) the 2008 Make Good Shares, as applicable and (v)
any
securities issued or issuable upon any stock split, dividend or other
distribution, recapitalization or similar event, or any price adjustment as
a
result of such stock splits, reverse stock splits or similar events with respect
to any of the securities referenced in (i) through (iv) above.
"Registration
Statement"
means
the registration statement required to be filed in accordance with Section
2(a)
and any additional registration statement(s) required to be filed under Section
2(b), Section 2(c), or Section 2(d), including (in each case) the Prospectus,
amendments and supplements to such registration statements or Prospectus,
including pre- and post-effective amendments, all exhibits thereto, and all
material incorporated by reference or deemed to be incorporated by reference
therein.
"Rule
415"
means
Rule 415 promulgated by the Commission pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect as
such
Rule.
"Rule
424"
means
Rule 424 promulgated by the Commission pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect as
such
Rule.
2.
Registration
.
(a)
On
or
prior to the fifth Trading Day following the date Stockholder Approval is
obtained, the Company shall prepare and file with the Commission a Registration
Statement covering the resale
of
all
Registrable Securities (other than the 2007 Make Good Shares and the 2008 Make
Good Shares) not already covered by an existing and effective Registration
Statement for an offering to be made on a continuous basis pursuant to Rule
415,
on Form S-1 (or on such other form appropriate for such purpose).
(b)
Promptly
following any date on which the Company becomes eligible to use a registration
statement on Form S-3 to register Registrable Securities for resale, the Company
shall file a Registration Statement on Form S-3 covering all such Registrable
Securities (or a post-effective amendment on Form S-3 to the then effective
Registration Statement) and shall cause such Registration Statement to be filed
by the Filing Date for such Registration.
(c)
On
or
prior to the applicable Filing Date, the Company shall prepare and file with
the
Commission a Registration Statement covering the resale of the 2007 Make Good
Shares on Form S-1 or Form S-3 if the Company is then eligible to utilize such
Form (or on such other form appropriate for such purpose) and shall cause such
Registration Statement to be filed by the Filing Date for such Registration
Statement.
(d)
On
or
prior to the applicable Filing Date, the Company shall prepare and file with
the
Commission a Registration Statement covering the resale of the 2008 Make Good
Shares on Form S-1 or Form S-3 if the Company is then eligible to utilize such
Form (or on such other form appropriate for such purpose) and shall cause such
Registration Statement to be filed by the Filing Date for such Registration
Statement.
(e)
Each
Registration Statement filed pursuant to subpart (a) through (d) shall contain
(except if otherwise required pursuant to written comments received from the
Commission upon a review of such Registration Statement) the "Plan of
Distribution" attached hereto as
Annex
A
.
The
Company shall cause each such Registration Statement to be declared effective
under the Securities Act as soon as possible but, in any event, no later than
its Effectiveness Date, and shall use its reasonable best efforts to keep each
such Registration Statement continuously effective under the Securities Act
until the date which is the earliest of (i) two years after its Effective Date,
(ii) such time as all of the Registrable Securities covered by such Registration
Statement have been publicly sold by the Holders, or (iii) such time as all
of
the Registrable Securities covered by such Registration Statement may be sold
by
the Holders pursuant to Rule 144(k) as determined by the counsel to the Company
pursuant to a written opinion letter to such effect, addressed and acceptable
to
the Company's transfer agent and the affected Holders (the
"Effectiveness
Period"
).
By
5:00 p.m. (New York City time) on the Business Day immediately following the
Effective Date of each such Registration Statement, the Company shall file
with
the Commission in accordance with Rule 424 under the Securities Act the final
prospectus to be used in connection with sales pursuant to such Registration
Statement (whether or not such filing is technically required under such
Rule).
(f)
Each
Holder agrees to furnish to the Company a completed Questionnaire in the form
attached to this Agreement as
Annex
B
(a
“Selling
Holder Questionnaire”
).
The
Company shall not be required to include the Registrable Securities of a Holder
in a Registration Statement who fails to furnish to the Company a fully
completed Selling Holder Questionnaire at least two Trading Days prior to the
Filing Date (subject to the requirements set forth in Section
3(a)).
3.
Registration
Procedures
.
In
connection with the Company's registration obligations hereunder, the Company
shall:
(a)
Not
less
than four Trading Days prior to the filing of a Registration Statement or any
related Prospectus or any amendment or supplement thereto, the Company shall
furnish to each Holder copies of the “Selling Stockholders” section of such
document, the “Plan of Distribution” and any risk factor contained in such
document that addresses specifically this transaction or the Selling
Stockholders, as proposed to be filed which documents will be subject to the
review of such Holder. Any Holder must provide their comments, if any, to the
Company at least two Trading Days prior to the filing of such Registration
Statement or any related Prospectus or any amendment or supplement thereto.
The
Company shall not file a Registration Statement, any Prospectus or any
amendments or supplements thereto in which the “Selling Stockholder” section
thereof differs from the disclosure received from a Holder in its Selling Holder
Questionnaire (as amended or supplemented)
.
(b)
(i)
Prepare and file with the Commission such amendments, including post-effective
amendments, to each Registration Statement and the Prospectus used in connection
therewith as may be necessary to keep such Registration Statement continuously
effective as to the applicable Registrable Securities for its Effectiveness
Period and prepare and file with the Commission such additional Registration
Statements in order to register for resale under the Securities Act all of
the
Registrable Securities; (ii) cause the related Prospectus to be amended or
supplemented by any required Prospectus supplement, and as so supplemented
or
amended to be filed pursuant to Rule 424; (iii) respond as promptly as
reasonably possible to any comments received from the Commission with respect
to
each Registration Statement or any amendment thereto and, as promptly as
reasonably possible provide the Holders true and complete copies of all
correspondence from and to the Commission relating to such Registration
Statement that would not result in the disclosure to the Holders of material
and
non-public information concerning the Company; and (iv) comply in all material
respects with the provisions of the Securities Act and the Exchange Act with
respect to the Registration Statements and the disposition of all Registrable
Securities covered by each Registration Statement.
(c)
Notify
the Holders as promptly as reasonably possible (and, in the case of (i)(A)
below, not less than three Trading Days prior to such filing and, in the case
of
(v) below, not less than three Trading Days prior to the financial statements
in
any Registration Statement becoming ineligible for inclusion therein) and (if
requested by any such Person) confirm such notice in writing no later than
one
Trading Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to a Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will
be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement (the Company shall provide true and
complete copies thereof and all written responses thereto to each of the Holders
that pertain to the Holders as a Selling Stockholder or to the Plan of
Distribution, but not information which the Company believes would constitute
material and non-public information); and (C) with respect to each Registration
Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the Commission or any other Federal or state governmental
authority for amendments or supplements to a Registration Statement or
Prospectus or for additional information; (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of a Registration
Statement covering any or all of the Registrable Securities or the initiation
of
any Proceedings for that purpose; (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; (v) of the occurrence of any event or passage of time that makes the
financial statements included in a Registration Statement ineligible for
inclusion therein or any statement made in such Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein
by
reference untrue in any material respect or that requires any revisions to
such
Registration Statement, Prospectus or other documents so that, in the case
of
such Registration Statement or the Prospectus, as the case may be, it will
not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading; and
(vi) of the occurrence of any event or passage of time that causes a
Registration Statement not to be effective.
(d)
Use
its
reasonable best efforts to avoid the issuance of, or, if issued, obtain the
withdrawal of (i) any order suspending the effectiveness of a Registration
Statement, or (ii) any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities for sale in any
jurisdiction, at the earliest practicable moment.
(e)
Furnish
to each Holder, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto and all exhibits to the extent requested
by
such Person (including those previously furnished) promptly after the filing
of
such documents with the Commission.
(f)
Promptly
deliver to each Holder, without charge, as many copies of each Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request. The Company hereby
consents to the use of such Prospectus and each amendment or supplement thereto
by each of the selling Holders in connection with the offering and sale of
the
Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(g)
Prior
to
any public offering of Registrable Securities, register or qualify such
Registrable Securities for offer and sale under the securities or Blue Sky
laws
of such jurisdictions within the United States as any Holder may request, to
keep each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by the Registration Statements.
(h)
Cooperate
with the Holders to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be delivered to a transferee
pursuant to the Registration Statements, which certificates shall be free,
to
the extent permitted by the Purchase Agreement or Warrant, of all restrictive
legends, and to enable such Registrable Securities to be in such denominations
and registered in such names as any such Holders may request.
(i)
Upon
the
occurrence of any event contemplated by Section 3(c)(v), as promptly as
reasonably possible, prepare a supplement or amendment, including a
post-effective amendment, to the affected Registration Statements or a
supplement to the related Prospectus or any document incorporated or deemed
to
be incorporated therein by reference, and file any other required document
so
that, as thereafter delivered, no Registration Statement nor any Prospectus
will
contain an untrue statement of a material fact or omit to state a material
fact
required to be stated therein or necessary to make the statements therein,
in
light of the circumstances under which they were made, not
misleading.
(j)
In
conjunction with the filing of the Registration Statement, the Company will
cooperate and coordinate with the placement agent in connection with the filings
to be made with the NASD, via the COBRA desk filing system, for approval of
underwriting compensation under Section 2710 of the rules and regulations of
the
NASD, obtain from the NASD a standard clearance letter, and coordinate
with the placement agent on filings it will be required to make upon sales
under
the registration statement.
4.
Registration
Expenses
.
All
fees and expenses incident to the performance of or compliance with this
Agreement by the Company shall be borne by the Company whether or not any
Registrable Securities are sold pursuant to a Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with any
Trading Market on which the Common Stock is then listed for trading, and (B)
in
compliance with applicable state securities or Blue Sky laws), (ii) printing
expenses (including, without limitation, expenses of printing certificates
for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is reasonably requested by the holders of a majority of the
Registrable Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for
the
Company, (v) Securities Act liability insurance, if the Company so desires
such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated
by
this Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation,
all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit and the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
5.
Indemnification
.
(a)
Indemnification
by the Company
.
The
Company shall, notwithstanding any termination of this Agreement, indemnify
and
hold harmless each Holder, the officers, directors, agents, investment advisors,
partners, members and employees of each of them, each Person who controls any
such Holder (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) and the officers, directors, agents and employees of
each such controlling Person, to the fullest extent permitted by applicable
law,
from and against any and all losses, claims, damages, liabilities, costs
(including, without limitation, reasonable costs of preparation and reasonable
attorneys' fees) and expenses (collectively, "
Losses
"),
as
incurred, arising out of or relating to any untrue or alleged untrue statement
of a material fact contained in any Registration Statement, any Prospectus
or
any form of prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or relating to any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein (in the case of any Prospectus or form of prospectus
or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that (1) such
untrue statements or omissions are based solely upon information regarding
such
Holder furnished in writing to the Company by such Holder expressly for use
therein, or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use
in
the Registration Statement, such Prospectus or such form of Prospectus or in
any
amendment or supplement thereto (it being understood that the Holder has
approved Annex A hereto for this purpose) or (2) in the case of an occurrence
of
an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder
of an outdated or defective Prospectus after the Company has notified such
Holder in writing that the Prospectus is outdated or defective and prior to
the
receipt by such Holder of an Advice or an amended or supplemented Prospectus,
but only if and to the extent that following the receipt of the Advice or the
amended or supplemented Prospectus the misstatement or omission giving rise
to
such Loss would have been corrected. The Company shall notify the Holders
promptly of the institution, threat or assertion of any Proceeding of which
the
Company is aware in connection with the transactions contemplated by this
Agreement.
(b)
Indemnification
by Holders
.
Each
Holder shall, severally and not jointly, indemnify and hold harmless the
Company, its directors, officers, agents and employees, each Person who controls
the Company (within the meaning of Section 15 of the Securities Act and Section
20 of the Exchange Act), and the directors, officers, agents or employees of
such controlling Persons, to the fullest extent permitted by applicable law,
from and against all Losses, as incurred, arising solely out of or based solely
upon: (x) such Holder's failure to comply with the prospectus delivery
requirements of the Securities Act or (y) any untrue statement of a material
fact contained in any Registration Statement, any Prospectus, or any form of
prospectus, or in any amendment or supplement thereto, or arising solely out
of
or based solely upon any omission of a material fact required to be stated
therein or necessary to make the statements therein not misleading to the
extent, but only to the extent that, (1) such untrue statements or omissions
are
based solely upon information regarding such Holder furnished in writing to
the
Company by such Holder expressly for use therein, or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement (it
being understood that the Holder has approved Annex A hereto for this purpose),
such Prospectus or such form of Prospectus or in any amendment or supplement
thereto or (2) in the case of an occurrence of an event of the type specified
in
Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective
Prospectus after the Company has notified such Holder in writing that the
Prospectus is outdated or defective and prior to the receipt by such Holder
of
an Advice or an amended or supplemented Prospectus, but only if and to the
extent that following the receipt of the Advice or the amended or supplemented
Prospectus the misstatement or omission giving rise to such Loss would have
been
corrected. In no event shall the liability of any selling Holder hereunder
be
greater in amount than the dollar amount of the net proceeds received by such
Holder upon the sale of the Registrable Securities giving rise to such
indemnification obligation.
(c)
Conduct
of Indemnification Proceedings
.
If any
Proceeding shall be brought or asserted against any Person entitled to indemnity
hereunder (an "
Indemnified
Party
"),
such
Indemnified Party shall promptly notify the Person from whom indemnity is sought
(the "
Indemnifying
Party
")
in
writing, and the Indemnifying Party shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to the Indemnified Party
and
the payment of all fees and expenses incurred in connection with defense
thereof; provided, that the failure of any Indemnified Party to give such notice
shall not relieve the Indemnifying Party of its obligations or liabilities
pursuant to this Agreement, except (and only) to the extent that it shall be
finally determined by a court of competent jurisdiction (which determination
is
not subject to appeal or further review) that such failure shall have
proximately and materially adversely prejudiced the Indemnifying
Party.
An
Indemnified Party shall have the right to employ separate counsel in any such
Proceeding and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such Indemnified Party or Parties
unless: (1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to
such
Indemnified Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such Indemnified
Party
and the Indemnifying Party, and such Indemnified Party shall have been advised
by counsel that a conflict of interest is likely to exist if the same counsel
were to represent such Indemnified Party and the Indemnifying Party (in which
case, if such Indemnified Party notifies the Indemnifying Party in writing
that
it elects to employ separate counsel at the expense of the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense thereof
and such counsel shall be at the expense of the Indemnifying Party). The
Indemnifying Party shall not be liable for any settlement of any such Proceeding
effected without its written consent, which consent shall not be unreasonably
withheld. No Indemnifying Party shall, without the prior written consent of
the
Indemnified Party, effect any settlement of any pending Proceeding in respect
of
which any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All
fees
and expenses of the Indemnified Party (including reasonable fees and expenses
to
the extent incurred in connection with investigating or preparing to defend
such
Proceeding in a manner not inconsistent with this Section) shall be paid to
the
Indemnified Party, as incurred, within ten Trading Days of written notice
thereof to the Indemnifying Party (regardless of whether it is ultimately
determined that an Indemnified Party is not entitled to indemnification
hereunder; provided, that the Indemnifying Party may require such Indemnified
Party to undertake to reimburse all such fees and expenses to the extent it
is
finally judicially determined that such Indemnified Party is not entitled to
indemnification hereunder).
(d)
Contribution
.
If a
claim for indemnification under Section 5(a) or 5(b) is unavailable to an
Indemnified Party (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material
fact,
has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms.
The
parties hereto agree that it would not be just and equitable if contribution
pursuant to this Section 5(d) were determined by pro rata allocation or by
any
other method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which
the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that
such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission.
The
indemnity and contribution agreements contained in this Section are in addition
to any liability that the Indemnifying Parties may have to the Indemnified
Parties.
6.
Miscellaneous
.
(a)
Remedies
.
In the
event of a breach by the Company or by a Holder, of any of their obligations
under this Agreement, each Holder or the Company, as the case may be, in
addition to being entitled to exercise all rights granted by law and under
this
Agreement, including recovery of damages, will be entitled to specific
performance of its rights under this Agreement. The Company and each Holder
agree that monetary damages would not provide adequate compensation for any
losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense
that
a remedy at law would be adequate.
(b)
Compliance
.
Each
Holder covenants and agrees that it will comply with the prospectus delivery
requirements of the Securities Act as applicable to it in connection with sales
of Registrable Securities pursuant to the Registration Statement.
(c)
Discontinued
Disposition
.
Each
Holder agrees by its acquisition of such Registrable Securities that, upon
receipt of a notice from the Company of the occurrence of any event of the
kind
described in Section 3(c), such Holder will forthwith discontinue disposition
of
such Registrable Securities under the Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement or until it is advised in writing (the
"Advice"
)
by the
Company that the use of the applicable Prospectus may be resumed, and, in either
case, has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement. The Company may provide appropriate stop orders to
enforce the provisions of this paragraph.
(d)
Piggy-Back
Registrations
.
If at
any time during the Effectiveness Period there is not an effective Registration
Statement covering all of the Registrable Securities and the Company shall
determine to prepare and file with the Commission a registration statement
relating to an offering for its own account or the account of others under
the
Securities Act of any of its equity securities, other than on Form S-4 or Form
S-8 (each as promulgated under the Securities Act) or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, then the Company
shall send to each Holder written notice of such determination and, if within
fifteen days after receipt of such notice, any such Holder shall so request
in
writing, the Company shall include in such registration statement all or any
part of such Registrable Securities such holder requests to be registered,
subject to customary underwriter cutbacks applicable to all holders of
registration rights.
(e)
No
Piggyback on Registrations
.
Except
with respect to the shares of Common Stock underlying the warrant issued by
the
Company to the Placement Agent and as set forth on Schedule 6(e) attached
hereto, neither the Company nor any of its security holders (other than the
Holders in such capacity pursuant hereto) may include securities of the Company
in the Registration Statement other than the Registrable Securities, and the
Company shall not after the date hereof enter into any agreement providing
any
such right to any of its security holders to include securities of the Company
in the Registration Statement.
(f)
Amendments
and Waivers
.
The
provisions of this Agreement, including the provisions of this Section 6(f),
may
not be amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, unless the same shall be in writing
and signed by the Company and the Holders of no less than a majority in interest
of the then outstanding Registrable Securities. Notwithstanding the foregoing,
a
waiver or consent to depart from the provisions hereof with respect to a matter
that relates exclusively to the rights of certain Holders and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of at least a majority of the Registrable Securities to which such
waiver or consent relates.
(g)
Notices
.
Any and
all notices or other communications or deliveries required or permitted to
be
provided hereunder shall be in writing and shall be deemed given and effective
on the earliest of (a) the date of transmission, if such notice or communication
is delivered via facsimile (provided the sender receives a machine-generated
confirmation of successful transmission) at the facsimile number specified
in
this Section prior to 3:30 p.m. (New York City time) on a Trading Day, (b)
the
next Trading Day after the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile number specified in this Section
on
a day that is not a Trading Day or later than 3:30 p.m. (New York City time)
on
any Trading Day, (c) the Trading Day following the date of mailing, if sent
by
U.S. nationally recognized overnight courier service, or (d) upon actual receipt
by the party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
|
|
If to the Company:
|
Millennium Quest, Inc.
Beihuan
Road
Junan
County
Shandong,
China
Facsimile:
(0086539) 7314886 7311026
Attn:
Mr. Si Chen
|
|
|
|
|
|
|
With a copy to:
|
Thelen Reid Brown Raysman & Steiner
LLP
701
8
th
Street NW
Washington,
D.C. 20001
Facsimile:
(202) 654-1804
Attn.:
Louis A. Bevilacqua, Esq.
|
|
|
|
|
|
|
If to a Investor:
|
To
the address set forth under such Investor's name on the
signature
pages hereto.
|
|
|
|
|
|
|
If to any other Person who
is then
the registered Holder:
|
|
|
|
|
|
|
|
To
the address of such Holder as it appears in the stock
transfer
books of the Company
|
or
such
other address as may be designated in writing hereafter, in the same manner,
by
such Person.
(h)
Successors
and Assigns
.
This
Agreement shall inure to the benefit of and be binding upon the successors
and
permitted assigns of each of the parties and shall inure to the benefit of
each
Holder. The Company may not assign its rights or obligations hereunder without
the prior written consent of each Holder. Each Holder may assign their
respective rights hereunder in the manner and to the Persons as permitted under
the Purchase Agreement.
(i)
Execution
and Counterparts
.
This
Agreement may be executed in any number of counterparts, each of which when
so
executed shall be deemed to be an original and, all of which taken together
shall constitute one and the same Agreement. In the event that any signature
is
delivered by facsimile transmission, such signature shall create a valid binding
obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
were the original thereof.
(j)
Governing
Law
.
All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, without regard to the
principles of conflicts of law thereof. Each party agrees that all Proceedings
concerning the interpretations, enforcement and defense of the transactions
contemplated by this Agreement (whether brought against a party hereto or its
respective Affiliates, employees or agents) will be commenced in the New York
Courts. Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert
in
any Proceeding, any claim that it is not personally subject to the jurisdiction
of any New York Court, or that such Proceeding has been commenced in an improper
or inconvenient forum. Each party hereto hereby irrevocably waives personal
service of process and consents to process being served in any such Proceeding
by mailing a copy thereof via registered or certified mail or overnight delivery
(with evidence of delivery) to such party at the address in effect for notices
to it under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any
Proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby. If either party shall commence a Proceeding to enforce
any
provisions of this Agreement, then the prevailing party in such Proceeding
shall
be reimbursed by the other party for its attorney’s fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such
Proceeding.
(k)
Cumulative
Remedies
.
The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
(l)
Severability
.
If any
term, provision, covenant or restriction of this Agreement is held by a court
of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their reasonable efforts to
find and employ an alternative means to achieve the same or substantially the
same result as that contemplated by such term, provision, covenant or
restriction. It is hereby stipulated and declared to be the intention of the
parties that they would have executed the remaining terms, provisions, covenants
and restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.
(m)
Headings
.
The
headings in this Agreement are for convenience of reference only and shall
not
limit or otherwise affect the meaning hereof.
(n)
Independent
Nature of Investors' Obligations and Rights
.
The
obligations of each Investor under this Agreement are several and not joint
with
the obligations of each other Investor, and no Investor shall be responsible
in
any way for the performance of the obligations of any other Investor under
this
Agreement. Nothing contained herein or in any Transaction Document, and no
action taken by any Investor pursuant thereto, shall be deemed to constitute
the
Investors as a partnership, an association, a joint venture or any other kind
of
entity, or create a presumption that the Investors are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by this Agreement or any other Transaction Document. Each Investor
acknowledges that no other Investor will be acting as agent of such Investor
in
enforcing its rights under this Agreement. Each Investor shall be entitled
to
independently protect and enforce its rights, including without limitation
the
rights arising out of this Agreement, and it shall not be necessary for any
other Investor to be joined as an additional party in any Proceeding for such
purpose. The Company acknowledges that each of the Investors has been provided
with the same Registration Rights Agreement for the purpose of closing a
transaction with multiple Investors and not because it was required or requested
to do so by any Investor.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE
PAGES TO FOLLOW]
IN
WITNESS WHEREOF, the parties have executed this Registration Rights Agreement
as
of the date first written above.
|
|
|
|
|
|
MILLENNIUM
QUEST, INC
.
|
|
|
|
|
|
By:
|
|
|
|
|
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE
PAGES OF INVESTORS TO FOLLOW]
IN
WITNESS WHEREOF, the parties have executed this Registration Rights Agreement
as
of the date first written above.
|
|
NAME OF INVESTING
ENTITY
|
|
|
_________________________________________
|
|
|
|
|
|
By:
____________________________________________
|
|
|
Name:
Title:
|
|
|
|
|
|
ADDRESS FOR
NOTICE
|
|
|
c/o:
_____________________________________________
|
|
|
Street:
___________________________________________
|
|
|
City/State/Zip:
_____________________________________
|
|
|
Attention:
________________________________________
|
|
|
Tel:_____________________________________________
|
|
|
Fax:_____________________________________________
|
|
|
Email:___________________________________________
|
|
|
|
Exhibit
4.5
NEITHER
THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE
SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY
AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.
COMMON
STOCK PURCHASE WARRANT
To
Purchase __________ Shares of Common Stock of
MILLENNIUM
QUEST, INC.
THIS
COMMON STOCK PURCHASE WARRANT (the “
Warrant
”) certifies that, for value
received, _____________ (the “
Holder
”), is entitled, subject to
Shareholder Approval and the Amendment Filing, and upon the other terms and
limitations on exercise hereinafter set forth, at any time on or after May
3,
2007 (the “
Initial Exercise Date
”) and on or prior to the close of
business on the third anniversary of the Initial Exercise Date (the
“
Termination Date
”) but not thereafter, to subscribe for and purchase
from Millennium Quest, Inc., a Delaware corporation (the “
Company
”), up
to ______
1
shares (the “
Warrant Shares
”) of the Common
Stock, par value $0.001 per share, of the Company (the “
Common Stock
”).
The purchase price of one share of Common Stock under this Warrant shall be
equal to the Exercise Price, as defined in Section 2(b).
This
Warrant is being issued to the Holder pursuant to Section 2(b) of that certain
engagement letter agreement dated March 16, 2007 between International Lorain
Holding, Inc. and Sterne, Agee & Leach, Inc.
Section
1
.
Definitions
.
Capitalized terms used and not otherwise defined herein shall have the meanings
set forth in that certain Securities Purchase Agreement (the “
Purchase
Agreement
”), dated May 3, 2007, among the Company, the purchasers signatory
thereto, and the Beneficial Owners. For the sake of clarity, the stated number
of Warrant Shares and the stated Exercise Price set forth herein are determined
pre-Reverse Split and will be adjusted by the Reverse Split.
Section
2
.
Exercise
.
a)
Exercise
of Warrant
.
Subject
to Shareholder Approval and the Amendment Filing, exercise of the purchase
rights represented by this Warrant may be made, in whole or in part, at any
time
or times on or after the Initial Exercise Date and on or before the Termination
Date by delivery to the Company of a duly executed facsimile copy of the Notice
of Exercise Form annexed hereto (or such other office or agency of the Company
as it may designate by notice in writing to the registered Holder at the address
of such Holder appearing on the books of the Company); and, within three Trading
Days of the date said Notice of Exercise is delivered to the Company, the
Company shall have received payment of the aggregate Exercise Price of the
shares thereby purchased by wire transfer or cashier’s check drawn on a United
States bank. Notwithstanding anything herein to the contrary, the Holder shall
not be required to physically surrender this Warrant to the Company until the
Holder has purchased all of the Warrant Shares available hereunder and the
Warrant has been exercised in full, in which case, the Holder shall surrender
this Warrant to the Company for cancellation within three Trading Days of the
date the final Notice of Exercise is delivered to the Company. Partial exercises
of this Warrant resulting in purchases of a portion of the total number of
Warrant Shares available hereunder shall have the effect of lowering the
outstanding number of Warrant Shares purchasable hereunder in an amount equal
to
the applicable number of Warrant Shares purchased. The Holder and the Company
shall maintain records showing the number of Warrant Shares purchased and the
date of such purchases. The Company shall deliver any objection to any Notice
of
Exercise Form within one Business Day of receipt of such notice. The Holder
and
any assignee, by acceptance of this Warrant, acknowledge and agree that, by
reason of the provisions of this paragraph, following the purchase of a portion
of the Warrant Shares hereunder, the number of Warrant Shares available for
purchase hereunder at any given time may be less than the amount stated on
the
face hereof.
_______________________
1
Warrant
Shares shall be a number equal to 20% of the shares of common stock issuable
upon conversion of the Series B Voting Convertible Preferred Stock purchased
by
Holder.
b)
Exercise
Price
.
The
exercise price per share of the Common Stock under this Warrant shall be
$0.1294153, subject to adjustment as set forth herein (the “
Exercise
Price
”).
c)
Cashless
Exercise
.
If at
any time after one year from the date of issuance of this Warrant there is
no
effective Registration Statement registering, or no current prospectus available
for, the resale of the Warrant Shares by the Holder, then this Warrant may
also
be exercised at such time by means of a “cashless exercise” in which the Holder
shall be entitled to tender Warrants for cancellation and in return receive
a
certificate for the number of Warrant Shares equal to the quotient obtained
by
dividing [(A-B) (X)] by (A), where:
|
|
(A)
|
=
the VWAP on the Trading Day immediately preceding the date of such
election;
|
|
|
(B)
|
=
the Exercise Price of this Warrant, as adjusted; and
|
|
|
(X)
|
=
the number of Warrant Shares issuable upon exercise of the Warrants
tendered for cancellation in accordance with the terms of this Warrant
by
means of a cash exercise rather than a cashless
exercise.
|
“
VWAP
”
means,
for any date, the price determined by the first of the following clauses that
applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the Trading Market on which the Common Stock
is
then listed or quoted for trading as reported by Bloomberg Financial L.P. (based
on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York
City
time); (b) if the OTC Bulletin Board is the Trading Market, the volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
quoted for trading on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a
similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported; or
(d) in all other cases, the fair market value of a share of Common Stock as
determined by an independent appraiser selected in good faith by the Holder
and
reasonably acceptable to the Company.
Notwithstanding
anything herein to the contrary, on the Termination Date, this Warrant shall
be
automatically exercised via cashless exercise pursuant to this Section
2(c).
d)
Mechanics
of Exercise
.
i.
Authorization
of Warrant Shares
.
The
Company covenants that all Warrant Shares which may be issued upon the exercise
of the purchase rights represented by this Warrant will, upon exercise of the
purchase rights represented by this Warrant and subject to Shareholder Approval
and the Amendment Filing, be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and charges created by the Company
in respect of the issue thereof (other than taxes in respect of any transfer
occurring contemporaneously with such issue).
ii.
Delivery
of Certificates Upon Exercise
.
Subject
to and in reliance on Holder’s covenant in Section 6(b) of the Registration
Rights Agreement, in the event of exercise of this Warrant at a time when a
Registration Statement covering the resale of the Warrant Shares is effective
under the Securities Act,
certificates
for shares purchased hereunder shall be transmitted by the transfer agent of
the
Company to the Holder by crediting the account of the Holder’s prime broker with
the Depository Trust Company through its Deposit Withdrawal Agent Commission
(“
DWAC
”)
system
if the Company is a participant in such system, and otherwise by physical
delivery to the address specified by the Holder in the Notice of Exercise within
three Trading Days from the delivery to the Company of the Notice of Exercise
Form, surrender of this Warrant (if required) and payment of the aggregate
Exercise Price as set forth above (“
Warrant
Share Delivery Date
”).
This
Warrant shall be deemed to have been exercised on the date the Exercise Price
is
received by the Company. The Warrant Shares shall be deemed to have been issued,
and Holder or any other person so designated to be named therein shall be deemed
to have become a holder of record of such shares for all purposes, as of the
date the Warrant has been exercised by payment to the Company of the Exercise
Price (or by cashless exercise, if permitted) and all taxes required to be
paid
by the Holder, if any, pursuant to Section 2(e)(vii) prior to the issuance
of
such shares, have been paid.
iii.
Delivery
of New Warrants Upon Exercise
.
If this
Warrant shall have been exercised in part, the Company shall, at the request
of
a Holder and upon surrender of this Warrant certificate, at the time of delivery
of the certificate or certificates representing Warrant Shares, deliver to
Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased
Warrant Shares called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant.
iv.
Rescission
Rights
.
If the
Company fails to cause its transfer agent to transmit to the Holder a
certificate or certificates representing the Warrant Shares by the Warrant
Share
Delivery Date, then the Holder will have the right to rescind such
exercise.
v.
Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon
Exercise
.
In
addition to any other rights available to the Holder, if the Company fails
to
cause its transfer agent to transmit to the Holder a certificate or certificates
representing the Warrant Shares pursuant to an exercise by the Warrant Share
Delivery Date, and if after such date the Holder is required by its broker
to
purchase (in an open market transaction or otherwise) shares of Common Stock
to
deliver in satisfaction of a sale by the Holder of the Warrant Shares which
the
Holder anticipated receiving upon such exercise (a “
Buy-In”
),
then
the Company shall (1) pay in cash to the Holder the amount by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of shares purchased in the Buy-In at issue times
(B)
the price at which the sell order giving rise to such purchase obligation was
executed, and (2) at the option of the Holder, either reinstate the portion
of
the Warrant and equivalent number of Warrant Shares for which such exercise
was
not honored or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its exercise and
delivery obligations hereunder. For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to
an attempted exercise of shares of Common Stock with an aggregate sale price
giving rise to such purchase obligation of $10,000, under clause (1) of the
immediately preceding sentence the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In and, upon request of
the
Company, evidence of the amount of such loss. Nothing herein shall limit a
Holder’s right to pursue any other remedies available to it hereunder, at law or
in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon exercise of the Warrant
as
required pursuant to the terms hereof.
vi.
No
Fractional Shares or Scrip
.
No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of this Warrant. As to any fraction of a share which Holder would
otherwise be entitled to purchase upon such exercise, the Company shall pay a
cash adjustment in respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price.
vii.
Charges,
Taxes and Expenses
.
Issuance of certificates for Warrant Shares shall be made without charge to
the
Holder for any issue or transfer tax or other incidental expense in respect
of
the issuance of such certificate, all of which taxes and expenses shall be
paid
by the Company, and such certificates shall be issued in the name of the Holder
or in such name or names as may be directed by the Holder;
provided
,
however
,
that in
the event certificates for Warrant Shares are to be issued in a name other
than
the name of the Holder, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the Holder;
and the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
viii.
Closing
of Books
.
The
Company will not close its stockholder books or records in any manner which
prevents the timely exercise of this Warrant, pursuant to the terms
hereof.
e)
Registration
Rights
. The Company shall prepare and file with the Commission a
registration statement under the Securities Act on Form S-1 (or on such other
form appropriate for such purpose) covering the resale of all Warrant Shares
for
an offering to be made on a continuous basis pursuant to Rule 415. The Company
shall provide to the Holders and its assignees registration rights at least
as
favorable to the selling stockholder as the rights set forth in the Registration
Rights Agreement, and the Company shall enter into a registration rights
agreement with the Holder and its assignees on terms and conditions at least
as
favorable to the selling stockholder as the Registration Rights Agreement.
In
furtherance of its covenants herein, the Company shall include the Warrant
Shares on the Registration Statement to be filed for the benefit of the
Investors pursuant to the Registration Rights Agreement.
Section
3
.
Certain
Adjustments
.
a)
Stock
Dividends and Splits
.
If the
Company, at any time while this Warrant is outstanding: (A) pays a stock
dividend or otherwise make a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company upon exercise of this Warrant),
(B)
subdivides outstanding shares of Common Stock into a larger number of shares,
(C) combines (including by way of the Reverse Split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issues by reclassification
of shares of the Common Stock any shares of capital stock of the Company, then
in each case the Exercise Price shall be multiplied by a fraction of which
the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event and the number of shares issuable upon exercise
of
this Warrant shall be proportionately adjusted. Any adjustment made pursuant
to
this Section 3(a) shall become effective immediately after the record date
for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date
in
the case of a subdivision, combination or re-classification.
b)
Pro
Rata Distributions
.
If the
Company, at any time while the Warrant is outstanding, shall distribute to
all
holders of Common Stock (and not to Holders of the Warrants) (i) evidences
of
its indebtedness or assets (including cash and cash dividends), (ii) any
security (other than a distribution of Common Stock covered by subpart (a)
above), or (iii) rights or warrants to subscribe for or purchase any security,
(each, a “Distributed Property”) then in each such case the Holder shall, upon
exercise of this Warrant, be entitled to receive such Distributed Property
as
the Holder would have received had the Holder exercised the Warrant prior to
the
record date for the distribution of the Distributed Property.
c)
Fundamental
Transaction
.
If, at
any time while this Warrant is outstanding, (A) the Company effects any merger
or consolidation of the Company with or into another Person, (B) the Company
effects any sale of all or substantially all of its assets in one or a series
of
related transactions, (C) any tender offer or exchange offer (whether by the
Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities,
cash or property, or (D) the Company effects any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or property
(in any such case, a “
Fundamental
Transaction
”),
then,
upon any subsequent exercise of this Warrant, the Holder shall have the right
to
receive, for each Warrant Share that would have been issuable upon such exercise
immediately prior to the occurrence of such Fundamental Transaction, at the
option of the Holder, (a) upon exercise of this Warrant, the number of shares
of
Common Stock of the successor or acquiring corporation or of the Company, if
it
is the surviving corporation, and any additional consideration (the
“
Alternate
Consideration
”)
receivable upon or as a result of such reorganization, reclassification, merger,
consolidation or disposition of assets by a Holder of the number of shares
of
Common Stock for which this Warrant is exercisable immediately prior to such
event or (b) if the Company is acquired in an all cash transaction, cash equal
to the value of this Warrant as determined in accordance with the Black-Scholes
option pricing formula. For purposes of any such exercise, the determination
of
the Exercise Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect
of one share of Common Stock in such Fundamental Transaction, and the Company
shall apportion the Exercise Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components
of
the Alternate Consideration. If holders of Common Stock are given any choice
as
to the securities, cash or property to be received in a Fundamental Transaction,
then the Holder shall be given the same choice as to the Alternate Consideration
it receives upon any exercise of this Warrant following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions,
any
successor to the Company or surviving entity in such Fundamental Transaction
shall issue to the Holder a new warrant consistent with the foregoing provisions
and evidencing the Holder’s right to exercise such warrant into Alternate
Consideration. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or
surviving entity to comply with the provisions of this Section 3(c) and insuring
that this Warrant (or any such replacement security) will be similarly adjusted
upon any subsequent transaction analogous to a Fundamental
Transaction.
d)
Calculations
.
All
calculations under this Section 3 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be. For purposes of this Section
3,
the number of shares of Common Stock deemed to be issued and outstanding as
of a
given date shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) issued and outstanding.
e)
Voluntary
Adjustment By Company
.
The
Company may at any time during the term of this Warrant reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate
by
the Board of Directors of the Company.
f)
Notice
to Holders
.
i.
Adjustment
to Warrant Shares; Notice of Adjustment
.
Whenever the Exercise Price is adjusted pursuant to any provision of this
Section 3, the number of Warrant Shares issuable hereunder shall be increased
such that the aggregate Exercise Price payable hereunder, after taking into
account the decrease in the Exercise Price, shall be equal to the aggregate
Exercise Price prior to such adjustment. The Company shall promptly mail to
each
Holder a notice setting forth the Exercise Price and Warrant Share amount after
each adjustment and setting forth a brief statement of the facts requiring
such
adjustment.
ii.
Notice
to Allow Exercise by Holder
.
If (A)
the Company shall declare a dividend (or any other distribution in whatever
form) on the Common Stock; (B) the Company shall declare a special nonrecurring
cash dividend on or a redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock rights or warrants
to
subscribe for or purchase any shares of capital stock of any class or of any
rights; (D) the approval of any stockholders of the Company shall be required
in
connection with any reclassification of the Common Stock, any consolidation
or
merger to which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or property;
(E) the Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company; then, in each case,
the
Company shall cause to be mailed to the Holder at its last address as it shall
appear upon the Warrant Register of the Company, at least 20 calendar days
prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not
to
be taken, the date as of which the holders of the Common Stock of record to
be
entitled to such dividend, distributions, redemption, rights or warrants are
to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided that the
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. The Holder is entitled to exercise this Warrant during the
20-day period commencing on the date of such notice to the effective date of
the
event triggering such notice.
Section
4
.
Transfer
of Warrant
.
a)
Transferability
.
Subject
to compliance with any applicable securities laws and the conditions set forth
in Section 4(d), this Warrant and all rights hereunder (including, without
limitation, any registration rights) are transferable, in whole or in part,
upon
surrender of this Warrant at the principal office of the Company or its
designated agent, together with a written assignment of this Warrant
substantially in the form attached hereto duly executed by the Holder or its
agent or attorney and funds sufficient to pay any transfer taxes payable upon
the making of such transfer. Upon such surrender and, if required, such payment,
the Company shall execute and deliver a new Warrant or Warrants in the name
of
the assignee or assignees and in the denomination or denominations specified
in
such instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be exercised by
a
new holder for the purchase of Warrant Shares without having a new Warrant
issued.
b)
New
Warrants
.
This
Warrant may be divided or combined with other Warrants upon presentation hereof
at the aforesaid office of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by the Holder or its agent or attorney. Subject to compliance with
Section 4(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants
in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
c)
Warrant
Register
.
The
Company shall register this Warrant, upon records to be maintained by the
Company for that purpose (the “
Warrant
Register
”),
in
the name of the record Holder hereof from time to time. The Company may deem
and
treat the registered Holder of this Warrant as the absolute owner hereof for
the
purpose of any exercise hereof or any distribution to the Holder, and for all
other purposes, absent actual notice to the contrary.
d)
Transfer
Restrictions
.
I
n
connection with any transfer of this Warrant,
the
Company may require, as a condition of allowing such transfer (i) that the
Holder or transferee of this Warrant, as the case may be, furnish to the Company
a written opinion of counsel (which opinion shall be in form, substance and
scope customary for opinions of counsel in comparable transactions) to the
effect that such transfer may be made without
registration
under
the
Securities Act and under applicable state securities or blue sky laws, (ii)
that
the holder or transferee execute and deliver to the Company an investment letter
in form and substance acceptable to the Company and (iii) that the transferee
be
an
“accredited
investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8)
promulgated under the Securities Act or a “qualified institutional buyer” as
defined in Rule 144A(a) under the Securities Act.
Section
5
.
Miscellaneous
.
a)
No
Rights as Shareholder Until Exercise
.
This
Warrant does not entitle the Holder to any voting rights or other rights as
a
shareholder of the Company prior to the exercise hereof as set forth in Section
2(d)(ii).
b)
Loss,
Theft, Destruction or Mutilation of Warrant
.
The
Company covenants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
or any stock certificate relating to the Warrant Shares, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it
(which, in the case of the Warrant, shall not include the posting of any bond),
and upon surrender and cancellation of such Warrant or stock certificate, if
mutilated, the Company will make and deliver a new Warrant or stock certificate
of like tenor and dated as of such cancellation, in lieu of such Warrant or
stock certificate.
c)
Saturdays,
Sundays, Holidays, etc
.
If the
last or appointed day for the taking of any action or the expiration of any
right required or granted herein shall not be a Business Day, then such action
may be taken or such right may be exercised on the next succeeding Business
Day.
d)
Authorized
Shares
.
The
Company covenants to take all action in a timely manner to obtain Shareholder
Approval and effect the Amendment Filing, and thereafter, during the period
the
Warrant is outstanding, reserve from its authorized and unissued Common Stock
a
sufficient number of shares to provide for the issuance of the Warrant Shares
upon the exercise of any purchase rights under this Warrant. The Company further
covenants that its issuance of this Warrant shall constitute full authority
to
its officers who are charged with the duty of executing stock certificates
to
execute and issue the necessary certificates for the Warrant Shares upon the
exercise of the purchase rights under this Warrant. The Company will take all
such reasonable action as may be necessary to assure that such Warrant Shares
may be issued as provided herein without violation of any applicable law or
regulation, or of any requirements of the Trading Market upon which the Common
Stock may be listed. The Company further covenants to list the Warrant Shares
on
each Trading Market on which its Common Stock is or becomes listed.
Except
and to the extent as waived or consented to by the Holder, the Company shall
not
by any action, including, without limitation, amending its certificate of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of
this
Warrant, but will at all times in good faith assist in the carrying out of
all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder as set forth in this Warrant against
impairment. Without limiting the generality of the foregoing, the Company will
(a) not increase the par value of any Warrant Shares above the amount payable
therefor upon such exercise immediately prior to such increase in par value,
(b)
take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable Warrant
Shares upon the exercise of this Warrant, and (c) use commercially reasonable
efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to enable
the Company to perform its obligations under this Warrant.
Before
taking any action which would result in an adjustment in the number of Warrant
Shares for which this Warrant is exercisable or in the Exercise Price, the
Company shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof.
e)
Jurisdiction
.
All
questions concerning the construction, validity, enforcement and interpretation
of this Warrant shall be determined in accordance with the provisions of the
Purchase Agreement.
f)
Reissuance
of Warrant
.
Following Shareholder Approval and the Amendment Filing, the Company, at the
request of the Holder and upon delivery of this Warrant for cancellation and
reissuance hereunder, shall issue to Holder, at the Company’s expense, a new
Warrant that gives effect to the Shareholder Approval and the Amendment Filing
but which otherwise is on exactly the same terms and conditions as this
Warrant.
g)
Nonwaiver
and Expenses
.
No
course of dealing or any delay or failure to exercise any right hereunder on
the
part of Holder shall operate as a waiver of such right or otherwise prejudice
Holder’s rights, powers or remedies, notwithstanding the fact that all rights
hereunder terminate on the Termination Date. If the Company willfully and
knowingly fails to comply with any provision of this Warrant, which results
in
any material damages to the Holder, the Company shall pay to Holder such amounts
as shall be sufficient to cover any costs and expenses including, but not
limited to, reasonable attorneys’ fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due pursuant hereto
or
in otherwise enforcing any of its rights, powers or remedies
hereunder.
h)
Notices
.
Any
notice, request or other document required or permitted to be given or delivered
to the Holder by the Company shall be delivered in accordance with the notice
provisions of the Purchase Agreement to the Holder as follows:
Sterne
Agee & Leach, Inc.
800
Shades Creek Parkway, Suite 300
Birmingham,
Alabama 35209
Facsimile:
(205) 949-3626
Attention:
Ryan C. Medo
i)
Limitation
of Liability
.
No
provision hereof, in the absence of any affirmative action by Holder to exercise
this Warrant to purchase Warrant Shares, and no enumeration herein of the rights
or privileges of Holder, shall give rise to any liability of Holder for the
purchase price of any Common Stock or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the
Company.
j)
Remedies
.
Holder,
in addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Warrant. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of
the
provisions of this Warrant and hereby agrees to waive and not to assert the
defense in any action for specific performance that a remedy at law would be
adequate.
k)
Successors
and Assigns
.
Subject
to applicable securities laws, this Warrant and the rights and obligations
evidenced hereby shall inure to the benefit of and be binding upon the
successors of the Company and the successors and permitted assigns of Holder.
The provisions of this Warrant are intended to be for the benefit of all Holders
from time to time of this Warrant and shall be enforceable by any such Holder
or
holder of Warrant Shares.
l)
Amendment
.
This
Warrant may be modified or amended or the provisions hereof waived with the
written consent of the Company and the Holder.
m)
Severability
.
Wherever possible, each provision of this Warrant shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Warrant shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provisions or the remaining
provisions of this Warrant.
n)
Headings
.
The
headings used in this Warrant are for the convenience of reference only and
shall not, for any purpose, be deemed a part of this Warrant.
********************
IN
WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer thereunto duly authorized.
Dated:
May 3, 2007
|
MILLENNIUM
QUEST, INC.
|
|
By:__________________________________________
|
Si
Chen, Chief Executive Officer
|
NOTICE
OF EXERCISE
TO:
MILLENNIUM
QUEST, INC.
(1)
The
undersigned hereby elects to purchase ________ Warrant Shares of the Company
pursuant to the terms of the attached Warrant (only if exercised in full),
and
tenders herewith payment of the exercise price in full, together with all
applicable transfer taxes, if any.
(2)
Payment
shall take the form of (check applicable box):
[
] in
lawful money of the United States; or
[
] [if
permitted] the cancellation of such number of Warrant Shares as is necessary,
in
accordance with the formula set forth in subsection 2(c), to exercise this
Warrant with respect to the maximum number of Warrant Shares purchasable
pursuant to the cashless exercise procedure set forth in subsection
2(c).
(3)
Please
issue a certificate or certificates representing said Warrant Shares in the
name
of the undersigned or in such other name as is specified below:
_______________________________
The
Warrant Shares shall be delivered to the following DWAC Account Number or by
physical delivery of a certificate to:
_______________________________
_______________________________
_______________________________
(4)
Accredited
Investor
.
The
undersigned is an “accredited investor” as defined in Regulation D promulgated
under the Securities Act of 1933, as amended.
[SIGNATURE
OF HOLDER]
Name
of
Investing Entity:
________________________________________________________________________
Signature
of Authorized Signatory of Investing Entity
:
_________________________________________________
Name
of
Authorized Signatory:
___________________________________________________________________
Title
of
Authorized Signatory:
____________________________________________________________________
Date:
________________________________________________________________________________________
ASSIGNMENT
FORM
(To
assign the foregoing warrant, execute
this
form
and supply required information.
Do
not
use this form to exercise the warrant.)
FOR
VALUE
RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all
rights evidenced thereby are hereby assigned to
_______________________________________________
whose address is
_______________________________________________________________.
_______________________________________________________________
Dated:
______________, _______
Holder’s
Signature:
_____________________________
Holder’s
Address:
_____________________________
_____________________________
Signature
Guaranteed: ___________________________________________
NOTE:
The
signature to this Assignment Form must correspond with the name as it appears
on
the face of the Warrant, without alteration or enlargement or any change
whatsoever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing
Warrant.
NEITHER
THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION
FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT,
THE
SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY
AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED
IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.
COMMON
STOCK PURCHASE WARRANT
To
Purchase
Shares of Common Stock of
MILLENNIUM
QUEST, INC.
THIS
COMMON STOCK PURCHASE WARRANT (the “
Warrant
”)
certifies that, for value
received,
(the “
Holder
”),
is
entitled, subject to Shareholder Approval and the Amendment Filing, and upon
the
other terms and limitations on exercise hereinafter set forth, at any time
on or
after May 3, 2007 (the “
Initial
Exercise Date
”)
and on
or prior to the close of business on the third anniversary of the Initial
Exercise Date (the “
Termination
Date
”)
but
not thereafter, to subscribe for and purchase from Millennium Quest, Inc.,
a
Delaware corporation (the “
Company
”),
up
to
shares (the “Warrant Shares”) of the Common Stock, par value $0.001 per share,
of the Company (the “Common Stock”). The purchase price of one share of Common
Stock under this Warrant shall be equal to the Exercise Price, as defined
in
Section 2(b).
This
Warrant is being issued to the Holder pursuant to Section 2(b) of that
certain engagement letter agreement dated March 16, 2007 between International
Lorain Holding, Inc. and Sterne, Agee & Leach, Inc.
Section
1
.
Definitions
.
Capitalized terms used and not otherwise defined herein shall have the meanings
set forth in that certain Securities Purchase Agreement (the “
Purchase
Agreement
”),
dated
May 3, 2007, among the Company, the purchasers signatory thereto, and the
Beneficial Owners. For the sake of clarity, the stated number of Warrant
Shares
and the stated Exercise Price set forth herein are determined pre-Reverse
Split
and will be adjusted by the Reverse Split.
Section
2
.
Exercise
.
a)
Exercise
of Warrant
.
Subject
to Shareholder Approval and the Amendment Filing, exercise of the purchase
rights represented by this Warrant may be made, in whole or in part, at any
time
or times on or after the Initial Exercise Date and on or before the Termination
Date by delivery to the Company of a duly executed facsimile copy of the
Notice
of Exercise Form annexed hereto (or such other office or agency of the Company
as it may designate by notice in writing to the registered Holder at the
address
of such Holder appearing on the books of the Company); and, within three
Trading
Days of the date said Notice of Exercise is delivered to the Company, the
Company shall have received payment of the aggregate Exercise Price of the
shares thereby purchased by wire transfer or cashier’s check drawn on a United
States bank. Notwithstanding anything herein to the contrary, the Holder
shall
not be required to physically surrender this Warrant to the Company until
the
Holder has purchased all of the Warrant Shares available hereunder and the
Warrant has been exercised in full, in which case, the Holder shall surrender
this Warrant to the Company for cancellation within three Trading Days of
the
date the final Notice of Exercise is delivered to the Company. Partial exercises
of this Warrant resulting in purchases of a portion of the total number of
Warrant Shares available hereunder shall have the effect of lowering the
outstanding number of Warrant Shares purchasable hereunder in an amount equal
to
the applicable number of Warrant Shares purchased. The Holder and the Company
shall maintain records showing the number of Warrant Shares purchased and
the
date of such purchases. The Company shall deliver any objection to any Notice
of
Exercise Form within one Business Day of receipt of such notice. The Holder
and
any assignee, by acceptance of this Warrant, acknowledge and agree that,
by
reason of the provisions of this paragraph, following the purchase of a portion
of the Warrant Shares hereunder, the number of Warrant Shares available for
purchase hereunder at any given time may be less than the amount stated on
the
face hereof.
b)
Exercise
Price
.
The
exercise price per share of the Common Stock under this Warrant shall be
$0.1294153, subject to adjustment as set forth herein (the “
Exercise
Price
”).
c)
Cashless
Exercise
.
If at
any time after one year from the date of issuance of this Warrant there is
no
effective Registration Statement registering, or no current prospectus available
for, the resale of the Warrant Shares by the Holder, then this Warrant may
also
be exercised at such time by means of a “cashless exercise” in which the Holder
shall be entitled to tender Warrants for cancellation and in return receive
a
certificate for the number of Warrant Shares equal to the quotient obtained
by
dividing [(A-B) (X)] by (A), where:
(A)
= the
VWAP on the Trading Day immediately preceding the date of such
election;
(B)
= the
Exercise Price of this Warrant, as adjusted; and
(X)
= the
number of Warrant Shares issuable upon exercise of the Warrants tendered
for
cancellation in accordance with the terms of this Warrant by means of a cash
exercise rather than a cashless exercise.
“
VWAP
”
means,
for any date, the price determined by the first of the following clauses
that
applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
the daily volume weighted average price of the Common Stock for such date
(or
the nearest preceding date) on the Trading Market on which the Common Stock
is
then listed or quoted for trading as reported by Bloomberg Financial L.P.
(based
on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York
City
time); (b) if the OTC Bulletin Board is the Trading Market, the volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not
then
quoted for trading on the OTC Bulletin Board and if prices for the Common
Stock
are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a
similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported; or
(d) in all other cases, the fair market value of a share of Common Stock as
determined by an independent appraiser selected in good faith by the Holder
and
reasonably acceptable to the Company.
Notwithstanding
anything herein to the contrary, on the Termination Date, this Warrant shall
be
automatically exercised via cashless exercise pursuant to this Section
2(c).
d)
Mechanics
of Exercise
.
i.
Authorization
of Warrant Shares
.
The
Company covenants that all Warrant Shares which may be issued upon the exercise
of the purchase rights represented by this Warrant will, upon exercise of
the
purchase rights represented by this Warrant and subject to Shareholder Approval
and the Amendment Filing, be duly authorized, validly issued, fully paid
and
nonassessable and free from all taxes, liens and charges created by the Company
in respect of the issue thereof (other than taxes in respect of any transfer
occurring contemporaneously with such issue).
ii.
Delivery
of Certificates Upon Exercise
.
Subject
to and in reliance on Holder’s covenant in Section 6(b) of the Registration
Rights Agreement, in the event of exercise of this Warrant at a time when
a
Registration Statement covering the resale of the Warrant Shares is effective
under the Securities Act,
certificates
for shares purchased hereunder shall be transmitted by the transfer agent
of the
Company to the Holder by crediting the account of the Holder’s prime broker with
the Depository Trust Company through its Deposit Withdrawal Agent Commission
(“
DWAC
”)
system
if the Company is a participant in such system, and otherwise by physical
delivery to the address specified by the Holder in the Notice of Exercise
within
three Trading Days from the delivery to the Company of the Notice of Exercise
Form, surrender of this Warrant (if required) and payment of the aggregate
Exercise Price as set forth above (“
Warrant
Share Delivery Date
”).
This
Warrant shall be deemed to have been exercised on the date the Exercise Price
is
received by the Company. The Warrant Shares shall be deemed to have been
issued,
and Holder or any other person so designated to be named therein shall be
deemed
to have become a holder of record of such shares for all purposes, as of
the
date the Warrant has been exercised by payment to the Company of the Exercise
Price (or by cashless exercise, if permitted) and all taxes required to be
paid
by the Holder, if any, pursuant to Section 2(e)(vii) prior to the issuance
of
such shares, have been paid.
iii.
Delivery
of New Warrants Upon Exercise
.
If this
Warrant shall have been exercised in part, the Company shall, at the request
of
a Holder and upon surrender of this Warrant certificate, at the time of delivery
of the certificate or certificates representing Warrant Shares, deliver to
Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased
Warrant Shares called for by this Warrant, which new Warrant shall in all
other
respects be identical with this Warrant.
iv.
Rescission
Rights
.
If the
Company fails to cause its transfer agent to transmit to the Holder a
certificate or certificates representing the Warrant Shares by the Warrant
Share
Delivery Date, then the Holder will have the right to rescind such
exercise.
v.
Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon
Exercise
.
In
addition to any other rights available to the Holder, if the Company fails
to
cause its transfer agent to transmit to the Holder a certificate or certificates
representing the Warrant Shares pursuant to an exercise by the Warrant Share
Delivery Date, and if after such date the Holder is required by its broker
to
purchase (in an open market transaction or otherwise) shares of Common Stock
to
deliver in satisfaction of a sale by the Holder of the Warrant Shares which
the
Holder anticipated receiving upon such exercise (a “
Buy-In”
),
then
the Company shall (1) pay in cash to the Holder the amount by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of shares purchased in the Buy-In at issue times
(B)
the price at which the sell order giving rise to such purchase obligation
was
executed, and (2) at the option of the Holder, either reinstate the portion
of
the Warrant and equivalent number of Warrant Shares for which such exercise
was
not honored or deliver to the Holder the number of shares of Common Stock
that
would have been issued had the Company timely complied with its exercise
and
delivery obligations hereunder. For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to
an attempted exercise of shares of Common Stock with an aggregate sale price
giving rise to such purchase obligation of $10,000, under clause (1) of the
immediately preceding sentence the Company shall be required to pay the Holder
$1,000. The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In and, upon request
of the
Company, evidence of the amount of such loss. Nothing herein shall limit
a
Holder’s right to pursue any other remedies available to it hereunder, at law or
in equity including, without limitation, a decree of specific performance
and/or
injunctive relief with respect to the Company’s failure to timely deliver
certificates representing shares of Common Stock upon exercise of the Warrant
as
required pursuant to the terms hereof.
vi.
No
Fractional Shares or Scrip
.
No
fractional shares or scrip representing fractional shares shall be issued
upon
the exercise of this Warrant. As to any fraction of a share which Holder
would
otherwise be entitled to purchase upon such exercise, the Company shall pay
a
cash adjustment in respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price.
vii.
Charges,
Taxes and Expenses
.
Issuance of certificates for Warrant Shares shall be made without charge
to the
Holder for any issue or transfer tax or other incidental expense in respect
of
the issuance of such certificate, all of which taxes and expenses shall be
paid
by the Company, and such certificates shall be issued in the name of the
Holder
or in such name or names as may be directed by the Holder;
provided
,
however
,
that in
the event certificates for Warrant Shares are to be issued in a name other
than
the name of the Holder, this Warrant when surrendered for exercise shall
be
accompanied by the Assignment Form attached hereto duly executed by the Holder;
and the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
viii.
Closing
of Books
.
The
Company will not close its stockholder books or records in any manner which
prevents the timely exercise of this Warrant, pursuant to the terms
hereof.
e)
Registration
Rights
.
T
he
Company shall prepare and file with the Commission a registration statement
under the Securities Act on Form S-1 (or on such other form appropriate for
such
purpose) covering the resale of all Warrant Shares for an offering to be
made on
a continuous basis pursuant to Rule 415. The Company shall provide to the
Holders and its assignees registration rights at least as favorable to the
selling stockholder as the rights set forth in the Registration Rights
Agreement, and the Company shall enter into a registration rights agreement
with
the Holder and its assignees on terms and conditions at least as favorable
to
the selling stockholder as the Registration Rights Agreement. In furtherance
of
its covenants herein, the Company shall include the Warrant Shares on the
Registration Statement to be filed for the benefit of the Investors pursuant
to
the Registration Rights Agreement.
Section
3
.
Certain
Adjustments
.
a)
Stock
Dividends and Splits
.
If the
Company, at any time while this Warrant is outstanding: (A) pays a stock
dividend or otherwise make a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities payable
in
shares of Common Stock (which, for avoidance of doubt, shall not include
any
shares of Common Stock issued by the Company upon exercise of this Warrant),
(B)
subdivides outstanding shares of Common Stock into a larger number of shares,
(C) combines (including by way of the Reverse Split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issues by reclassification
of shares of the Common Stock any shares of capital stock of the Company,
then
in each case the Exercise Price shall be multiplied by a fraction of which
the
numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event and the number of shares issuable upon exercise
of
this Warrant shall be proportionately adjusted. Any adjustment made pursuant
to
this Section 3(a) shall become effective immediately after the record date
for
the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date
in
the case of a subdivision, combination or re-classification.
b)
Pro
Rata Distributions
.
If the
Company, at any time while the Warrant is outstanding, shall distribute to
all
holders of Common Stock (and not to Holders of the Warrants) (i) evidences
of
its indebtedness or assets (including cash and cash dividends), (ii) any
security (other than a distribution of Common Stock covered by subpart (a)
above), or (iii) rights or warrants to subscribe for or purchase any security,
(each, a “Distributed Property”) then in each such case the Holder shall, upon
exercise of this Warrant, be entitled to receive such Distributed Property
as
the Holder would have received had the Holder exercised the Warrant prior
to the
record date for the distribution of the Distributed Property.
c)
Fundamental
Transaction
.
If, at
any time while this Warrant is outstanding, (A) the Company effects any merger
or consolidation of the Company with or into another Person, (B) the Company
effects any sale of all or substantially all of its assets in one or a series
of
related transactions, (C) any tender offer or exchange offer (whether by
the
Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities,
cash or property, or (D) the Company effects any reclassification of the
Common
Stock or any compulsory share exchange pursuant to which the Common Stock
is
effectively converted into or exchanged for other securities, cash or property
(in any such case, a “
Fundamental
Transaction
”),
then,
upon any subsequent exercise of this Warrant, the Holder shall have the right
to
receive, for each Warrant Share that would have been issuable upon such exercise
immediately prior to the occurrence of such Fundamental Transaction, at the
option of the Holder, (a) upon exercise of this Warrant, the number of shares
of
Common Stock of the successor or acquiring corporation or of the Company,
if it
is the surviving corporation, and any additional consideration (the
“
Alternate
Consideration
”)
receivable upon or as a result of such reorganization, reclassification,
merger,
consolidation or disposition of assets by a Holder of the number of shares
of
Common Stock for which this Warrant is exercisable immediately prior to such
event or (b) if the Company is acquired in an all cash transaction, cash
equal
to the value of this Warrant as determined in accordance with the Black-Scholes
option pricing formula. For purposes of any such exercise, the determination
of
the Exercise Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in
respect
of one share of Common Stock in such Fundamental Transaction, and the Company
shall apportion the Exercise Price among the Alternate Consideration in a
reasonable manner reflecting the relative value of any different components
of
the Alternate Consideration. If holders of Common Stock are given any choice
as
to the securities, cash or property to be received in a Fundamental Transaction,
then the Holder shall be given the same choice as to the Alternate Consideration
it receives upon any exercise of this Warrant following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions,
any
successor to the Company or surviving entity in such Fundamental Transaction
shall issue to the Holder a new warrant consistent with the foregoing provisions
and evidencing the Holder’s right to exercise such warrant into Alternate
Consideration. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor
or
surviving entity to comply with the provisions of this Section 3(c) and insuring
that this Warrant (or any such replacement security) will be similarly adjusted
upon any subsequent transaction analogous to a Fundamental
Transaction.
d)
Calculations
.
All
calculations under this Section 3 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be. For purposes of this Section
3,
the number of shares of Common Stock deemed to be issued and outstanding
as of a
given date shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) issued and outstanding.
e)
Voluntary
Adjustment By Company
.
The
Company may at any time during the term of this Warrant reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate
by
the Board of Directors of the Company.
f)
Notice
to Holders
.
i.
Adjustment
to Warrant Shares; Notice of Adjustment
.
Whenever the Exercise Price is adjusted pursuant to any provision of this
Section 3, the number of Warrant Shares issuable hereunder shall be increased
such that the aggregate Exercise Price payable hereunder, after taking into
account the decrease in the Exercise Price, shall be equal to the aggregate
Exercise Price prior to such adjustment. The Company shall promptly mail
to each
Holder a notice setting forth the Exercise Price and Warrant Share amount
after
each adjustment and setting forth a brief statement of the facts requiring
such
adjustment.
ii.
Notice
to Allow Exercise by Holder
.
If (A)
the Company shall declare a dividend (or any other distribution in whatever
form) on the Common Stock; (B) the Company shall declare a special nonrecurring
cash dividend on or a redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock rights or warrants
to
subscribe for or purchase any shares of capital stock of any class or of
any
rights; (D) the approval of any stockholders of the Company shall be required
in
connection with any reclassification of the Common Stock, any consolidation
or
merger to which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or property;
(E) the Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company; then, in each case,
the
Company shall cause to be mailed to the Holder at its last address as it
shall
appear upon the Warrant Register of the Company, at least 20 calendar days
prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of
such
dividend, distribution, redemption, rights or warrants, or if a record is
not to
be taken, the date as of which the holders of the Common Stock of record
to be
entitled to such dividend, distributions, redemption, rights or warrants
are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective
or
close, and the date as of which it is expected that holders of the Common
Stock
of record shall be entitled to exchange their shares of the Common Stock
for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided that the
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. The Holder is entitled to exercise this Warrant during the
20-day period commencing on the date of such notice to the effective date
of the
event triggering such notice.
Section
4
.
Transfer
of Warrant
.
a)
Transferability
.
Subject
to compliance with any applicable securities laws and the conditions set
forth
in Section 4(d), this Warrant and all rights hereunder (including, without
limitation, any registration rights) are transferable, in whole or in part,
upon
surrender of this Warrant at the principal office of the Company or its
designated agent, together with a written assignment of this Warrant
substantially in the form attached hereto duly executed by the Holder or
its
agent or attorney and funds sufficient to pay any transfer taxes payable
upon
the making of such transfer. Upon such surrender and, if required, such payment,
the Company shall execute and deliver a new Warrant or Warrants in the name
of
the assignee or assignees and in the denomination or denominations specified
in
such instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant
shall
promptly be cancelled. A Warrant, if properly assigned, may be exercised
by a
new holder for the purchase of Warrant Shares without having a new Warrant
issued.
b)
New
Warrants
.
This
Warrant may be divided or combined with other Warrants upon presentation
hereof
at the aforesaid office of the Company, together with a written notice
specifying the names and denominations in which new Warrants are to be issued,
signed by the Holder or its agent or attorney. Subject to compliance with
Section 4(a), as to any transfer which may be involved in such division or
combination, the Company shall execute and deliver a new Warrant or Warrants
in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
c)
Warrant
Register
.
The
Company shall register this Warrant, upon records to be maintained by the
Company for that purpose (the “
Warrant
Register
”),
in
the name of the record Holder hereof from time to time. The Company may deem
and
treat the registered Holder of this Warrant as the absolute owner hereof
for the
purpose of any exercise hereof or any distribution to the Holder, and for
all
other purposes, absent actual notice to the contrary.
d)
Transfer
Restrictions
.
In
connection with any transfer of this Warrant,
the
Company may require, as a condition of allowing such transfer (i) that the
Holder or transferee of this Warrant, as the case may be, furnish to the
Company
a written opinion of counsel (which opinion shall be in form, substance and
scope customary for opinions of counsel in comparable transactions) to the
effect that such transfer may be made without
registration
under
the
Securities Act and under applicable state securities or blue sky laws, (ii)
that
the holder or transferee execute and deliver to the Company an investment
letter
in form and substance acceptable to the Company and (iii) that the transferee
be
an
“accredited
investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8)
promulgated under the Securities Act or a “qualified institutional buyer” as
defined in Rule 144A(a) under the Securities Act.
Section
5
.
Miscellaneous
.
a)
No
Rights as Shareholder Until Exercise
.
This
Warrant does not entitle the Holder to any voting rights or other rights
as a
shareholder of the Company prior to the exercise hereof as set forth in Section
2(d)(ii).
b)
Loss,
Theft, Destruction or Mutilation of Warrant
.
The
Company covenants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant
or any stock certificate relating to the Warrant Shares, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to
it
(which, in the case of the Warrant, shall not include the posting of any
bond),
and upon surrender and cancellation of such Warrant or stock certificate,
if
mutilated, the Company will make and deliver a new Warrant or stock certificate
of like tenor and dated as of such cancellation, in lieu of such Warrant
or
stock certificate.
c)
Saturdays,
Sundays, Holidays, etc
.
If the
last or appointed day for the taking of any action or the expiration of any
right required or granted herein shall not be a Business Day, then such action
may be taken or such right may be exercised on the next succeeding Business
Day.
d)
Authorized
Shares
.
The
Company covenants to take all action in a timely manner to obtain Shareholder
Approval and effect the Amendment Filing, and thereafter, during the period
the
Warrant is outstanding, reserve from its authorized and unissued Common Stock
a
sufficient number of shares to provide for the issuance of the Warrant Shares
upon the exercise of any purchase rights under this Warrant. The Company
further
covenants that its issuance of this Warrant shall constitute full authority
to
its officers who are charged with the duty of executing stock certificates
to
execute and issue the necessary certificates for the Warrant Shares upon
the
exercise of the purchase rights under this Warrant. The Company will take
all
such reasonable action as may be necessary to assure that such Warrant Shares
may be issued as provided herein without violation of any applicable law
or
regulation, or of any requirements of the Trading Market upon which the Common
Stock may be listed. The Company further covenants to list the Warrant Shares
on
each Trading Market on which its Common Stock is or becomes listed.
Except
and to the extent as waived or consented to by the Holder, the Company shall
not
by any action, including, without limitation, amending its certificate of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms
of this
Warrant, but will at all times in good faith assist in the carrying out of
all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder as set forth in this Warrant
against
impairment. Without limiting the generality of the foregoing, the Company
will
(a) not increase the par value of any Warrant Shares above the amount payable
therefor upon such exercise immediately prior to such increase in par value,
(b)
take all such action as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable Warrant
Shares upon the exercise of this Warrant, and (c) use commercially reasonable
efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to
enable
the Company to perform its obligations under this Warrant.
Before
taking any action which would result in an adjustment in the number of Warrant
Shares for which this Warrant is exercisable or in the Exercise Price, the
Company shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof.
e)
Jurisdiction
.
All
questions concerning the construction, validity, enforcement and interpretation
of this Warrant shall be determined in accordance with the provisions of
the
Purchase Agreement.
f)
Reissuance
of Warrant
.
Following Shareholder Approval and the Amendment Filing, the Company, at
the
request of the Holder and upon delivery of this Warrant for cancellation
and
reissuance hereunder, shall issue to Holder, at the Company’s expense, a new
Warrant that gives effect to the Shareholder Approval and the Amendment Filing
but which otherwise is on exactly the same terms and conditions as this
Warrant.
g)
Nonwaiver
and Expenses
.
No
course of dealing or any delay or failure to exercise any right hereunder
on the
part of Holder shall operate as a waiver of such right or otherwise prejudice
Holder’s rights, powers or remedies, notwithstanding the fact that all rights
hereunder terminate on the Termination Date. If the Company willfully and
knowingly fails to comply with any provision of this Warrant, which results
in
any material damages to the Holder, the Company shall pay to Holder such
amounts
as shall be sufficient to cover any costs and expenses including, but not
limited to, reasonable attorneys’ fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due pursuant hereto
or
in otherwise enforcing any of its rights, powers or remedies
hereunder.
h)
Notices
.
Any
notice, request or other document required or permitted to be given or delivered
to the Holder by the Company shall be delivered in accordance with the notice
provisions of the Purchase Agreement to the Holder as follows:
i)
Limitation
of Liability
.
No
provision hereof, in the absence of any affirmative action by Holder to exercise
this Warrant to purchase Warrant Shares, and no enumeration herein of the
rights
or privileges of Holder, shall give rise to any liability of Holder for the
purchase price of any Common Stock or as a stockholder of the Company, whether
such liability is asserted by the Company or by creditors of the
Company.
j)
Remedies
.
Holder,
in addition to being entitled to exercise all rights granted by law, including
recovery of damages, will be entitled to specific performance of its rights
under this Warrant. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of
the
provisions of this Warrant and hereby agrees to waive and not to assert the
defense in any action for specific performance that a remedy at law would
be
adequate.
k)
Successors
and Assigns
.
Subject
to applicable securities laws, this Warrant and the rights and obligations
evidenced hereby shall inure to the benefit of and be binding upon the
successors of the Company and the successors and permitted assigns of Holder.
The provisions of this Warrant are intended to be for the benefit of all
Holders
from time to time of this Warrant and shall be enforceable by any such Holder
or
holder of Warrant Shares.
l)
Amendment
.
This
Warrant may be modified or amended or the provisions hereof waived with the
written consent of the Company and the Holder.
m)
Severability
.
Wherever possible, each provision of this Warrant shall be interpreted in
such
manner as to be effective and valid under applicable law, but if any provision
of this Warrant shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provisions or the remaining
provisions of this Warrant.
n)
Headings
.
The
headings used in this Warrant are for the convenience of reference only and
shall not, for any purpose, be deemed a part of this Warrant.
********************
IN
WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer thereunto duly authorized.
|
Dated:
|
|
|
|
|
MILLENNIUM
QUEST, INC.
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
NOTICE
OF EXERCISE
TO:
MILLENNIUM
QUEST, INC.
(1)
The
undersigned hereby elects to purchase ________ Warrant Shares of the Company
pursuant to the terms of the attached Warrant (only if exercised in full),
and
tenders herewith payment of the exercise price in full, together with all
applicable transfer taxes, if any.
(2)
Payment
shall take the form of (check applicable box):
o
in lawful money of the
United States; or
o
[if permitted] the cancellation of such
number of Warrant Shares as is necessary, in accordance with the formula
set
forth in subsection 2(c), to exercise this Warrant with respect to the maximum
number of Warrant Shares purchasable pursuant to the cashless exercise procedure
set forth in subsection 2(c).
(3)
Please
issue a certificate or certificates representing said Warrant Shares in the
name
of the undersigned or in such other name as is specified below:
_______________________________
The
Warrant Shares shall be delivered to the following DWAC Account Number or
by
physical delivery of a certificate to:
_______________________________
_______________________________
_______________________________
(4)
Accredited
Investor
.
The
undersigned is an “accredited investor” as defined in Regulation D promulgated
under the Securities Act of 1933, as amended.
[SIGNATURE
OF HOLDER]
Name
of
Investing Entity:
________________________________________________________________________
Signature
of Authorized Signatory of Investing Entity
:
__________________________________________________
Name
of
Authorized Signatory:
____________________________________________________________________
Title
of
Authorized Signatory:
_____________________________________________________________________
Date:
________________________________________________________________________________________
ASSIGNMENT
FORM
(To
assign the foregoing warrant, execute
this
form
and supply required information.
Do
not
use this form to exercise the warrant.)
FOR
VALUE
RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and
all
rights evidenced thereby are hereby assigned to
_______________________________________________
whose address is
_______________________________________________________________.
_______________________________________________________________
Dated:
______________, _______
Holder’s
Signature:
_____________________________
Holder’s
Address:
_____________________________
_____________________________
Signature
Guaranteed: ___________________________________________
NOTE:
The
signature to this Assignment Form must correspond with the name as it appears
on
the face of the Warrant, without alteration or enlargement or any change
whatsoever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing
Warrant.
Exhibit
10.1
SECURITIES
PURCHASE AGREEMENT
This
Securities Purchase Agreement (this
“Agreement”
)
is
dated as of May 3, 2007, by and among Millennium Quest, Inc., a Delaware
corporation, and all predecessors thereto (the
“Company”
)
and the
investors identified on the signature pages hereto (each, an
“Investor”
and
collectively, the
“Investors”
).
Hisashi Akazawa and Si Chen join as additional parties to this Agreement for
purposes of Sections 5 and 7 only (each a “
Beneficial
Owner
”
and
together the “
Beneficial
Owners
”).
R
E C
I T A L S
A.
Subject
to the terms and conditions set forth in this Agreement and pursuant to Section
4(2) of the Securities Act (as defined below) and Rule 506 promulgated
thereunder, the Company desires to issue and sell to each Investor, and each
Investor, severally and not jointly, desires to purchase from the Company
certain securities of the Company, as more fully described in this
Agreement.
B.
Prior
to
the consummation of the purchase and sale of the Company’s securities pursuant
to this Agreement, the Company shall consummate its acquisition (“
Lorain
Acquisition
”)
of all
of the outstanding capital shares of International Lorain Holding, Inc., a
Cayman Islands company (“
Lorain
”),
in
consideration of the Company’s issuance of 697,663 shares of its Series B Voting
Convertible Preferred Stock, pursuant to that certain Share Exchange Agreement
of even date herewith (“
Share
Exchange Agreement
”)
between the Company, Lorain and Hisashi Akazawa.
A
G R
E E M E N T
NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration the receipt and adequacy of which
are hereby acknowledged, the Company and the Investors agree as
follows:
ARTICLE
1.
DEFINITIONS
1.1.
Definitions
.
In
addition to the terms defined elsewhere in this Agreement, for all purposes
of
this Agreement, the following terms shall have the meanings indicated in this
Section 1.1:
“2007
Guaranteed ATNI”
has
the
meaning set forth in Section 5.2(a).
“2007
Make Good Shares”
has
the
meaning set forth in Section 5.2(a).
“2008
Guaranteed
ATNI”
has
the
meaning set forth in Section 5.2(b).
“2008
Make Good Shares”
has
the
meaning set forth in Section 5.2(b).
“Action”
means
any action, suit, inquiry, notice of violation, proceeding (including any
partial proceeding such as a deposition) or investigation pending or threatened
in writing against or affecting the Company, any Subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or
administrative agency, regulatory authority (federal, state, county, local
or
foreign), stock market, stock exchange or trading facility.
“Affiliate”
means
any Person that, directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with a Person, as such
terms are used in and construed under Rule 144.
“
Amendment
Filing
”
shall
mean the filing of a certificate of amendment to the restated certificate of
incorporation of the Company with the Delaware Secretary of State for purposes
of effecting (i) an increase in the number of authorized shares of Common Stock
to 200,000,000 shares, (ii) a change in the corporate name of the Company to
“Lorain International Food Group, Inc.”, and (iii) the Reverse
Split.
“Business
Day”
means
any day except Saturday, Sunday and any day which is a federal legal holiday
or
a day on which banking institutions in the State of New York or the State of
Utah are authorized or required by law or other governmental action to
close.
“Buy-In”
has
the
meaning set forth in Section 4.1(c).
"Certificate
of Designation"
shall
mean a Certificate of Designation to be filed prior to the Closing by the
Company with the Secretary of State of the State of Delaware, setting forth
the
rights, preferences and privileges of the Shares, in the form attached as
Exhibit
A
hereto.
“Closing”
means
the closing of the purchase and sale of the Shares pursuant to Article
II.
“Closing
Date”
means
the Business Day on which all of the conditions set forth in Sections 6.1 and
6.2 hereof are satisfied, or such other date as the parties may
agree.
"Closing
Escrow Agreement"
means
the Closing Escrow Agreement, dated as of the date hereof, between the Placement
Agent, the Company and the Escrow Agent pursuant to which the Investors shall
deposit their Investment Amounts with the Escrow Agent to be applied to the
transactions contemplated hereunder, in the form of
Exhibit
B
hereto.
“Commission”
means
the Securities and Exchange Commission.
“Common
Stock”
means
the common stock of the Company, par value $0.001 per share, and any securities
into which such common stock may hereafter be reclassified or for which it
may
be exchanged as a class.
“Common
Stock Equivalents”
means
any securities of the Company or any Subsidiary which entitle the holder thereof
to acquire Common Stock at any time, including without limitation, any debt,
preferred stock, rights, options, warrants or other instrument that is at any
time convertible into or exchangeable for, or otherwise entitles the holder
thereof to receive, Common Stock or other securities that entitle the holder
to
receive, directly or indirectly, Common Stock.
“Company
Counsel”
means
Thelen Reid Brown Raysman & Steiner LLP.
“Company
Deliverables”
has the
meaning set forth in Section 2.2(a).
“Disclosure
Materials”
means
the SEC reports, the Draft S-1 Registration Statement and the schedules to
this
Agreement.
“Disclosure
Schedules”
means
the Disclosure Schedules of the Company delivered by the Company to Investors
contemporaneously with this Agreement.
“
Draft
S-1 Registration Statement
”
means
a
draft registration statement on Form S-1 under the Securities Act, draft
dated April 24, 2007, to be filed by the Company (with such changes as are
needed to finalize such draft) with the Commission, pursuant to the Registration
Rights Agreement, for purposes of registering the resale of the Underlying
Shares and Warrant Shares.
“Effective
Date”
means
the date that the Registration Statement required by Section 2(a) of the
Registration Rights Agreement is first declared effective by the
Commission.
“
Escrow
Agent
”
means
Thelen Reid Brown Raysman & Steiner LLP, 701 Eighth Street N.W., Washington,
DC 20001.
“Evaluation
Date”
has
the
meaning set forth in Section 3.1(t).
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended.
“FCPA”
means
the
Foreign Corrupt Practices Act of 1977, as amended.
“FCPA
Subsidiary”
means
any Subsidiary of the Company that has been subject to the FCPA prior to the
Closing Date, and specifically excluding Lorain and its subsidiaries.
“GAAP”
means
U.S. generally accepted accounting principles, consistently
applied.
“Intellectual
Property Rights”
has the
meaning set forth in Section 3.1(q).
“Investment
Amount”
means,
with respect to each Investor, the Investment Amount indicated on such
Investor’s signature page to this Agreement.
“Investor
Deliverables”
has the
meaning set forth in Section 2.2(b).
“Investor
Party”
has the
meaning set forth in Section 4.7.
“Lien”
means
any lien, charge, encumbrance, security interest, right of first refusal, right
of participation or other restrictions of any kind.
“
Lorain
Acquisition
”
has
the
meaning set forth in Recital B to this Agreement.
“Make
Good Escrow Agreement”
means
the
Make Good Escrow Agreement, dated as of the date hereof, among the Company,
the
Placement Agent, the Securities Transfer Corporation, as the Make Good Escrow
Agent (the
“Make
Good Escrow Agent”
)
and the
Beneficial Owners, in the form of
Exhibit
C
hereto.
“Material
Adverse Effect”
means
any of (i) a material and adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material and adverse effect
on the results of operations, assets, prospects, business or condition
(financial or otherwise) of the Company and the Subsidiaries, taken as a whole,
or (iii) an adverse impairment to the Company’s ability to perform on a timely
basis any of its obligations under any Transaction Document.
“New
York Courts”
means
the state and federal courts sitting in the City of New York, Borough of
Manhattan.
“Outside
Date”
means
the 15
th
following the date of this Agreement.
“Person”
means an
individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any
kind.
“Placement
Agent”
means
Sterne, Agee & Leach, Inc.
“Proceeding”
means an
action, claim, suit, investigation or proceeding (including, without limitation,
an investigation or partial proceeding, such as a deposition), whether commenced
or threatened.
“Registration
Rights Agreement”
means
the Registration Rights Agreement, dated as of the date of this Agreement,
among
the Company and the Investors, in the form of
Exhibit
D
hereto.
“Registration
Statement”
means a
registration statement meeting the requirements set forth in the Registration
Rights Agreement and covering the resale by the Investors of the Underlying
Shares and Warrant Shares.
“Reverse
Split”
means a
1 for 32.84 reverse stock split of the Company’s Common Stock.
“Rule
144”
means
Rule 144 promulgated by the Commission pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect as
such
Rule.
“SEC
Reports”
has the
meaning set forth in Section 3.1(h).
“Securities”
means
the Shares, Warrants, Underlying Shares and Warrant Shares.
“Securities
Act”
means
the Securities Act of 1933, as amended.
“Series
B Preferred Stock”
means
the Series B Voting Convertible Preferred Stock, par value $0.001, of the
Company.
“Share
Delivery Date”
has the
meaning set forth in Section 4.1(c).
“Share
Exchange Agreement”
has the
meaning set forth in Recital B to this Agreement.
“Shares”
means
the shares of Series B Preferred Stock issued or issuable to the Investors
pursuant to this Agreement.
“Short
Sales”
include,
without limitation, all “short sales” as defined in Rule 200 promulgated under
Regulation SHO under the Exchange Act and all types of direct and indirect
stock
pledges, forward sale contracts, options, puts, calls, swaps and similar
arrangements (including on a total return basis), and sales and other
transactions through non-US broker dealers or foreign regulated
brokers.
“Stockholder
Approval”
has the
meaning set forth in Section 4.13.
“Subsidiary”
means
any subsidiary of the Company as set forth on
Schedule 3.1(a)
.
“Trading
Day”
means
(i) a day on which the Common Stock is traded on a Trading Market (other than
the OTC Bulletin Board), or (ii) if the Common Stock is not listed on a Trading
Market (other than the OTC Bulletin Board), a day on which the Common Stock
is
traded in the over-the-counter market, as reported by the OTC Bulletin Board,
or
(iii) if the Common Stock is not quoted on any Trading Market, a day on which
the Common Stock is quoted in the over-the-counter market as reported by the
Pink Sheets LLC (or any similar organization or agency succeeding to its
functions of reporting prices); provided, that in the event that the Common
Stock is not listed or quoted as set forth in (i), (ii) and (iii) hereof, then
Trading Day shall mean a Business Day.
“Trading
Market”
means
whichever of the New York Stock Exchange, the American Stock Exchange, the
NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market
or OTC Bulletin Board on which the Common Stock is listed or quoted for trading
on the date in question.
“Transaction
Documents”
means
this Agreement, the Certificate of Designation, the Registration Rights
Agreement, the Closing Escrow Agreement, the Make Good Escrow Agreement and
any
other documents or agreements executed in connection with the transactions
contemplated hereunder.
“Underlying
Shares”
means
the shares of Common Stock issuable upon conversion or exchange of the
Shares.
“
Warrants
”
means
collectively the Common Stock purchase warrants, in the form of
Exhibit
E
,
delivered to the Investors at the Closing in accordance with Section 2.2(a)
and
6.1(e) hereof, which Warrants shall be (i) immediately exercisable subject
to
Shareholder Approval at an exercise price of $0.1294153 per share (pre-Reverse
Split), (ii) have a term of exercise equal to three years, and (iii) issued
to
each Investor in a number equal to 20% of the shares of common stock issuable
upon conversion of the Series B Preferred Stock purchased by such Investor.
“
Warrant
Shares
”
means
the shares of Common Stock issuable upon exercise of the Warrants.
ARTICLE
2.
PURCHASE
AND SALE
2.1.
Closing
.
Subject
to the terms and conditions set forth in this Agreement, at the Closing the
Company shall issue and sell to each Investor, and each Investor shall,
severally and not jointly, purchase from the Company, the number of Shares
and
Warrants set forth on each respective Investor’s signature page attached hereto,
in consideration of the Investor’s payment of the Investment Amount set forth
thereon. The Closing shall take place at the offices of Escrow Agent on the
Closing Date or at such other location or time as the parties may
agree.
2.2.
Closing
Deliveries
.
(a)
On or
prior to the Closing, the Company shall deliver or cause to be delivered to
each
Investor the following (the
“Company
Deliverables”
):
(i)
this
Agreement duly executed by the Company and each Beneficial Owner;
(ii)
a
copy of
the executed, filed and effective Certificate of Designation, accompanied by
a
certified copy thereof issued by the Secretary of State of the State of
Delaware;
(iii)
a
certificate, executed by the Secretary of the Company and dated as of the
Closing Date, as to (i) the resolutions consistent with Section 3.1(c) as
adopted by the Company's Board of Directors in a form reasonably acceptable
to
the Investors, and (ii) the current certificate of incorporation, as amended,
and bylaws, as amended, of the Company;
(iv)
executed
consents of at least a majority of (i) the shares of Common Stock then
outstanding, and (ii) the share of Common Stock and Series A Preferred Stock
then outstanding voting as a group, irrevocably approving the items set forth
in
Section 4.13 herein;
(v)
the
legal
opinion of King & Wood, People’s Republic of China, Counsel to the Company
addressed to the Investors, in the form of
Exhibit
F
attached
hereto;
(vi)
the
legal
opinion of Company Counsel addressed to the Investors, in the form of Exhibit
G
attached hereto;
(vii)
the
Closing Escrow Agreement, duly executed by all parties thereto;
(viii)
the
Make
Good Escrow Agreement, duly executed by all parties thereto;
(ix)
the
Registration Rights Agreement, duly executed by the Company; and
(x)
the
Draft
S-1 Registration Statement.
(b)
On
or
prior to the Closing Date, each Investor shall deliver or cause to be delivered
the following (the
“Investor
Deliverables”
):
(i)
to
the
Company, this Agreement duly executed by the Investor;
(ii)
to
the
Escrow Agent for deposit and disbursement in accordance with the Closing Escrow
Agreement, Investment Amount, in United States dollars and in immediately
available funds, by wire transfer to an account designated in writing by the
Company for such purpose; and
(iii)
to
the
Company, the Registration Rights Agreement, duly executed by such
Investor.
(c)
Within
three (3) Business Days following the Closing Date, the Company shall deliver
or
cause to be delivered the following:
(i)
one
or
more stock certificates evidencing Shares with a stated value equal to such
Investor’s Investment Amount, registered in the name of such Investor;
and
(ii)
a
Warrant
registered in the name of such Investor evidencing the number of Warrants set
forth on such Investor’s signature page attached hereto.
ARTICLE
3.
REPRESENTATIONS
AND WARRANTIES
3.1.
Representations
and Warranties of the Company
.
Except
as set forth under the corresponding section of the Disclosure Schedules which
Disclosure Schedules shall be deemed a part hereof and to qualify any
representation or warranty otherwise made herein to the extent of such
disclosure, the Company hereby makes the following representations and
warranties to each Investor:
(a)
Subsidiaries
.
All of
the direct or indirect subsidiaries of the Company are set forth on
Schedule
3.1(a)
.
Except
as disclosed in
Schedule
3.1(a)
,
the
Company owns, directly or indirectly, all of the capital stock of each
Subsidiary free and clear of any and all Liens, and all the issued and
outstanding shares of capital stock of each Subsidiary are validly issued and
are fully paid, non-assessable and free of preemptive and similar rights. The
Company owns all of the outstanding capital stock of Lorain in accordance with
the Share Exchange Agreement, free and clear of all Liens. For the sake of
clarity, as used herein the term Subsidiaries includes Lorain and all direct
and
indirect subsidiaries of Lorain.
(b)
Organization
and Qualification
.
The
Company and each Subsidiary are duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the jurisdiction of
its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. Neither the Company nor any Subsidiary is in violation
of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. The Company
and each Subsidiary are duly qualified to conduct its respective businesses
and
are in good standing as a foreign corporation or other entity in each
jurisdiction in which the nature of the business conducted or property owned
by
it makes such qualification necessary, except where the failure to be so
qualified or in good standing, as the case may be, could not, individually
or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect.
(c)
Authorization;
Enforcement
.
Subject
to Shareholder Approval and the Amendment Filing, the Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out
its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company, its board
of directors or its stockholders in connection therewith, other than Shareholder
Approval or the Amendment Filing. Each Transaction Document has been (or upon
delivery will have been) duly executed by the Company and, when delivered in
accordance with the terms hereof, will constitute the valid and binding
obligation of the Company enforceable against the Company in accordance with
its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating
to,
or affecting generally the enforcement of, creditors’ rights and remedies or by
other equitable principles of general application.
(d)
No
Conflicts
.
The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated thereby
do
not and will not (i) conflict with or violate any provision of the Company’s or
any Subsidiary’s certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute a
default (or an event that with notice or lapse of time or both would become
a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both)
of,
any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company
or
any Subsidiary is a party or by which any property or asset of the Company
or
any Subsidiary is bound or affected, or (iii) result in a violation of any
law,
rule, regulation, order, judgment, injunction, decree or other restriction
of
any court or governmental authority to which the Company or a Subsidiary is
subject (including federal and state securities laws and regulations), or by
which any property or asset of the Company or a Subsidiary is bound or affected;
except in the case of each of clauses (ii) and (iii), such as could not,
individually or in the aggregate, have or reasonably be expected to result
in a
Material Adverse Effect.
(e)
Filings,
Consents and Approvals
.
The
Company is not required to obtain any consent, waiver, authorization or order
of, give any notice to, or make any filing or registration with, any court
or
other federal, state, local or other governmental authority or other Person
in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than (i) the filing with the Commission of one
or
more Registration Statements in accordance with the requirements of the
Registration Rights Agreement, (ii) filings required by state securities laws,
(iii) the filing of a Notice of Sale of Securities on Form D with the Commission
under Regulation D of the Securities Act, (iv) the information statement
referred to in Section 4.13; (v) an information statement that complies with
Section 14(f) of the Exchange Act and Rule 14f-1 thereunder; (vi) the Amendment
Filing; and (vii) the filings required in accordance with Section 4.5
(collectively, the “
Required
Approvals
”).
(f)
Issuance
of the Shares
.
The
Shares and the Warrants have been duly authorized and, when issued and paid
for
in accordance with the Transaction Documents, will be duly and validly issued,
fully paid and nonassessable, free and clear of all Liens other than
restrictions on transfer provided for in the Transaction Documents. Upon
Stockholder Approval and the Amendment Filing, the Company will reserve from
its
duly authorized capital stock the shares of Common Stock issuable upon
conversion of the Shares and exercise of the Warrants. Subject to Shareholder
Approval and the Amendment Filing, the Underlying Shares and Warrant Shares,
when issued in accordance with the terms of the Transaction Documents, will
be
validly issued, fully paid and nonassessable, free and clear of all Liens other
than restrictions on transfer provided for in the Transaction Documents.
(g)
Capitalization
.
The
capitalization of the Company is as set forth on
Schedule
3.1(g)
.
No
Person has any right of first refusal, preemptive right, right of participation,
or any similar right to participate in the transactions contemplated by the
Transaction Documents. Except as set forth in
Schedule
3.1(g)
,
there
are no outstanding options, warrants, scrip rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights
or
obligations convertible into or exchangeable for, or giving any Person any
right
to subscribe for or acquire, any securities of the Company or any Subsidiary,
or
contracts, commitments, understandings or arrangements by which the Company
or
any Subsidiary is or may become bound to issue additional securities of the
Company or any Subsidiary. The issue and sale of the Securities will not,
immediately or with the passage of time, obligate the Company to issue shares
of
Common Stock or other securities to any Person (other than the Investors) and
will not result in a right of any holder of Company securities to adjust the
exercise, conversion, exchange or reset price under such securities. All of
the
outstanding shares of capital stock of the Company are validly issued, fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities. Except for Shareholder Approval, no further approval or
authorization of any stockholder, the board of directors of the Company or
others is required for the issuance and sale of the Securities. Except for
the
Transaction Documents and as set forth on
Schedule
3.1(g)
,
there
are no stockholders agreements, voting agreements or other similar agreements
with respect to the Company’s capital stock to which the Company is a party or,
to the knowledge of the Company, between or among any of the Company’s
stockholders.
(h)
SEC
Reports; Financial Statements
.
The
Company has filed all reports required to be filed by it under the Securities
Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,
since January 1, 2004 (collectively, the
“SEC
Reports”
)
on a
timely basis or has timely filed a valid extension of such time of filing and
has filed any such SEC Reports prior to the expiration of any such extension.
As
of their respective dates, the SEC Reports complied in all material respects
with the requirements of the Securities Act and the Exchange Act and the rules
and regulations of the Commission promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary
in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing. Such financial statements have
been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved, except as may be otherwise specified in such financial
statements or the notes thereto, and fairly present in all material respects
the
financial position of the Company and its consolidated Subsidiaries as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.
(i)
Lorain
Financial Statements; Draft S-1 Registration Statement
.
The
Company has delivered to each Investor the following financial statements:
(i)
audited consolidated balance sheet of Lorain as of December 31, 2006; (ii)
audited consolidated statements of income, stockholders’ equity and cash flows
of Lorain for the period from August 4, 2006 (date of incorporation of Lorain)
to December 31, 2006; and (iii) the pro forma unaudited combined balance sheet
and statements of income and cash flows of Lorain as of and for the three years
ended December 31, 2006 (collectively, the “Lorain Financial Statements”). The
Lorain Financial Statements comply in all material respects with applicable
accounting requirements and the rules and regulations of the Commission with
respect thereto. The Lorain Financial Statements have been prepared in
accordance with GAAP, except as may be otherwise specified in such financial
statements or the notes thereto and except that unaudited financial statements
may not contain all footnotes required by GAAP, and fairly present in all
material respects the financial position of Lorain and its consolidated
subsidiaries as of and for the dates thereof and the results of operations
and
cash flows for the periods then ended, subject, in the case of unaudited
statements, to normal, year-end audit adjustments.
The
Company has delivered to each Investor the Draft S-1 Registration Statement.
After giving effect to the Lorain Acquisition and the transactions contemplated
by the Transaction Documents, the Draft S-1 Registration Statement does not
contain any untrue statement of a material fact or omit to state a material
fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(j)
Press
Releases
.
The
press releases disseminated by the Company during the twelve months preceding
the date of this Agreement taken as a whole do not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made and when made, not
misleading.
(k)
Material
Changes
.
(A)
Since
the
date of the latest balance sheet included within the SEC Reports, except as
specifically disclosed in the SEC Reports, (i) there has been no event,
occurrence or development that has had or that could reasonably be expected
to
result in a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities not required to be reflected in the Company’s
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting or the identity of its auditors, (iv) the Company has not declared
or
made any dividend or distribution of cash or other property to its stockholders
or purchased, redeemed or made any agreements to purchase or redeem any shares
of its capital stock, and (v) the Company has not issued any equity securities
to any officer, director or Affiliate. The Company does not have pending before
the Commission any request for confidential treatment of
information.
(B)
Lorain
.
Since
the date of the latest balance sheet included within the Lorain Financial
Statements, except as specifically disclosed in the Draft S-1 Registration
Statement, (i) there has been no event, occurrence or development that has
had
or that could reasonably be expected by the Company or Lorain to result in
a
Material Adverse Effect, (ii) none of Lorain or any of its direct or indirect
subsidiaries have incurred any liabilities (contingent or otherwise) other
than
(A) trade payables and accrued expenses incurred in the ordinary course of
business consistent with past practice and (B) liabilities not required to
be
reflected in the Lorain Financial Statements pursuant to GAAP or disclosed
in
the Draft S-1 Registration Statement as filed with the Commission under the
Securities Act, (iii) none of Lorain or any of its direct or indirect
subsidiaries have altered their method of accounting, (iv) none of Lorain or
any
of its direct or indirect subsidiaries has declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock and (v) none of Lorain or any of its direct or indirect subsidiaries
has
issued any equity securities to any officer, director or Affiliate.
(l)
Litigation
.
There
is no Action which (i) adversely affects or challenges the legality, validity
or
enforceability of any of the Transaction Documents, the Securities or the Share
Exchange Agreement or (ii) could, if there were an unfavorable decision,
individually or in the aggregate, have or reasonably be expected to result
in a
Material Adverse Effect. Neither the Company nor any Subsidiary, nor any
director or officer thereof (in his or her capacity as such), is or has been
the
subject of any Action involving a claim of violation of or liability under
U.S.
or foreign federal or state securities laws or a claim of breach of fiduciary
duty. There has not been, and to the knowledge of the Company, there is not
pending any investigation by the Commission involving the Company or any current
or former director or officer of the Company (in his or her capacity as such).
The Commission has not issued any stop order or other order suspending the
effectiveness of any registration statement filed by the Company under the
Exchange Act or the Securities Act.
(m)
Labor
Relations
.
No
material labor dispute exists or, to the knowledge of the Company or any
Subsidiary, is imminent with respect to any of the employees of the Company
or
any Subsidiary which could reasonably be expected to result in a Material
Adverse Effect. Except as set forth in
Schedule
3.1(m)
,
none of
the Company's or its Subsidiaries' employees is a member of a union that relates
to such employee's relationship with the Company or such Subsidiary, and neither
the Company or any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that their relationships
with their employees are good. No executive officer of the Company or any
Subsidiary, to the knowledge of the Company or any Subsidiary, is, or is now
expected to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement or
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each such executive officer does
not
subject the Company or any of its Subsidiaries to any liability with respect
to
any of the foregoing matters. The Company and its Subsidiaries are in compliance
with all U.S. federal, state, local and foreign laws and regulations relating
to
employment and employment practices, terms and conditions of employment and
wages and hours, except where the failure to be in compliance could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(n)
Compliance
.
Neither
the Company nor any Subsidiary (i) is in default under or in violation of (and
no event has occurred that has not been waived that, with notice or lapse of
time or both, would result in a default by the Company or any Subsidiary under),
nor has the Company or any Subsidiary received notice of a claim that it is
in
default under or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) is in violation of any order of any U.S. or
foreign court, arbitrator or governmental body, or (iii) is or has been in
violation of any U.S. or foreign statute, rule or regulation of any governmental
authority, including without limitation all foreign, federal, state and local
laws relating to taxes, environmental protection, occupational health and
safety, product quality and safety and employment and labor matters, except
in
each case as could not, individually or in the aggregate, have or reasonably
be
expected to result in a Material Adverse Effect. The Share Exchange Agreement
and the transaction contemplated thereby comply with all applicable laws, rules
and regulations of the United States and the People’s Republic of China.
(o)
Regulatory
Permits
.
The
Company and the Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate federal, state, local or foreign regulatory
authorities necessary to conduct their respective businesses as described in
the
Disclosure Documents, except where the failure to possess such permits could
not, individually or in the aggregate, have or reasonably be expected to result
in a Material Adverse Effect, and neither the Company nor any Subsidiary has
received any notice of proceedings relating to the revocation or modification
of
any such permits.
(p)
Title
to Assets
.
The
Company and the Subsidiaries have good and marketable title to all real property
owned by them that is material to their respective businesses and good and
marketable title in all personal property owned by them that is material to
their respective businesses, in each case free and clear of all Liens, except
for Liens as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such property
by the Company and the Subsidiaries. Any real property and facilities held
under
lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases of which the Company and the Subsidiaries
are
in compliance, except as could not, individually or in the aggregate, have
or
reasonably be expected to result in a Material Adverse Effect.
(q)
Patents
and Trademarks
.
The
Company and the Subsidiaries have, or have rights to use, all patents, patent
applications, trademarks, trademark applications, service marks, trade names,
copyrights, licenses and other similar rights that are necessary or material
for
use in connection with their respective businesses as described in the
Disclosure Documents and which the failure to so have could, individually or
in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect (collectively, the
“Intellectual
Property Rights”
).
Neither the Company nor any Subsidiary has received a written notice that the
Intellectual Property Rights used by the Company or any Subsidiary violates
or
infringes upon the rights of any Person. All such Intellectual Property Rights
are enforceable and there is no existing infringement by another Person of
any
of the Intellectual Property Rights. The Company and its Subsidiaries have
taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties, except where failure to do so could
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(r)
Insurance
.
The
Company and the Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiaries are
engaged. Neither the Company nor any Subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may
be
necessary to continue its business on terms consistent with market for the
Company’s and such Subsidiaries’ respective lines of business without a
significant increase in cost.
(s)
Transactions
With Affiliates and Employees
.
Except
as set forth in
Schedule
3.1(s)
,
none of
the officers, directors or employees of the Company or any Subsidiary is
presently a party to any transaction with the Company or any Subsidiary (other
than for services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to
or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to
the
knowledge of the Company, any entity in which any officer, director, or any
such
employee has a substantial interest or is an officer, director, trustee or
partner, in each case in excess of $60,000 other than (i) for payment of salary
or consulting fees for services rendered, or (ii) reimbursement for bona fide
expenses incurred on behalf of the Company or any Subsidiary.
(t)
Internal
Accounting Controls
.
The
Company is in compliance with all requirements of the Sarbanes-Oxley Act of
2002, as amended, and the rules and regulations thereunder, that are applicable
to it. The Company and the Subsidiaries maintain a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management’s general or
specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences. The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and designed such disclosure controls and procedures
to ensure that information
required
to be disclosed by the Company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission’s rules and forms.
The
Company’s certifying officers have evaluated the effectiveness of the Company’s
disclosure controls and procedures
as
of the
end of the period covered by the Company’s most recently filed periodic report
under the Exchange Act
(such
date, the
“Evaluation
Date”
).
The
Company presented in its most recently filed periodic report under the Exchange
Act the conclusions of the certifying officers about the effectiveness of the
disclosure controls and procedures based on their evaluations as of the
Evaluation Date. Since the Evaluation Date, there have been no significant
changes in the Company’s internal controls over financial reporting (as such
term is defined in Rule 13a-15(e) under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
(u)
Solvency
.
Based
on the financial condition of the Company as of the Closing Date (and assuming
that the Closing shall have occurred), (i) the Company’s fair saleable value of
its assets exceeds the amount that will be required to be paid on or in respect
of the Company’s existing debts and other liabilities (including known
contingent liabilities) as they mature, (ii) the Company’s assets do not
constitute unreasonably small capital to carry on its business for the current
fiscal year as now conducted and as proposed to be conducted including its
capital needs taking into account the particular capital requirements of the
business conducted by the Company, and projected capital requirements and
capital availability thereof, and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to liquidate
all
of its assets, after taking into account all anticipated uses of the cash,
would
be sufficient to pay all amounts on or in respect of its debt when such amounts
are required to be paid. The Company does not intend to incur debts beyond
its
ability to pay such debts as they mature (taking into account the timing and
amounts of cash to be payable on or in respect of its debt).
(v)
Certain
Fees
.
Except
for fees payable to the Placement Agent, no brokerage or finder’s fees or
commissions are or will be payable by the Company or any Subsidiary to any
broker, financial advisor or consultant, finder, placement agent, investment
banker, bank or other Person with respect to the transactions contemplated
by
the Transaction Documents. The Investors shall have no obligation with respect
to any fees or with respect to any claims (other than such fees or commissions
owed by an Investor pursuant to written agreements executed by such Investor
which fees or commissions shall be the sole responsibility of such Investor)
made by or on behalf of other Persons for fees of a type contemplated in this
Section that may be due in connection with the transactions contemplated by
this
Agreement.
(w)
Certain
Registration Matters
.
Assuming the accuracy of the Investors’ representations and warranties set forth
in Section 3.2(b)-(e), no registration under the Securities Act is required
for
the offer and sale of the Securities by the Company to the Investors under
the
Transaction Documents. The Company is eligible to register its Common Stock
for
resale by the Investors under Form S-1 promulgated under the Securities Act.
Except as set forth on
Schedule
3.1(w)
,
the
Company has not granted or agreed to grant to any Person any rights (including
“piggy-back” registration rights) to have any securities of the Company
registered with the Commission or any other governmental authority that have
not
been satisfied.
(x)
Listing
and Maintenance Requirements
.
The
Company’s Common Stock is registered pursuant to Section 12(b) or 12(g) of the
Exchange Act, and the Company has taken no action designed to, or which to
its
knowledge is likely to have the effect of, terminating the registration of
the
Common Stock under the Exchange Act nor has the Company received any
notification that the Commission is contemplating terminating such registration.
The Company has not during the two years preceding the date hereof, received
notice from any Trading Market to the effect that the Company is not in
compliance with the listing or maintenance requirements thereof. The Company
is,
and has no reason to believe that it will not in the foreseeable future continue
to be, in compliance with the listing and maintenance requirements for continued
listing of the Common Stock on the Trading Market on which the Common Stock
is
currently listed or quoted. The issuance and sale of the Securities under the
Transaction Documents does not contravene the rules and regulations of the
Trading Market on which the Common Stock is currently listed or quoted, and
no
approval of the stockholders of the Company thereunder is required for the
Company to issue and deliver to the Investors the Securities contemplated by
the
Transaction Documents.
(y)
Investment
Company
.
The
Company is not, and is not an Affiliate of, and immediately following the
Closing will not have become, an “investment company” within the meaning of the
Investment Company Act of 1940, as amended.
(z)
Application
of Takeover Protections
.
The
Company and its Board of Directors have taken all necessary action, if any,
in
order to render inapplicable any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Company’s certificate of
incorporation (or similar charter documents) or the laws of its state of
incorporation that is or could become applicable to the Investors as a result
of
the Investors and the Company fulfilling their obligations or exercising their
rights under the Transaction Documents, including without limitation the
Company’s issuance of the Securities and the Investors’ ownership of the
Securities.
(aa)
No
Additional Agreements
.
The
Company does not have any agreement or understanding with any Investor with
respect to the transactions contemplated by the Transaction Documents other
than
as specified in the Transaction Documents.
(bb)
Consultation
with Auditors
.
The
Company has consulted its independent auditors concerning the accounting
treatment of the transactions contemplated by the Transaction Documents, and
in
connection therewith has furnished such auditors complete copies of the
Transaction Documents.
(cc)
Disclosure
.
The
Company confirms that neither it nor any Person acting on its behalf has
provided any Investor or its respective agents or counsel with any information
that the Company believes constitutes material, non-public information
concerning the Company, the Subsidiaries or their respective businesses, except
insofar as the existence and terms of the proposed transactions contemplated
hereunder may constitute such information. The Company understands and confirms
that the Investors will rely on the foregoing representations and covenants
in
effecting transactions in securities of the Company. All disclosure provided
to
the Investors regarding the Company, the Subsidiaries or their respective
businesses and the transactions contemplated hereby, furnished by or on behalf
of the Company (including the Company’s representations and warranties set forth
in this Agreement) are true and correct and do not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to
make
the statements made therein, in light of the circumstances under which they
were
made, not misleading. The Company acknowledges and agrees that no Investor
has
made nor makes any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in
Section 3.2 hereof.
(dd)
No
Integrated Offering
.
Assuming
the accuracy of the Investors’ representations and warranties set forth in
Section 3.2, neither the Company, nor any of its Affiliates, nor any Person
acting on its or their behalf has, directly or indirectly, made any offers
or
sales of any security or solicited any offers to buy any security, under
circumstances that would cause this offering of the Securities to be integrated
with prior offerings by the Company for purposes of the Securities Act or any
applicable shareholder approval provisions of any Trading Market on which any
of
the securities of the Company are listed or designated.
(ee)
Tax
Status
.
Except
as set forth on
Schedule
3.1(ee)
,
and for
matters that would not, individually or in the aggregate, have or reasonably
be
expected to result in a Material Adverse Effect, the Company and each Subsidiary
has filed all necessary federal, state and foreign income and franchise tax
returns and has paid or accrued all taxes shown as due thereon, and the Company
has no knowledge of a tax deficiency which has been asserted or threatened
against the Company or any Subsidiary.
(ff)
No
General Solicitation
.
Neither
the Company nor any person acting on behalf of the Company has offered or sold
any of the Securities by any form of general solicitation or general
advertising. The Company has offered the Securities for sale only to the
Investors and certain other “accredited investors” within the meaning of Rule
501 under the Securities Act.
(gg)
Foreign
Corrupt Practices.
Neither
the Company, any FCPA Subsidiary, nor to the knowledge of the Company or any
FCPA Subsidiary, any agent or other person acting on behalf of the Company
or
any FCPA Subsidiary, has (i) directly or indirectly, used any funds for unlawful
contributions, gifts, entertainment or other unlawful expenses related to
foreign or domestic political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed
to
disclose fully any contribution made by the Company, any FCPA Subsidiary (or
made by any person acting on its behalf of which the Company or any FCPA
Subsidiary is aware) which is in violation of law, or (iv) violated in any
material respect any provision of the FCPA, as amended.
(hh)
Accountants
.
The
Company’s and Lorain’s accountants are set forth on
Schedule
3.1(hh)
of the
Disclosure Schedule. To the knowledge of the Company, such accountants, who
the
Company expects will express their opinions with respect to the financial
statements of the Company and Lorain to be included in the Registration
Statement, are each a registered public accounting firms as required by the
Securities Act and are independent of the Company and Lorain, as the case may
be, in accordance with Rule 2-01 of Regulation S-X under the Exchange Act.
(ii)
Acknowledgment
Regarding Investors’ Purchase of Securities
.
The
Company acknowledges and agrees that each of the Investors is acting solely
in
the capacity of an arm’s length purchaser with respect to the Transaction
Documents and the transactions contemplated thereby. The Company further
acknowledges that no Investor is acting as a financial advisor or fiduciary
of
the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated thereby and any advice given by
any
Investor or any of their respective representatives or agents in connection
with
the Transaction Documents and the transactions contemplated thereby is merely
incidental to the Investors’ purchase of the Securities. The Company further
represents to each Investor that the Company’s decision to enter into this
Agreement and the other Transaction Documents has been based solely on the
independent evaluation of the transactions contemplated hereby by the Company
and its representatives.
(jj)
Acknowledgement
Regarding Investors’ Trading Activity
.
Anything
in this Agreement or elsewhere herein to the contrary notwithstanding (except
for Sections 3.2(f) and 4.5 hereof), it is understood and acknowledged by the
Company (i) that none of the Investors have been asked to agree, nor has any
Investor agreed, to desist from purchasing or selling, long and/or short,
securities of the Company, or “derivative” securities based on securities issued
by the Company or to hold the Securities for any specified term; (ii) that
past
or future open market or other transactions by any Investor, including Short
Sales, and specifically including, without limitation, Short Sales or
“derivative” transactions, before or after the closing of this or future private
placement transactions, may negatively impact the market price of the Company’s
publicly-traded securities; (iii) that any Investor, and counter-parties in
“derivative” transactions to which any such Investor is a party, directly or
indirectly, presently may have a “short” position in the Common Stock, and (iv)
that each Investor shall not be deemed to have any affiliation with or control
over any arm’s length counter-party in any “derivative” transaction. The Company
further understands and acknowledges that (a) one or more Investors may engage
in hedging activities at various times during the period that the Securities
are
outstanding, including, without limitation, during the periods that the value
of
the Warrant Shares deliverable with respect to Securities are being determined
and (b) such hedging activities (if any) could reduce the value of the existing
stockholders' equity interests in the Company at and after the time that the
hedging activities are being conducted. The Company acknowledges that such
aforementioned hedging activities do not constitute a breach of any of the
Transaction Documents.
(kk)
Regulation
M
.
The Company has not, and to its knowledge no one acting on its behalf has,
(i)
taken, directly or indirectly, any action designed to cause or to result in
the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of any of the Securities, (ii) sold, bid for,
purchased, or, paid any compensation for soliciting purchases of, any of the
Securities, or (iii) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company, other than,
in the case of clauses (ii) and (iii), compensation paid to the Company’s
placement agent in connection with the placement of the Securities.
3.2.
Representations
and Warranties of the Investors
.
Each
Investor hereby, for itself and for no other Investor, represents and warrants
to the Company as follows:
(a)
Organization;
Authority
.
Such
Investor is an entity duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization with the requisite
corporate or partnership power and authority to enter into and to consummate
the
transactions contemplated by the applicable Transaction Documents and otherwise
to carry out its obligations thereunder. The execution, delivery and performance
by such Investor of the transactions contemplated by this Agreement has been
duly authorized by all necessary corporate or, if such Investor is not a
corporation, such partnership, limited liability company or other applicable
like action, on the part of such Investor. Each of this Agreement and the
Registration Rights Agreement has been duly executed by such Investor, and
when
delivered by such Investor in accordance with the terms hereof, will constitute
the valid and legally binding obligation of such Investor, enforceable against
it in accordance with its terms, except as such enforceability may be limited
by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general
application.
(b)
Investment
Intent
.
Such
Investor is acquiring the Securities as principal for its own account for
investment purposes only and not with a view to or for distributing or reselling
such Securities or any part thereof, without prejudice, however, to such
Investor’s right at all times to sell or otherwise dispose of all or any part of
such Securities in compliance with applicable federal and state securities
laws.
Subject to the immediately preceding sentence, nothing contained herein shall
be
deemed a representation or warranty by such Investor to hold the Securities
for
any period of time. Such Investor is acquiring the Securities hereunder in
the
ordinary course of its business. Such Investor does not have any agreement
or
understanding, directly or indirectly, with any Person to distribute any of
the
Securities.
(c)
Investor
Status
.
At the
time such Investor was offered the Securities, it was, and at the date hereof
it
is, an “accredited investor” as defined in Rule 501(a) under the Securities Act.
Such Investor is not a registered broker-dealer under Section 15 of the Exchange
Act.
(d)
General
Solicitation
.
Such
Investor is not purchasing the Securities as a result of any advertisement,
article, notice or other communication regarding the Securities published in
any
newspaper, magazine or similar media or broadcast over television or radio
or
presented at any seminar or any other general solicitation or general
advertisement.
(e)
Access
to Information
.
Such
Investor acknowledges that it has reviewed the Disclosure Materials and has
been
afforded (i) the opportunity to ask such questions as it has deemed necessary
of, and to receive answers from, representatives of the Company concerning
the
terms and conditions of the offering of the Securities and the merits and risks
of investing in the Securities; (ii) access to information about the Company
and
the Subsidiaries and their respective financial condition, results of
operations, business, properties, management and prospects sufficient to enable
it to evaluate its investment; and (iii) the opportunity to obtain such
additional information that the Company possesses or can acquire without
unreasonable effort or expense that is necessary to make an informed investment
decision with respect to the investment. Neither such inquiries nor any other
investigation conducted by or on behalf of such Investor or its representatives
or counsel shall modify, amend or affect such Investor’s right to rely on the
truth, accuracy and completeness of the Disclosure Materials and the Company’s
representations and warranties contained in the Transaction Documents.
(f)
Certain
Trading Activities
.
Such
Investor has not directly or indirectly, nor has any Person acting on behalf
of
or pursuant to any understanding with such Investor, engaged in any transactions
in the securities of the Company (including, without limitations, any Short
Sales involving the Company’s securities) since the earlier to occur of (1) the
time that such Investor was first contacted by the Company or the Placement
Agent regarding an investment in the Company and (2) the 30
th
day
prior to the date of this Agreement. Notwithstanding the foregoing, in the
case
of an Investor that is a multi-managed investment vehicle whereby separate
portfolio managers manage separate portions of such Investor's assets and the
portfolio managers have no direct knowledge of the investment decisions made
by
the portfolio managers managing other portions of such Investor's assets, the
representation set forth above shall only apply with respect to the portion
of
assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement. Such Investor covenants
that
neither it nor any Person acting on its behalf or pursuant to any understanding
with it will engage in any transactions in the securities of the Company
(including Short Sales) prior to the time that the transactions contemplated
by
this Agreement are publicly disclosed.
(g)
Independent
Investment Decision
.
Such
Investor has independently evaluated the merits of its decision to purchase
the
Securities pursuant to the Transaction Documents, and such Investor confirms
that it has not relied on the advice of any other Investor’s business and/or
legal counsel in making such decision. Such Investor has not relied on the
business or legal advice of Placement Agent or any of its agents, counsel or
Affiliates in making its investment decision hereunder, and confirms that none
of such Persons has made any representations or warranties to such Investor
in
connection with the transactions contemplated by the Transaction
Documents.
ARTICLE
4.
OTHER
AGREEMENTS OF THE PARTIES
4.1.
(a)
Securities
may only be disposed of in compliance with state and federal securities laws.
In
connection with any transfer of the Securities other than pursuant to an
effective registration statement, to the Company, to an Affiliate of an Investor
or in connection with a pledge as contemplated in Section 4.1(b), the Company
may require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor, the form and substance of which opinion
shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred Securities under
the
Securities Act.
(b)
Certificates
evidencing the Securities will contain the following legend, until such time
as
they are not required under Section 4.1(c):
[NEITHER
THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES
HAVE BEEN REGISTERED] [THESE SECURITIES HAVE NOT BEEN REGISTERED] WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE
IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL
TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. [THESE SECURITIES AND THE SECURITIES ISSUABLE UPON
CONVERSION OF THESE SECURITIES] [THESE SECURITIES] MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.
The
Company acknowledges and agrees that an Investor may from time to time pledge,
and/or grant a security interest in some or all of the Securities pursuant
to a
bona fide margin agreement in connection with a bona fide margin account and,
if
required under the terms of such agreement or account, such Investor may
transfer pledged or secured
Securities
to the
pledgees or secured parties. Such a pledge or transfer would not be subject
to
approval or consent of the Company and no legal opinion of legal counsel to
the
pledgee, secured party or pledgor shall be required in connection with the
pledge, but such legal opinion may be required in connection with a subsequent
transfer following default by the Investor transferee of the pledge. No notice
shall be required of such pledge. At the appropriate Investor’s expense, the
Company will execute and deliver such reasonable documentation as a pledgee
or
secured party of Securities may reasonably request in connection with a pledge
or transfer of the Securities including the preparation and filing of any
required prospectus supplement under Rule 424(b)(3) of the Securities Act or
other applicable provision of the Securities Act to appropriately amend the
list
of Selling Stockholders thereunder. Except as otherwise provided in Section
4.1(c), any Securities subject to a pledge or security interest as contemplated
by this Section 4.1(b) shall continue to bear the legend set forth in this
Section 4.1(b) and be subject to the restrictions on transfer set forth in
Section 4.1(a).
(c)
Certificates
evidencing Underlying Shares shall not contain any legend (including the legend
set forth in Section 4.1(b)): (i) following a sale or transfer of such
Underlying Shares pursuant to an effective registration statement (including
a
Registration Statement), or (ii) following a sale or transfer of such Underlying
Shares pursuant to Rule 144 (assuming the transferee is not an Affiliate of
the
Company), or (iii) while such Underlying Shares are eligible for sale under
Rule
144(k). If an Investor shall make a sale or transfer of Underlying Shares either
(x) pursuant to Rule 144 or (y) pursuant to a registration statement and in
each
case shall have delivered to the Company or the Company’s transfer agent the
certificate representing Underlying Shares containing a restrictive legend
which
are the subject of such sale or
transfer
and a representation letter in customary form
(the
date of
such sale or transfer and Underlying Share delivery being the
“Share
Delivery Date”)
and (1)
the Company shall fail to deliver or cause to be delivered to such Investor
a
certificate representing such Underlying Shares that is free from all
restrictive or other legends by the third Trading Day following the Share
Delivery Date and (2) following such third Trading Day after the Share Delivery
Date and prior to the time such Underlying Shares are received free from
restrictive legends, the Investor, or any third party on behalf of such
Investor, purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Investor of such
Underlying Shares (a
"Buy-In"
),
then
the Company shall pay in cash to the Investor (for costs incurred either
directly by such Investor or on behalf of a third party) the amount by which
the
total purchase price paid for Common Stock as a result of the Buy-In (including
brokerage commissions, if any) exceed the proceeds received by such Investor
as
a result of the sale to which such Buy-In relates. The Investor shall provide
the Company written notice indicating the amounts payable to the Investor in
respect of the Buy-In.
4.2.
Furnishing
of Information
.
As long
as any Investor owns the Securities, the Company covenants to timely file (or
obtain extensions in respect thereof and file within the applicable grace
period) all reports required to be filed by the Company after the date hereof
pursuant to the Exchange Act. As long as any Investor owns Securities, if the
Company is not required to file reports pursuant to such laws, it will prepare
and furnish to the Investors and make publicly available in accordance with
Rule
144(c) such information as is required for the Investors to sell the
Underlying
Shares
under Rule 144. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell the
Underlying
Shares
and Warrant Shares without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144.
4.3.
Integration
.
The
Company shall not, and shall use its best efforts to ensure that no Affiliate
of
the Company shall, sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the Securities
Act) that would be integrated with the offer or sale of the Securities in a
manner that would require the registration under the Securities Act of the
sale
of the Securities to the Investors, or that would be integrated with the offer
or sale of the Securities for purposes of the rules and regulations of any
Trading Market in a manner that would require stockholder approval of the sale
of the Securities to the Investors.
4.4.
Subsequent
Registrations
.
Other
than pursuant to the Registration Statement, prior to the Effective Date, the
Company may not file any registration statement (other than on Form S-8) with
the Commission with respect to any securities of the Company.
4.5.
Securities
Laws Disclosure; Publicity
.
By 9:00
a.m. (New York time) on the Trading Day following the Closing Date, the Company
shall issue a press release disclosing the transactions contemplated hereby
and
the Closing. By the fourth Trading Day following the execution of this Agreement
the Company will file a Current Report on Form 8-K disclosing the material
terms
of the Transaction Documents (and attach as exhibits thereto the Transaction
Documents), and by the fourth Trading Day following the Closing Date the Company
will file a Current Report on Form 8-K to disclose the Closing and the
information and financial statements required by Item 9.01(c) of Form 8-K.
In
addition, the Company will make such other filings and notices in the manner
and
time required by the Commission and the Trading Market on which the Common
Stock
is listed. Notwithstanding the foregoing, the Company shall not publicly
disclose the name of any Investor, or include the name of any Investor in any
filing with the Commission (other than the Registration Statement and any
exhibits to filings made in respect of this transaction in accordance with
periodic filing requirements under the Exchange Act) or any regulatory agency
or
Trading Market, without the prior written consent of such Investor, except
to
the extent such disclosure is required by law or Trading Market
regulations.
4.6.
Limitation
on Issuance of Future Priced Securities
.
During
the six months following the Closing Date, the Company shall not issue any
“Future Priced Securities” as such term is described by NASD
IM-4350-1.
4.7.
Indemnification
of Investors
.
Subject
to the provisions of this Section 4.7, the Company will indemnify and hold
each
Investor and its directors, officers, shareholders, members, partners, employees
and agents (and any other Persons with a functionally equivalent role of a
Person holding such titles notwithstanding a lack of such title or any other
title), each Person who controls such Investor (within the meaning of Section
15
of the Securities Act and Section 20 of the Exchange Act), and the directors,
officers, shareholders, agents, members, partners or employees (and any other
Persons with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title) of such controlling
persons (each, a “
Investor
Party
”)
harmless from any and all actual losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys’ fees and costs of
investigation that any such Investor Party may suffer or incur as a result
of or
relating to (a) any breach of any of the representations, warranties, covenants
or agreements made by the Company or the Beneficial Owners in this Agreement
or
in the other Transaction Documents or (b) any action instituted against an
Investor, or any of them or their respective Affiliates, by any stockholder
of
the Company with respect to any of the transactions contemplated by the
Transaction Documents (unless such action is based upon a breach of such
Investor’s representations, warranties or covenants under the Transaction). If
any action shall be brought against any Investor Party in respect of which
indemnity may be sought pursuant to this Agreement, such Investor Party shall
promptly notify the Company in writing, and the Company shall have the right
to
assume the defense thereof with counsel of its own choosing reasonably
acceptable to the Investor Party. Any Investor Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense
of
such Investor Party except to the extent that (i) the employment thereof has
been specifically authorized by the Company in writing, (ii) the Company has
failed after a reasonable period of time to assume such defense and to employ
counsel or (iii) in such action there is, in the reasonable opinion of such
separate counsel, a material conflict on any material issue between the position
of the Company and the position of such Investor Party, in which case the
Company shall be responsible for the reasonable fees and expenses of no more
than one such separate counsel. The Company will not be liable to any Investor
Party under this Agreement (i) for any settlement by a Investor Party effected
without the Company’s prior written consent, which shall not be unreasonably
withheld or delayed; or (ii) to the extent, but only to the extent that a loss,
claim, damage or liability is attributable to any Investor Party’s breach of any
of the representations, warranties, covenants or agreements made by such
Investor Party in this Agreement or in the other Transaction Documents as
determined by a final non-appealable judgment of a court of competent
jurisdiction.
4.8.
Reimbursement
.
If any
Investor becomes involved in any capacity in any Proceeding by or against any
Person who is a stockholder of the Company (except as a result of (i)
Proceedings brought by another Investor against such Investor, (ii) sales,
pledges, margin sales and similar transactions by such Investor to or with
any
other stockholder or (iii) as a result of a breach of such Investor’s
representations, warranties or covenants under the Transaction Documents or
any
violations by such Investor of state or federal securities laws or any conduct
by such Investor which constitutes fraud, gross negligence, willful misconduct
or malfeasance), solely as a result of such Investor’s acquisition of the
Securities under this Agreement, the Company will reimburse such Investor for
its reasonable legal and other expenses (including the cost of any
investigation, preparation and travel in connection therewith) incurred in
connection therewith, as such expenses are incurred. The reimbursement
obligations of the Company under this paragraph shall be in addition to any
liability which the Company may otherwise have, shall extend upon the same
terms
and conditions to any Affiliates of the Investors who are actually named in
such
action, proceeding or investigation, and partners, directors, agents, employees
and controlling persons (if any), as the case may be, of the Investor and any
such Affiliate, and shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Company, the
Investors and any such Affiliate and any such Person. The Company also agrees
that neither the Investors nor any such Affiliates, partners, directors, agents,
employees or controlling persons shall have any liability to the Company or
any
Person asserting claims on behalf of or in right of the Company solely as a
result of acquiring the Securities under this Agreement, except if such claim
arises primarily from a breach of such Investor’s representations, warranties or
covenants under the Transaction Documents or any agreements or understandings
such Purchaser may have with any such stockholder or any violations by the
Investor of state or federal securities laws or any conduct by such Investor
which constitutes fraud, gross negligence, willful misconduct or
malfeasance.
4.9.
Non-Public
Information
.
The Company covenants and agrees that neither it nor any other Person acting
on
its behalf will provide any Investor or its agents or counsel with any
information that the Company believes constitutes material non-public
information, unless prior thereto such Investor shall have executed a written
agreement regarding the confidentiality and use of such information. The Company
understands and confirms that each Investor shall be relying on the foregoing
representations in effecting transactions in securities of the
Company.
4.10.
Listing
of Securities
.
The
Company agrees, (i) if the Company applies to have the Common Stock traded
on
any other Trading Market, it will include in such application the Underlying
Shares and Warrant Shares, and will take such other action as is necessary
or
desirable to cause the Underlying Shares and Warrant Shares to be listed on
such
other Trading Market as promptly as possible, and (ii) it will take all action
reasonably necessary to continue the listing and trading of its Common Stock
on
a Trading Market and will comply in all material respects with the Company’s
reporting, filing and other obligations under the bylaws or rules of the Trading
Market.
4.11.
Use
of
Proceeds
.
The
Company will use the net proceeds from the sale of the Shares hereunder for
working capital purposes and not for the satisfaction of any portion of the
Company’s debt (other than payment of trade payables and accrued expenses in the
ordinary course of the Company’s business and consistent with prior practices),
or to redeem any Common Stock or Common Stock Equivalents.
4.12.
Make
Good Shares
.
The
Company covenants and agrees that upon any transfer under Article 5 of 2007
Make
Good Shares and 2008 Make Good Shares to the Investors in accordance with
Section 5 of the Make Good Escrow Agreement, the Company shall promptly reissue
such 2007 Make Good Shares or 2008 Make Good Shares in the applicable Investor’s
name and deliver the same as directed by such Investor.
4.13.
Stockholder
Approval
. The Company covenants and agrees to effect the approval of its
stockholders of (i) an increase in the number of authorized shares of Common
Stock to 200,000,000 shares, (ii) the change the name of the Company from
Millennium Quest, Inc. to Lorain International Food Group, Inc., and (iii)
the
Reverse Split, which stockholder approval shall be deemed to occur on the
twentieth day following the mailing by the Company of the definitive information
statement on Schedule 14C pertaining thereto (collectively “
Stockholder
Approval
”)
in
accordance with Rule 14c-2(b) under the Exchange Act. The Company agrees to
effect Stockholder Approval as soon as possible, but in no event later than
May
31, 2007.
4.14.
Acknowledgment
of Dilution
. The Company acknowledges that the issuance of Underlying Shares
upon conversion of Shares will result in substantial dilution of the outstanding
shares of Common Stock. The Company further acknowledges that its obligation
to
honor conversions under the Shares is unconditional and absolute and not subject
to any right of set off, counterclaim, delay or reduction, regardless of the
effect of any such dilution or any claim that the Company may have against
any
Investor.
4.15.
Reservation
of Shares
. Upon Stockholder Approval and the Amendment Filing, the Company
shall maintain a reserve from its duly authorized shares of Common Stock to
comply with its conversion obligations under the Shares and exercise obligation
under the Warrants. If on any date the Company would be, if notice of conversion
or exercise were to be delivered on such date, precluded from issuing the number
of Underlying Shares or Warrant Shares issuable upon conversion in full of
the
Shares or exercise of the Warrants due to the unavailability of a sufficient
number of authorized but unissued or reserved shares of Common Stock, then
the
Board of Directors of the Company shall promptly prepare and mail to the
stockholders of the Company proxy materials or other applicable materials
requesting authorization to amend the Company’s certificate of incorporation or
other organizational document to increase the number of shares of Common Stock
which the Company is authorized to issue so as to provide enough shares for
issuance of the Underlying Shares and Warrant Shares. In connection therewith,
the Board of Directors shall (a) adopt proper resolutions authorizing such
increase, (b) recommend to and otherwise use its best efforts to promptly and
duly obtain stockholder approval (including the hiring of a nationally
recognized proxy solicitor firm) to carry out such resolutions (and hold a
special meeting of the stockholders as soon as practicable, but in any event
not
later than the 60
th
day
after delivery of the proxy or other applicable materials relating to such
meeting) and (c) within five Business Days of obtaining such stockholder
authorization, file an appropriate amendment to the Company’s certificate of
incorporation or other organizational document to evidence such
increase.
4.16.
Retention
of U.S. Counsel.
As a further inducement to the Investors to enter into this
Agreement and purchase the Securities offered hereby, the Company covenants
and
agrees to use its good faith best efforts to retain, and rely upon, the law
firm
of Thelen Reid Brown Raysman & Steiner LLP as primary counsel on matters
relating to U.S. corporate and securities laws, including, but not limited
to,
the representation of the Company in connection with the preparation, filing
and
prosecution of the Registration Statement and all other reports, registration
statements and filings to be made by the Company with the Commission.
ARTICLE
5.
REPRESENTATIONS,
WARRANTIES AND COVENANTS
OF
THE
BENEFICIAL OWNERS
5.1.
Representations
and Warranties of the Company
.
As an
inducement to the Investors to enter into this Agreement and purchase the
Securities, each of the Beneficial Owner hereby makes the following
representations and warranties to, and covenants and agreements with, each
Investor:
(a)
Authority
.
Such
Beneficial Owner has all individual power and authority to enter into this
Agreement and to carry out its obligations hereunder. This Agreement has been
duly executed by such Beneficial Owner, and when delivered by such Beneficial
Owner in accordance with the terms hereof, will constitute the valid and legally
binding obligation of such Beneficial Owner, enforceable against it in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.
(b)
Record
and Beneficial Ownership
.
Immediately prior to the closing of the transactions under the Share Exchange
Agreement, Hisashi Akazawa was the sole record and beneficial owner of all
of
the outstanding capital shares of Lorain, as the term beneficial owner is
defined under Rule 13d-3(d) under the Exchange Act, free and clear of all
pledges, liens and encumbrances. Hisashi Akazawa is the sole record owner,
and
Hisashi Akazawa and Si Chen are the sole beneficial owners, of all 697,633
shares Series B Preferred Stock issued by the Company under the Share Exchange
Agreement, as the term beneficial owner is defined under Rule 13d-3(d) under
the
Exchange Act, free and clear of all pledges, liens and encumbrances.
(c)
Share
Exchange Agreement
.
The
representations and warranties of Lorain and Hisashi Akazawa contained in the
Share Exchange Agreement were true and correct in all material respects as
of
the date when made and as of the closing of the transactions thereunder as
though made on and as of such date. Lorain and Hisashi Akazawa performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required to be performed, satisfied or complied with by them
under the Share Exchange Agreement at or prior to the closing of the
transactions thereunder.
5.2.
Make
Good Shares.
(a)
2007
Make Good
.
The
Beneficial Owners agree that if the After-Tax Net Income for the fiscal year
ended
December
31, 2007
reported
in the Company’s Annual Report on Form 10-K for the fiscal year ending December
31, 2007, as filed with the Commission (the
“2007
Annual Report”
)
is less
than $9,266,000, inclusive of all commissions, legal fees, auditing fees and
other fees and expenses incurred in the Lorain Acquisition (the
“2007
Guaranteed ATNI”
),
the
Beneficial Owners will transfer to each Investor, for no additional
consideration, their pro rata share of 302,337 shares of Series B Preferred
Stock or the equivalent amount of Common Stock (adjusted for the Reverse Split)
following a conversion of such shares of Series B Preferred Stock in accordance
with the Certificate of Designation (for this purpose, any such conversion
to be
conducted without regard to any restrictions or caps on conversion contained
in
the Certificate of Designation or otherwise applicable to such shares) (the
“2007
Make Good Shares”
).
If the
Company’s audited consolidated financial statements for the fiscal year ended
December 31, 2007 specify that the 2007 Guaranteed ATNI shall have been
achieved, no transfer of the 2007 Make Good Shares shall be required by this
Section 5.2(a) and all 2007 Make Good Shares deposited with the Make Good Escrow
Agent shall be returned to the Beneficial Owners within seven Business Days
after the date which the 2007 Annual Report is filed with the Commission and
otherwise in accordance with the Make Good Escrow Agreement. Transfers of 2007
Make Good Shares required under this Section 5.2(a) shall be made to Investors
within seven Business Days after the date which the 2007 Annual Report is filed
with the Commission and otherwise in accordance with the Make Good Escrow
Agreement.
(b)
2008
Make Good
.
The
Beneficial Owners agree that, if the Company’s After-Tax Net Income reported in
the Company’s Annual Report on Form 10-K for the fiscal year ending December 31,
2008, as filed with the Commission (the
“2008
Annual Report”
)
is less
than $12,956,000 (the
“2008
Guaranteed ATNI”
),
the
Beneficial Owners will transfer to each Investor for no additional
consideration, their pro rata share of 302,337 shares of Series B Preferred
Stock, or the equivalent amount of Common Stock (adjusted for the Reverse Split)
following a conversion of such shares of Series B Preferred Stock in accordance
with the Certificate of Designation (for this purpose, any such conversion
to be
conducted without regard to any restrictions or caps on conversion contained
in
the Certificate of Designation or otherwise applicable to such shares) (the
“2008
Make Good Shares”
).
If the
2008 Annual Report indicates that the Company shall have satisfied the 2008
Guaranteed ATNI test specified above for such period, then no transfer to
Investors of 2008 Make Good Shares shall be required by this Section 5.2(b)
and
all 2008 Make Good Shares deposited with the Make Good Escrow Agent shall be
returned to the Beneficial Owners within seven Business Days after the date
which the Company’s 2008 Annual Report is filed with the Commission and
otherwise in accordance with the Make Good Escrow Agreement. Transfers of 2008
Make Good Shares required under this Section 5.2(b) shall be made to Investors
within seven Business Days after the date which the Company’s 2008 Annual Report
is filed with the Commission and otherwise in accordance with the Make Good
Escrow Agreement.
(c)
Make
Good Escrow
.
In
connection with the foregoing, the Beneficial Owners agree that within one
Trading Day following the Closing, the Beneficial Owners will deposit all
potential 2007 Make Good Shares and 2008 Make Good Shares into escrow in
accordance with the Make Good Escrow Agreement along with undated stock powers
with Medallion guarantees (or with such other instruments of transfer as in
accordance with the requirements of the Company’s transfer agent), in the form
and number acceptable to the Investors in their reasonable discretion, and
the
handling and disposition of the 2007 Make Good Shares and 2008 Make Good Shares
shall be governed by this Section 5.2 and such Make Good Escrow Agreement.
The
parties hereby agree that the Beneficial Owners’ obligation to transfer shares
of Common Stock to Investors pursuant to this Section 5.2 shall continue to
run
to the benefit of an Investor only to the extent of the portion of such Shares
or, in the case of their conversion, Underlying Shares which have not been
transferred or sold by such Investor as of the date the Company files with
the
Commission the 2007 Annual Report or 2008 Annual Report, as the case may be,
and
that Investors shall not have the right to assign their rights to receive all
or
any such shares of Common Stock to other Persons in conjunction with negotiated
sales or transfers of any of their Securities or otherwise.
The
2007
Make Good Shares or 2008 Make Good Shares, as applicable, corresponding to
Shares or, in the case of their conversion, Underlying Shares which have been
transferred or sold by an Investor, shall be released from the Make Good Escrow
and returned to the Beneficial Owners within seven Business Days after the
date
which the Company’s 2007 Annual Report or 2008 Annual Report, as applicable, is
filed with the Commission.
(d)
After-Tax
Net Income
.
For
purposes of this Section 5.2, the term After-Tax Net Income or ATNI shall mean
the after-tax net income of the Company and its consolidated subsidiaries
prepared in accordance with GAAP consistently applied; provided in the event
that the release of the 2007 Make Good Shares or the 2008 Make Good Shares
to the Investors or the Beneficial Owners is deemed to be an expense or
deduction from revenues/income of the Company for the applicable year, as
required under GAAP, then such expense or deduction shall be excluded for
purposes of determining whether or not the 2007 Guaranteed ATNI or the 2008
Guaranteed ATNI has been achieved by the Company.
(e)
Pro
Rata Share
.
Each
Investor’s pro rata share of the 2007 Make Good Shares or the 2008 Make Good
Shares shall be determined by dividing the 2007 Make Good Shares or the 2008
Make Good Shares, as the case may be, by a fraction the denominator of which
is
the aggregate Investment Amount of all Shares or, in the case of their
conversion, Underlying Shares held by the Investors as of the date the Company
files with the Commission the 2007 Annual Report or 2008 Annual Report, as
the
case may be (each such date, a “
Make
Good Determination Date
”),
and
the numerator of which is the Investment Amount of the Shares or, in the case
of
their conversion, Underlying Shares held by such Investor as of such Make Good
Determination Date.
ARTICLE
6.
CONDITIONS
PRECEDENT TO CLOSING
6.1.
Conditions
Precedent to the Obligations of the Investors to
Purchase
Securities
.
The
obligation of each Investor to acquire the Shares and Warrants at the Closing
is
subject to the satisfaction or waiver by such Investor, at or before the
Closing, of each of the following conditions:
(a)
Representations
and Warranties
.
The
representations and warranties of the Company and the Beneficial Owners shall
be
true and correct in all material respects (except for those representations
and
warranties that are qualified by materiality or Material Adverse Effect, which
shall be true and correct in all respects) as of the date when made and as
of
the Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date, which shall remain true and correct
as of such specific date);
(b)
Performance
.
The
Company and the Beneficial Owners shall have performed, satisfied and complied
in all material respects with all covenants, agreements and conditions required
by the Transaction Documents to be performed, satisfied or complied with by
each
of them at or prior to the Closing;
(c)
No
Injunction
.
No
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any
of
the transactions contemplated by the Transaction Documents;
(d)
Adverse
Changes
.
Since
the date of execution of this Agreement, no event or series of events shall
have
occurred that reasonably could have or result in a Material Adverse Effect
or a
material adverse change with respect to the Company or Lorain;
(e)
Company
Deliverables
.
The
Company shall have delivered the Company Deliverables in accordance with Section
2.2(a); and
(f)
Termination
.
This
Agreement shall not have been terminated as to such Investor in accordance
with
Section 7.5.
6.2.
Conditions
Precedent to the Obligations of the Company
to sell
Securities
.
The
obligation of the Company to sell Shares and Warrants at the Closing is subject
to the satisfaction or waiver by the Company, at or before the Closing, of
each
of the following conditions:
(a)
Representations
and Warranties
.
The
representations and warranties of the Investors shall be true and correct in
all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of the Closing Date
as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall remain true and correct as of such specific
date);
(b)
Performance
.
Each
Investor shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by such Investor at or
prior to the Closing;
(c)
No
Injunction
.
No
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any
of
the transactions contemplated by the Transaction Documents;
(d)
Investors
Deliverables
.
Each
Investor shall have delivered its Investors Deliverables in accordance with
Section 2.2(b); and
(e)
Termination
.
This
Agreement shall not have been terminated as to such Investor in accordance
with
Section 7.5.
ARTICLE
7.
MISCELLANEOUS
7.1.
Fees
and Expenses
.
Each
party shall pay the fees and expenses of its advisers, counsel, accountants
and
other experts, if any, and all other expenses incurred by such party incident
to
the negotiation, preparation, execution, delivery and performance of the
Transaction Documents. The Company shall pay all stamp and other taxes and
duties levied in connection with the sale of the Securities.
7.2.
Entire
Agreement
.
The
Transaction Documents, together with the Exhibits and Schedules thereto, contain
the entire understanding of the parties with respect to the subject matter
hereof and supersede all prior agreements, understandings, discussions and
representations, oral or written, with respect to such matters, which the
parties acknowledge have been merged into such documents, exhibits and
schedules.
7.3.
Notices
.
Any and
all notices or other communications or deliveries required or permitted to
be
provided hereunder shall be in writing and shall be deemed given and effective
on the earliest of (a) the date of transmission, if such notice or communication
is delivered via facsimile (provided the sender receives a machine-generated
confirmation of successful transmission) at the facsimile number specified
in
this Section prior to 3:30 p.m. (New York City time) on a Trading Day, (b)
the
next Trading Day after the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile number specified in this Section
on
a day that is not a Trading Day or later than 3:30 p.m. (New York City time)
on
any Trading Day, (c) the Trading Day following the date of mailing, if sent
by
U.S. nationally recognized overnight courier service, or (d) upon actual receipt
by the party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
|
|
If to the Company:
|
Millennium
Quest, Inc.
Beihuan
Road
Junan
County
Shandong,
China
Attn:
Mr. Si Chen
Facsimile:
(0086539) 7314886 7311026
|
|
|
|
|
|
|
With a copy to:
|
Thelen Reid Brown Raysman & Steiner LLP
701
8
th
Street NW
Washington,
D.C. 20001
Facsimile:
(202) 654-1804
Attn.:
Louis A. Bevilacqua, Esq.
|
|
|
|
|
|
|
If to an Investor:
|
To the address set forth under such
Investor’s name on the signature pages hereof;
|
|
|
|
|
|
|
If to the Beneficial
Owners:
|
Beihuan Road
Junan
County
Shandong,
China
Facsimile:
(0086539) 7314886 7311026
|
|
|
|
|
|
|
With a copy to:
|
King and Wood PRC Lawyers
40th
Floor, Office Tower A, Beijing Fortune Plaza,
7
Dongsanhuan Zhoulu, Chaoyang District,
Beijing
100020, China
Facsimile:
(008610) 5878-5566
Attn.:
Charles Law
|
or
such
other address as may be designated in writing hereafter, in the same manner,
by
such Person.
7.4.
Amendments;
Waivers; No Additional Consideration
.
No
provision of this Agreement may be waived or amended except in a written
instrument signed by the Company and the Investors holding a majority of the
Shares or, in the event of their conversion, Underlying Shares. No waiver of
any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver
of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right. No
consideration shall be offered or paid to any Investor to amend or consent
to a
waiver or modification of any provision of any Transaction Document unless
the
same consideration is also offered to all Investors who then hold Securities.
In
the event of any discrepancy between this Agreement and the Make Good Escrow
Agreement, the terms of the Make Good Escrow Agreement shall apply to the extent
of such discrepancy.
7.5.
Termination
.
This
Agreement may be terminated prior to Closing:
(a)
by
written agreement of the Investors and the Company; and
(b)
by
the
Company or an Investor (as to itself but no other Investor) upon written notice
to the other, if the Closing shall not have taken place by 6:30 p.m. Eastern
time on the Outside Date;
provided
,
that
the right to terminate this Agreement under this Section 7.5(b) shall not
be available to any Person whose failure to comply with its obligations under
this Agreement has been the cause of or resulted in the failure of the Closing
to occur on or before such time.
In
the
event of a termination pursuant to this Section, the Company shall promptly
notify all non-terminating Investors. Upon a termination in accordance with
this
Section 7.5, the Company and the terminating Investor(s) shall not have any
further obligation or liability (including as arising from such termination)
to
the other and no Investor will have any liability to any other Investor under
the Transaction Documents as a result therefrom.
7.6.
Construction
.
The
headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof. The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party. This Agreement shall be
construed as if drafted jointly by the parties, and no presumption or burden
of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Agreement or any of the Transaction
Documents.
7.7.
Successors
and Assigns
.
This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the Investors. Any Investor may assign any or all of its rights
under
this Agreement to any Person to whom such Investor assigns or transfers any
Shares, provided such transferee agrees in writing to be bound, with respect
to
the transferred Shares, by the provisions hereof that apply to the
“Investors.”
7.8.
No
Third-Party Beneficiaries
.
This
Agreement is intended for the benefit of the parties hereto and their respective
successors and permitted assigns and is not for the benefit of, nor may any
provision hereof be enforced by, any other Person, except as otherwise set
forth
in Section 4.7 (as to each Investor Party).
7.9.
Governing
Law
.
All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by and construed and enforced in accordance
with the internal laws of the State of New York, without regard to the
principles of conflicts of law thereof. Each party agrees that all Proceedings
concerning the interpretations, enforcement and defense of the transactions
contemplated by this Agreement and any other Transaction Documents (whether
brought against a party hereto or its respective Affiliates, employees or
agents) shall be commenced exclusively in the New York Courts. Each party hereto
hereby irrevocably submits to the exclusive jurisdiction of the New York Courts
for the adjudication of any dispute hereunder or in connection herewith or
with
any transaction contemplated hereby or discussed herein (including with respect
to the enforcement of the any of the Transaction Documents), and hereby
irrevocably waives, and agrees not to assert in any Proceeding, any claim that
it is not personally subject to the jurisdiction of any such New York Court,
or
that such Proceeding has been commenced in an improper or inconvenient forum.
Each party hereto hereby irrevocably waives personal service of process and
consents to process being served in any such Proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence
of
delivery) to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
Each party hereto hereby irrevocably waives, to the fullest extent permitted
by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Agreement or the transactions contemplated
hereby. If either party shall commence a Proceeding to enforce any provisions
of
a Transaction Document, then the prevailing party in such Proceeding shall
be
reimbursed by the other party for its reasonable attorneys’ fees and other costs
and expenses incurred with the investigation, preparation and prosecution of
such Proceeding.
7.10.
Survival
.
The
representations, warranties, agreements and covenants contained herein shall
survive the Closing and the delivery of the Shares and Warrants.
7.11.
Execution
.
This
Agreement may be executed in two or more counterparts, all of which when taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to
the
other party, it being understood that both parties need not sign the same
counterpart. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid and binding obligation of
the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile signature page were an original
thereof.
7.12.
Severability
.
If any
provision of this Agreement is held to be invalid or unenforceable in any
respect, the validity and enforceability of the remaining terms and provisions
of this Agreement shall not in any way be affected or impaired thereby and
the
parties will attempt to agree upon a valid and enforceable provision that is
a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.
7.13.
Rescission
and Withdrawal Right
.
Notwithstanding anything to the contrary contained in (and without limiting
any
similar provisions of) the Transaction Documents, whenever any Investor
exercises a right, election, demand or option under a Transaction Document
and
the Company does not timely perform its related obligations within the periods
therein provided, then such Investor may rescind or withdraw, in its sole
discretion from time to time upon written notice to the Company, any relevant
notice, demand or election in whole or in part without prejudice to its future
actions and rights.
7.14.
Replacement
of Securities
.
If any
certificate or instrument evidencing any Securities is mutilated, lost, stolen
or destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation thereof, or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and
customary and reasonable indemnity, if requested. The applicants for a new
certificate or instrument under such circumstances shall also pay any reasonable
third-party costs associated with the issuance of such replacement Securities.
If a replacement certificate or instrument evidencing any Securities is
requested due to a mutilation thereof, the Company may require delivery of
such
mutilated certificate or instrument as a condition precedent to any issuance
of
a replacement.
7.15.
Remedies
.
In
addition to being entitled to exercise all rights provided herein or granted
by
law, including recovery of damages, each of the Investors and the Company will
be entitled to specific performance under the Transaction Documents. The parties
agree that monetary damages may not be adequate compensation for any loss
incurred by reason of any breach of obligations described in the foregoing
sentence and hereby agrees to waive in any action for specific performance
of
any such obligation the defense that a remedy at law would be
adequate.
7.16.
Payment
Set Aside
.
To the
extent that the Company makes a payment or payments to any Investor pursuant
to
any Transaction Document or an Investor enforces or exercises its rights
thereunder, and such payment or payments or the proceeds of such enforcement
or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other person under any law (including, without limitation,
any
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full
force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
7.17.
Independent
Nature of
Investors
’
Obligations and Rights
.
The
obligations of each Investor under any Transaction Document are several and
not
joint with the obligations of any other Investor, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor under any Transaction Document. The decision of each Investor to
purchase Securities pursuant to the Transaction Documents has been made by
such
Investor independently of any other Investor. Nothing contained herein or in
any
Transaction Document, and no action taken by any Investor pursuant thereto,
shall be deemed to constitute the Investors as a partnership, an association,
a
joint venture or any other kind of entity, or create a presumption that the
Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents.
Each
Investor acknowledges that no other Investor has acted as agent for such
Investor in connection with making its investment hereunder and that no Investor
will be acting as agent of such Investor in connection with monitoring its
investment in the Securities or enforcing its rights under the Transaction
Documents. Each Investor shall be entitled to independently protect and enforce
its rights, including without limitation the rights arising out of this
Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Investor to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that each of the Investors
has been provided with the same Transaction Documents for the purpose of closing
a transaction with multiple Investors and not because it was required or
requested to do so by any Investor. Each Investor represents that it has been
represented by its own separate legal counsel in its review and negotiations
of
this Agreement and the Transaction Documents.
7.18.
Limitation
of Liability
.
Notwithstanding anything herein to the contrary, the Company acknowledges and
agrees that the liability of an Investor arising directly or indirectly, under
any Transaction Document of any and every nature whatsoever shall be satisfied
solely out of the assets of such Investor, and that no trustee, officer, other
investment vehicle or any other Affiliate of such Investor or any investor,
shareholder or holder of shares of beneficial interest of such a Investor shall
be personally liable for any liabilities of such Investor.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE
PAGES FOLLOW]
IN
WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as
of
the date first indicated above.
|
|
MILLENNIUM
QUEST, INC.
|
|
|
|
|
|
By:______________________________
Si
Chen, Chief
Executive Officer
Only
as to Sections 5 and 7 herein:
____________________________
Hisashi
Akazawa
____________________________
Si
Chen
|
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE
PAGES FOR INVESTORS FOLLOW]
IN
WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as
of
the date first indicated above.
|
|
NAME
OF INVESTOR
_________________________________________
By:
______________________________________
Name:
Title:
Shares
Subscribed For: ______________________
Warrants
Subscribed For:____________________
Investment
Amount: $_______________________
Tax
ID No.:_______________________________
|
|
|
|
|
|
ADDRESS
FOR NOTICE
c/o:
___________________________________
Street:
_________________________________
City/State/Zip:___________________________
Attention:______________________________
Tel:___________________________________
Fax:___________________________________
|
|
|
|
|
|
DELIVERY
INSTRUCTIONS
(if
different from above)
c/o:
___________________________________
Street:
_________________________________
City/State/Zip:___________________________
Attention:______________________________
Tel:___________________________________
|
Exhibit
10.2
MAKE
GOOD ESCROW AGREEMENT
This
Make
Good Escrow Agreement (the "Make Good Agreement"), dated effective as of May
3,
2007, is entered into by and among Millennium Quest, Inc., a Delaware
corporation (the "Company"), Sterne Agee & Leach, Inc., as agent (“Sterne”),
Hisashi Akazawa and Si Chen, each in their individual capacities (each a "Make
Good Pledgor" and together the "Make Good Pledgors"), and Securities Transfer
Corporation, as escrow agent ("Escrow Agent").
WHEREAS,
each of the investors in the private offering of securities of the Company
(the
"Investors") has entered into a Securities Purchase Agreement, dated May 3,
2007
(the "Purchase Agreement"), evidencing their participation in the Company's
private offering (the "Offering
"
)
of
securities. As an inducement to the Investors to participate in the Offering
and
as set forth in the Purchase Agreement, Make Good Pledgors agreed to place
the
Escrow Shares (as defined in Section 3 hereto) into escrow for the benefit
of
the Investors in the event the Company fails to satisfy certain After-Tax Net
Income thresholds.
WHEREAS,
pursuant to the requirements of the Purchase Agreement, the Company and Make
Good Pledgors have agreed to establish an escrow on the terms and conditions
set
forth in this Make Good Agreement;
WHEREAS,
Sterne has agreed to act as agent for the Investors in connection with this
Make
Good Agreement pursuant to the terms and conditions of that certain Agency
Agreement, dated as of the date hereof, by and among Sterne and the Investors;
and
WHEREAS,
the Escrow Agent has agreed to act as escrow agent pursuant to the terms and
conditions of this Make Good Agreement.
NOW,
THEREFORE, in consideration of the mutual promises of the parties and the terms
and conditions hereof, the parties hereby agree as follows:
1.
Definitions
.
Capitalized terms used and not otherwise defined herein that are defined in
the
Purchase Agreement will have the meanings given such terms in the Purchase
Agreement.
2.
Appointment
of Escrow Agent
.
Make
Good Pledgors, Agent and the Company hereby appoint Escrow Agent to act in
accordance with the terms and conditions set forth in this Make Good Agreement,
and Escrow Agent hereby accepts such appointment and agrees to act in accordance
with such terms and conditions.
3.
Establishment
of Escrow
.
Upon
the execution of this Make Good Agreement, Make Good Pledgors shall deliver,
or
cause to be delivered, to the Escrow Agent certificates evidencing a number
of
shares of the Series B Preferred Stock equal to the 2007 Make Good Shares and
the 2008 Make Good Shares, along with undated stock
powers
with Medallion guarantees, in the form and number acceptable to the Investors
in
their reasonable discretion, (or such other signed instrument of transfer
acceptable to the Company’s Transfer Agent (as defined in Section 5a below)).
The 2007 Make Good Shares and the 2008 Make Good Shares are collectively
referred to as the “Escrow Shares”.
4.
Representations
of Make Good Pledgors
.
Each
Make Good Pledgor hereby represents and warrants to Sterne and the Investors
as
follows:
a.
Such
Make
Good Pledgor has all individual power and authority to enter into this Agreement
and to carry out its obligations hereunder. This Agreement has been duly
executed by such Make Good Pledgor, and when delivered by such Make Good Pledgor
in accordance with the terms hereof, will constitute the valid and legally
binding obligation of such Make Good Pledgor, enforceable against it in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.
b.
Immediately
prior to the closing of the transactions under the Share Exchange Agreement,
Hisashi Akazawa was the sole record and beneficial owner of all of the
outstanding capital shares of Lorain, as the term beneficial owner is defined
under Rule 13d-3(d) under the Exchange Act, free and clear of all pledges,
liens
and encumbrances. Hisashi Akazawa is the sole record owner, and Hisashi Akazawa
and Si Chen are the sole beneficial owners of the Escrowed Shares, as the term
beneficial owner is defined under Rule 13d-3(d) under the Exchange Act, free
and
clear of all pledges, liens and encumbrances.
c.
All
of
the Escrow Shares are, and as to any Underlying Shares when issued upon
conversions will be, validly issued, fully paid and nonassessable shares of
the
Company, and free and clear of all pledges, liens and encumbrances. Upon any
transfer of Escrow Shares to Investors hereunder, Investors will receive full
right, title and authority to such shares as holders of Common Stock of the
Company.
d.
Performance
of this Make Good Agreement and compliance with the provisions hereof will
not
violate any provision of any applicable law and will not conflict with or result
in any breach of any of the terms, conditions or provisions of, or constitute
a
default under, or result in the creation or imposition of any lien, charge
or
encumbrance upon, any of the properties or assets of Make Good Pledgors pursuant
to the terms of any indenture, mortgage, deed of trust or other agreement or
instrument binding upon Make Good Pledgors, other than such breaches, defaults
or liens which would not have a material adverse effect taken as a whole.
5.
Disbursement
of Escrow Shares
.
a.
Fiscal
Year Ended December 31, 2007
.
Make
Good Pledgors agree that that if the After-Tax Net Income for the fiscal year
ended
December
31, 2007
reported
in the Company’s 2007 Annual Report, and as adjusted in accordance with Section
5.2(d) of the Purchase Agreement, is less than the 2007 Guaranteed ATNI,
Sterne
shall provide written instruction (with a copy to the Company) to the Escrow
Agent to instruct
the
Company’s transfer agent (“Transfer Agent”) to transfer to each Investor their
pro rata share of the 2007 Make Good Shares as determined under Section 5.2(e)
of the Purchase Agreement. The Escrow Agent need only rely on the letter of
instruction from Sterne in this regard and will disregard any contrary
instructions. The Escrow Agent shall be entitled to rely on the calculations
provided by Sterne in releasing the Escrow Shares for disbursement, with no
further responsibility to calculate or confirm amounts. If the Company’s 2007
Annual Report reflect that the 2007 Guaranteed ATNI has been achieved, no
transfer of the 2007 Make Good Shares shall be required by this Section and
Sterne shall provide written instruction (with a copy to the Company) to the
Escrow Agent to return all 2007 Make Good Shares deposited with the Escrow
Agent
to the Make Good Pledgors within seven Business Days after the date which the
2007 Annual Report is filed with the Commission, provided that Escrow Agent
is
given notice by Sterne of the 2007 Annual Report’s filing and results. Subject
to the timing of the Transfer Agent, transfers of 2007 Make Good Shares required
under this Section shall be made to Investors within seven Business Days after
the date which the 2007 Annual Report is filed with the Commission, provided
that Escrow Agent is given notice by Sterne of the 2007 Annual Report’s filing
and results.
b.
Fiscal
Year Ending December 31, 2008
.
The
Make Good Pledgors agree that if the Company’s After-Tax Net Income for the
fiscal year ended December 31, 2008 reported in the Company’s 2008 Annual
Report, and as adjusted in accordance with Section 5.2(d) of the Purchase
Agreement, is less than the 2008 Guaranteed ATNI, Sterne shall provide written
instruction (with a copy to the Company) to the Escrow Agent to instruct the
Transfer Agent to transfer to each Investor their pro rata share of the 2008
Make Good Shares as determined under Section 5.2(e) of the Purchase Agreement.
The Escrow Agent need only rely on the letter of instruction from Sterne in
this
regard and will disregard any contrary instructions. The Escrow Agent shall
be
entitled to reply on the calculations provided by Sterne in releasing the Escrow
Shares for disbursement, with no further responsibility to calculate or confirm
amounts. If the Company’s 2008 Annual Report reflect that the 2008 Guaranteed
ATNI has been achieved, no transfer of the 2008 Make Good Shares shall be
required by this Section and Sterne shall provide written instruction (with
a
copy to the Company) to the Escrow Agent to return all 2008 Make Good Shares
deposited with the Escrow Agent to the Make Good Pledgors within seven Business
Days after the date which the 2008 Annual Report is filed with the Commission,
provided that Escrow Agent is given notice by Sterne of the 2008 Annual Report’s
filing and results. Subject to the timing of the Transfer Agent, transfers
of
2008 Make Good Shares required under this Section shall be made to Investors
within seven Business Days after the date which the 2008 Annual Report is filed
with the Commission, provided that Escrow Agent is given notice by Sterne of
the
2008 Annual Report’s filing and results.
c.
In
connection with the foregoing, Make Good Pledgors agree that within one business
day following execution of the Purchase Agreement, Make Good Pledgors will
deposit the 2007 Make Good Shares and 2008 Make Good Shares into escrow in
accordance with this Agreement along with undated stock powers with Medallion
guarantees (or with such other instruments of transfer as in accordance with
the
requirements of the Company’s transfer agent), in the form and number acceptable
to the Investors in their reasonable discretion, and the handling and
disposition of the 2007 Make Good Shares and 2008 Make Good Shares in accordance
with Section 5(a) and 5(b) of this Agreement. The parties hereby agree that
the
Investors shall not have the right to assign its rights to receive all or any
2007 Make Good Shares and 2008 Make Good Shares in conjunction with negotiated
sales or transfers of any of its Shares or, in the case of their conversion,
Underlying Shares ( collectively, the “Securities”).
d.
The
parties hereby agree that the Make Good Pledgors’ obligation to transfer Escrow
Shares to the Investors pursuant to Section 5.2 of the Purchase Agreement shall
not continue to run to the benefit of any Securities transferred or sold by
the
Investors prior to a Make Good Determination Date. In the event an Investor
transfers or sells prior to the Make Good Determination Date relating to the
2008 Make Good Shares a portion of its Securities, the Escrow Agent shall,
upon
instruction from Sterne, return to the Make Good Pledgors a portion of 2008
Make
Good Shares and, if the Investor transfer or sale takes place prior to the
Make
Good Determination Date relating to the 2007 Make Good Shares, a portion of
the
2007 Make Good Shares equal to the initial number of 2008 Make Good Shares
and,
if appropriate, 2007 Make Good Shares multiplied by a fraction the numerator
of
which is the number of Securities involved in the particular Investor sale
or
transfer and denominator is the total amount of Securities originally purchased
by all Investors under Purchase Agreement. Any of the Escrowed Shares to
returned to the Make Good Pledgors hereunder shall
,
subject
to the timing of the Transfer Agent, be returned to the Make Good Pledgors
within seven Business Days after the date which the Company’s 2007 Annual Report
or 2008 Annual Report, as applicable, is filed with the Commission
.
Sterne
shall provide Escrow Agent with specific notice of those Escrow Shares which
shall be delivered back to the Make Good Pledgors for the above-listed reason.
Escrow Agent will in turn notify the Transfer Agent of such instructions. Escrow
Agent shall under no circumstances be responsible for instructions it does
not
receive or instructions it receives after Escrow Agent has instructed the
Transfer Agent.
e.
The
Escrow Agent covenants and agrees that upon any transfer of 2007 Make Good
Shares or 2008 Make Good Shares to the Investors in accordance with this
Agreement, the Escrow Agent shall promptly instruct the Transfer Agent to
reissue such 2007 Make Good Shares or 2008 Make Good Shares in the applicable
Investor’s name and deliver the same as directed by such Investor.
f.
The
Company and Made Good Pledgors covenant and agree, to provide the Escrow Agent
with certified tax identification numbers by furnishing appropriate forms W-9
or
W-8 and such other forms and documents that the Escrow Agent may request,
including appropriate W-9 or W-8 forms for each Investor. The Company and Make
Good Pledgors understand that if such tax reporting documentation is not
provided and certified to the Escrow Agent, the Escrow Agent may be required
by
the Internal Revenue Code of 1986, as amended, and the Regulations promulgated
thereunder, to withhold a portion of any interest or other income earned on
the
investment of the Escrow Property.
g.
The
Company and the Escrow Agent covenant and agree to provide, and cause others
under their control to provide, to Sterne, on a timely basis, any documents
or
information Sterne may require in its reasonable discretion in order to carry
out and enforce the terms and duties under this Make Good Agreement.
6.
Duration
.
This
Make Good Agreement shall terminate on the sooner of (i) the distribution of
all
the Escrow Shares or (ii) June 30, 2009. The Company agrees to promptly provide
the Escrow Agent written notice of the filing with the Commission of any
financial statements or reports referenced herein.
7.
Escrow
Shares
.
If any
Escrow Shares are deliverable to the Investors pursuant to the Purchase
Agreement and in accordance with this Make Good Agreement, (i) Make Good
Pledgors covenants and agrees to execute all such instruments of transfer
(including stock powers and assignment documents) as are customarily executed
to
evidence and consummate the transfer of the Escrow Shares from Make Good
Pledgors to the Investors, to the extent not done so in accordance with Section
5, and (ii) following its receipt of the documents referenced in Section 5,
the
Company and Escrow Agent covenant and agree to cooperate with the Transfer
Agent
so that the Transfer Agent promptly reissues such Escrow Shares in the
applicable Investor’s name and delivers the same as directed by such Investor.
Until such time as (if at all) the Escrow Shares are required to be delivered
pursuant to the Purchase Agreement and in accordance with this Make Good
Agreement, any dividends payable in respect of the Escrow Shares and all voting
rights applicable to the Escrow Shares shall be retained by Make Good Pledgors.
Should the Escrow Agent receive dividends or voting materials, such items shall
not be held by the Escrow Agent, but shall be passed immediately on to the
Make
Good Pledgors and shall not be invested or held for any time longer than is
needed to effectively re-route such items to the Make Good
Pledgors.
8.
Interpleader
.
Should
any controversy arise among the parties hereto with respect to this Make Good
Agreement or with respect to the right to receive the Escrow Shares, Escrow
Agent and/or Sterne shall have the right to consult and hire counsel and/or
to
institute an appropriate interpleader action to determine the rights of the
parties. Escrow Agent and/or Sterne are also each hereby authorized to institute
an appropriate interpleader action upon receipt of a written letter of direction
executed by the parties so directing either Escrow Agent or Sterne. If Escrow
Agent or Sterne is directed to institute an appropriate interpleader action,
it
shall institute such action not prior to thirty (30) days after receipt of
such
letter of direction and not later than sixty (60) days after such date. Any
interpleader action instituted in accordance with this Section 8 shall be filed
in any court of competent jurisdiction in the State of New York or the State
of
California, and the Escrow Shares in dispute shall be deposited with the court
and in such event Escrow Agent and Sterne shall be relieved of and discharged
from any and all obligations and liabilities under and pursuant to this Make
Good Agreement with respect to the Escrow Shares and any other obligations
hereunder.
9.
Exculpation
and Indemnification of Escrow Agent and Sterne
.
a.
Escrow
Agent is not a party to, and is not bound by or charged with notice of any
agreement out of which this escrow may arise. Escrow Agent acts under this
Make
Good Agreement as a depositary only and is not responsible or liable in any
manner whatsoever for the sufficiency, correctness, genuineness or validity
of
the subject matter of the escrow, or any part thereof, or for the form or
execution of any notice given by any other party hereunder, or for the identity
or authority of any person executing any such notice. Escrow Agent will have
no
duties or responsibilities other than those expressly set forth herein. Escrow
Agent will be under no liability to anyone by reason of any failure on the
part
of any party hereto (other than Escrow Agent) or any maker, endorser or other
signatory of any document to perform such person's or entity's obligations
hereunder or under any such document. Except for this Make Good Agreement and
instructions to Escrow Agent pursuant to the terms of this Make Good Agreement,
Escrow Agent will not be obligated to recognize any agreement between or among
any or all of the persons or entities referred to herein, notwithstanding its
knowledge thereof. Sterne’s sole obligation under this Make Good Agreement is to
provide written instruction to Escrow Agent (following such time as the Company
files certain periodic financial reports as specified in Section 5 hereof)
directing the distribution of the Escrow Shares. Sterne will provide such
written instructions upon review of the relevant earnings per share and/or
After-Tax Net Income amount reported in such periodic financial reports as
specified in Section 5 hereof. Sterne is not charged with any obligation to
conduct any investigation into the financial reports or make any other
investigation related thereto. In the event of any actual or alleged mistake
or
fraud of the Company, its auditors or any other person (other than Sterne)
in
connection with such financial reports of the Company, Sterne shall have no
obligation or liability to any party hereunder.
b.
Escrow
Agent will not be liable for any action taken or omitted by it, or any action
suffered by it to be taken or omitted, absent gross negligence or willful
misconduct. Escrow Agent may rely conclusively on, and will be protected in
acting upon, any order, notice, demand, certificate, or opinion or advice of
counsel (including counsel chosen by Escrow Agent), statement, instrument,
report or other paper or document (not only as to its due execution and the
validity and effectiveness of its provisions, but also as to the truth and
acceptability of any information therein contained) which is reasonably believed
by Escrow Agent to be genuine and to be signed or presented by the proper person
or persons. The duties and responsibilities of the Escrow Agent hereunder shall
be determined solely by the express provisions of this Make Good Agreement
and
no other or further duties or responsibilities shall be implied, including,
but
not limited to, any obligation under or imposed by any laws of the State of
New
York upon fiduciaries.
THE
ESCROW AGENT SHALL NOT BE LIABLE, DIRECTLY OR INDIRECTLY, FOR ANY (I) DAMAGES,
LOSSES OR EXPENSES ARISING OUT OF THE SERVICES PROVIDED HEREUNDER, OTHER THAN
DAMAGES, LOSSES OR EXPENSES WHICH HAVE BEEN FINALLY ADJUDICATED TO HAVE DIRECTLY
RESULTED FROM THE ESCROW AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, OR (II)
SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES OR LOSSES OF ANY KIND WHATSOEVER
(INCLUDING, WITHOUT LIMITATION, LOST PROFITS), EVEN IF THE ESCROW AGENT HAS
BEEN
ADVISED OF THE POSSIBILITY OF SUCH LOSSES OR DAMAGES AND REGARDLESS OF THE
FORM
OF ACTION.
c.
The
Company and Make Good Pledgors each hereby, jointly and severally, indemnify
and
hold harmless each of Escrow Agent, Sterne and any of their principals,
partners, agents, employees and affiliates
from
and
against any expenses, including reasonable attorneys' fees and disbursements,
damages or losses suffered by Escrow Agent or Sterne in connection with any
claim or demand, which, in any way, directly or indirectly, arises out of or
relates to this Make Good Agreement or the services of Escrow Agent or Sterne
hereunder; except, that if Escrow Agent or Sterne is guilty of willful
misconduct or gross negligence under this Make Good Agreement, then Escrow
Agent
or Sterne, as the case may be, will bear all losses, damages and expenses
arising as a result of its own willful misconduct or gross negligence. Promptly
after the receipt by Escrow Agent or Sterne of notice of any such demand or
claim or the commencement of any action, suit or proceeding relating to such
demand or claim, Escrow Agent or Sterne, as the case may be, will notify the
other parties hereto in writing. For the purposes hereof, the terms "expense"
and "loss" will include all amounts paid or payable to satisfy any such claim
or
demand, or in settlement of any such claim, demand, action, suit or proceeding
settled with the express written consent of the parties hereto, and all costs
and expenses, including, but not limited to, reasonable attorneys' fees and
disbursements, paid or incurred in investigating or defending against any such
claim, demand, action, suit or proceeding. The provisions of this Section 8
shall survive the termination of this Make Good Agreement, and the resignation
or removal of the Escrow Agent.
10.
Compensation
of Escrow Agent
.
Escrow
Agent shall be entitled to compensation for its services as stated in the fee
schedule attached hereto as
Exhibit
A
,
which
compensation shall be paid by the Company. The fee agreed upon for the services
rendered hereunder is intended as full compensation for Escrow Agent's services
as contemplated by this Make Good Agreement;
provided
,
however
,
that in
the event that Escrow Agent renders any material service not contemplated in
this Make Good Agreement, or there is any assignment of interest in the subject
matter of this Make Good Agreement, or any material modification hereof, or
if
any material controversy arises hereunder, or Escrow Agent is made a party
to
any litigation pertaining to this Make Good Agreement, or the subject matter
hereof, then Escrow Agent shall be reasonably compensated by the Company for
such extraordinary services and reimbursed for all costs and expenses, including
reasonable attorney's fees, occasioned by any delay, controversy, litigation
or
event, and the same shall be recoverable from the Company.
Prior
to
incurring any costs and/or expenses in connection with the foregoing sentence,
Escrow Agent shall be required to provide written notice to the Company of
such
costs and/or expenses and the relevancy thereof and Escrow Agent shall not
be
permitted to incur any such costs and/or expenses prior to receiving written
approval from the Company, which approval shall not be unreasonably
withheld.
11.
Resignation
of Escrow Agent
.
At any
time, upon ten (10) days' written notice to the Company, Escrow Agent may resign
and be discharged from its duties as Escrow Agent hereunder. As soon as
practicable after its resignation, Escrow Agent will promptly turn over to
a
successor escrow agent appointed by the Company the Escrow Shares held hereunder
upon presentation of a document appointing the new escrow agent and evidencing
its acceptance thereof. If, by the end of the 10-day period following the giving
of notice of resignation by Escrow Agent, the Company shall have failed to
appoint a successor escrow agent, Escrow Agent may interplead the Escrow Shares
into the registry of any court having jurisdiction.
12.
Records
.
Escrow
Agent shall maintain accurate records of all transactions hereunder. Promptly
after the termination of this Make Good Agreement or as may reasonably be
requested by the parties hereto from time to time before such termination,
Escrow Agent shall provide the parties hereto, as the case may be, with a
complete copy of such records, certified by Escrow Agent to be a complete and
accurate account of all such transactions. The authorized representatives of
each of the parties hereto shall have access to such books and records at all
reasonable times during normal business hours upon reasonable notice to Escrow
Agent and at the requesting party’s expense.
13.
Notice
.
All
notices, communications and instructions required or desired to be given under
this Make Good Agreement must be in writing and shall be deemed to be duly
given
if sent by registered or certified mail, return receipt requested, or overnight
courier, to the addresses listed on the signature pages hereto.
14.
Execution
in Counterparts
.
This
Make Good Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the
same
instrument.
15.
Assignment
and Modification
.
This
Make Good Agreement and the rights and obligations hereunder of any of the
parties hereto may not be assigned without the prior written consent of the
other parties hereto. Subject to the foregoing, this Make Good Agreement will
be
binding upon and inure to the benefit of each of the parties hereto and their
respective successors and permitted assigns. No other person will acquire or
have any rights under, or by virtue of, this Make Good Agreement. No portion
of
the Escrow Shares shall be subject to interference or control by any creditor
of
any party hereto, or be subject to being taken or reached by any legal or
equitable process in satisfaction of any debt or other liability of any such
party hereto prior to the disbursement thereof to such party hereto in
accordance with the provisions of this Make Good Agreement. This Make Good
Agreement may be amended or modified only in writing signed by all of the
parties hereto.
16.
Applicable
Law
.
This
Make Good Agreement shall be governed by and construed in accordance with the
laws of the State of New York without giving effect to the principles of
conflicts of laws thereof.
17.
Headings
.
The
headings contained in this Make Good Agreement are for convenience of reference
only and shall not affect the construction of this Make Good Agreement.
18.
Attorneys'
Fees
.
If any
action at law or in equity, including an action for declaratory relief, is
brought to enforce or interpret the provisions of this Make Good Agreement,
the
prevailing party shall be entitled to recover reasonable attorneys' fees from
the other party (unless such other party is the Escrow Agent), which fees may
be
set by the court in the trial of such action or may be enforced in a separate
action brought for that purpose, and which fees shall be in addition to any
other relief that may be awarded.
19.
Merger
or Consolidation
.
Any
corporation or association into which the Escrow Agent may be converted or
merged, or with which it may be consolidated, or to which it may sell or
transfer all or substantially all of its corporate trust business and assets
as
a whole or substantially as a whole, or any corporation or association resulting
from any such conversion, sale, merger, consolidation or transfer to which
the
Escrow Agent is a party, shall be and become the successor escrow agent under
this Escrow Agreement and shall have and succeed to the rights, powers, duties,
immunities and privileges as its predecessor, without the execution or filing
of
any instrument or paper or the performance of any further act.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
IN
WITNESS WHEREOF, the parties have duly executed this Make Good Agreement as
of
the date set forth opposite their respective names.
|
|
COMPANY
:
|
|
|
|
|
|
MILLENNIUM QUEST, INC
.
By:
/s/Si
Chen
Name:
Si Chen
Title:
Chief Executive Officer
Address:
Beihuan
Zhong Road
Junan
County
Shandong,
China 276600
Attn:
Si Chen
Facsimile:
86-539-7314886
|
|
|
|
|
|
MAKE
GOOD PLEDGORS
Hisashi
Akazawa:
/s/Hisashi
Akazawa
Address:
Beihuan
Zhong Road
Junan
County
Shandong,
China 276600
Facsimile:
86-539-7314886
Si
Chen:
/s/Si
Chen
Address:
Beihuan
Zhong Road
Junan
County
Shandong,
China 276600
Facsimile:
86-539-7314886
|
[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK SIGNATURE
PAGE
FOR
OTHER PARTIES FOLLOWS]
|
|
ESCROW AGENT
:
|
|
|
|
|
|
SECURITIES
TRANSFER CORPORATION
,
as
Escrow Agent
|
|
|
|
|
|
By:
/s/Kevin
B. Halter, Jr.
Kevin B. Halter, Jr., President
Address:
2591
Dallas Parkway Suite 102
Frisco
Texas 75034
Attn:
Kevin B. Halter, Jr.
Facsimile:
(469) 633-0088
|
|
|
|
|
|
AGENT
:
STERNE
AGEE & LEACH, INC.
By:
/s/Ryan
Medo
Ryan Medo,
Managing Director, Capital Markets
Address:
Sterne
Agee & Leach, Inc.
800
Shades Creek Parkway, Suite 700
Birmingham,
Alabama 35209
Attn:
Ryan Medo
Facsimile:
(205) 949-3607
|
Exhibit
10.3
CLOSING
ESCROW AGREEMENT
CLOSING
ESCROW AGREEMENT
,
dated
May 3, 2007 (“
Escrow
Agreement
”),
is
entered into by and between Millennium Quest, Inc., a Delaware corporation
(the
“
Company
”),
Thelen Reid Brown Raysman & Steiner LLP (the “
Escrow
Agent
”)
and
Sterne Agee & Leach, Inc., as agent (“
Sterne
Agee
”).
BACKGROUND
Concurrently
herewith the Company and Investors are entering into a Securities Purchase
Agreement, dated as of the date hereof (the “
Purchase
Agreement
”),
pursuant to which each Investor (as defined therein) has agreed to purchase
from
the Company, and the Company has agreed to sell to each Investor, the number
of
Shares and Warrants identified therein (capitalized terms used and not otherwise
defined herein shall have the meanings given such terms in the Purchase
Agreement).
Pursuant
to the Purchase Agreement, the Company and the Investors have agreed to
establish an escrow on the terms and conditions set forth in this Escrow
Agreement and the Escrow Agent is willing to accept appointment as Escrow Agent
for only the expressed duties outlined herein.
NOW,
THEREFORE
,
in
consideration of the premises set forth above and other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1.
Proceeds
to be Escrowed.
A
copy of
the Purchase Agreement is attached as
Exhibit
A
.
All
amounts provided by the Investors in connection with their acquisition of the
Shares and Warrants as set forth in the Purchase Agreement shall be deposited
directly with the Escrow Agent in immediately available funds by federal wire
transfer, such funds being referred to herein as the “
Escrow
Funds
.”
The
Escrow Funds shall be retained in escrow by the Escrow Agent in a separate
account and invested as stated below.
2.
Identity
of Investors.
Concurrent
with the execution of the Escrow Agreement, the Company shall furnish to the
Escrow Agent the information comprising the identity of the Investors in the
format set forth in the “
List
of Investors
”
attached as
Exhibit
B
,
or in
an electronic spreadsheet format with the same information. All Escrow Funds
shall remain the property of the Investors and shall not be subject to any
liens
or charges by the Company or the Escrow Agent or judgments or creditors' claims
against the Company, until released to the Company as hereinafter provided.
Escrow Agent will not use the information provided to it by the Company for
any
purpose other than to fulfill its obligations as Escrow Agent. The Company
and
the Escrow Agent will treat all Investor information as
confidential.
3.
Disbursement
of Funds.
(a)
The
Escrow Agent shall continue to hold the Escrow Funds delivered for deposit
hereunder by an Investor until the earlier of: (1) receipt of a joint written
notice from the Company and the Investors evidencing termination under Section
7.5(a) of the Purchase Agreement, (2) receipt of a written notice from the
Company or such Investor evidencing termination under Section 7.5(b) of the
Purchase Agreement (each of (1) and (2), a “
Termination
Election
”)
and
(3) receipt of both (x) written notice from the Company that the conditions
to
closing under Section 6.1 of the Purchase Agreement have been satisfied and
(y)
joint written notice from the Company and Sterne Agee, who acted as placement
agent in connection with the transactions contemplated by the Purchase
Agreement, to effect the Closing.
(b)
If
the
Escrow Agent receives a Termination Election prior to its receipt of the notices
contemplated under Section 3(a)(3), then the Escrow Agent shall return the
Escrow Funds delivered by such Investor as directed by such Investor. If the
Escrow Agent receives the notices contemplated under Section 3(a)(3) prior
to a
Termination Election, then the Escrow Agent shall disburse the portion of the
Escrow Funds for which the foregoing is the case in accordance with
Exhibit
C
to this
Escrow Agreement.
4.
Duty
and Limitation on Liability of the Escrow Agent.
The
sole
duty of the Escrow Agent shall be to receive the Escrow Funds and to hold them
subject to release, in accordance herewith, and the Escrow Agent shall be under
no duty to determine whether the Company is complying with requirements of
the
Escrow Agreement or the Purchase Agreement. The Escrow Agent may conclusively
rely upon and shall be protected in acting upon any statement, certificate,
notice, request, consent, order or other document believed by it to be genuine
and to have been signed or presented by the proper party or parties. The Escrow
Agent shall have no duty or liability to verify any such statement, certificate,
notice, request, consent, order or other document, and its sole responsibility
shall be to act only as expressly set forth in the Escrow Agreement. The Escrow
Agent shall be under no obligation to institute or defend any action, suit
or
proceeding in connection with the Escrow Agreement unless first indemnified
to
its satisfaction. The Escrow Agent may consult counsel of its own choice with
respect to any question arising under the Escrow Agreement and the Escrow Agent
shall not be liable for any action taken or omitted in good faith upon advice
of
such counsel.
In
no
event shall the Escrow Agent be liable, directly or indirectly, for any (a)
damages or expenses arising out of the services provided hereunder, other than
damages which result from the Escrow Agent’s gross negligence or willful
misconduct or (b) special or consequential damages, even if the Escrow Agent
has
been advised of the possibility of such damages.
The
Escrow Agent shall be obligated only to perform the duties specifically set
forth in this Escrow Agreement, which shall be deemed purely ministerial in
nature, and shall under no circumstances be deemed to be a fiduciary to the
Company, Sterne Agee or any other person. The Escrow Agent shall not assume
any
responsibility for the failure of the Company to perform in accordance with
this
Escrow Agreement. This Escrow Agreement sets forth all matters pertinent to
the
escrow contemplated hereunder, and no additional obligations of the Escrow
Agent
shall be implied by nor inferred from the terms of any other agreement,
including, without limitation, the Purchase Agreement.
Under
no
circumstances shall the Escrow Agent be expected or required to use, risk or
advance its own funds in the performance of its duties or exercise of its rights
hereunder.
The
Investors (by agreeing to use this form of Closing Escrow Agreement) and Sterne
Agee acknowledge that they are aware that the Escrow Agent has represented
the
Company in connection with the Purchase Agreement and this Escrow Agreement
and
that Escrow Agent may continue to represent the Company in that connection
and
in connection with the transactions contemplated by those agreements, including,
but not limited to, in connection with any disputes that may arise under either
of those agreements. The Escrow Agent shall not be precluded from or restricted
from representing the Company or any of its affiliates or otherwise acting
as
attorneys for the Company or any of its affiliates in any matter, including,
but
not limited to, any court proceeding or other matter related to the Purchase
Agreement or the transactions contemplated by the Purchase Agreement, or this
Escrow Agreement or the Escrow Funds, whether or not there is a dispute between
the Investors, Sterne Agee and/or the Company with respect to any such
matter.
5.
Interpleader
.
The
Escrow Agent may at any time commence an action in the nature of interpleader
or
other legal proceedings and may deposit the Escrow Deposit with the clerk of
the
court. In the event of any dispute regarding who is entitled to the Escrow
Deposit at any time, the Escrow Agent may determine not to release the Escrow
Deposit to either any Investor or the Company and may commence an interpleader
action as aforesaid or may cause the Escrow Deposit to be deposited with a
court
of competent jurisdiction whereupon it shall cease to have any further
obligation hereunder. Upon any delivery or deposit of the Escrow Deposit as
provided in this Section 5, the Escrow Agent shall be released and discharged
from any further obligation under this Agreement.
6.
Investment
of Proceeds.
The
Escrow Funds shall be credited by Escrow Agent and recorded in a non-interest
bearing escrow account.
The
Company agrees to indemnify and hold Escrow Agent harmless from and against
any
taxes, additions for late payment, interest, penalties and other expenses that
may be assessed against Escrow Agent on or with respect to any payment or other
activities under this Escrow Agreement unless any such tax, addition for late
payment, interest, penalties and other expenses shall arise out of or be caused
by the gross negligence or willful misconduct of the Escrow Agent.
The
Company acknowledges that Escrow Agent is not providing investment supervision,
recommendations or advice.
7.
Notices.
All
notices, requests, demands and other communications under the Escrow Agreement
shall be in writing and shall be deemed to have been duly given (a) on the
date
of service if served personally on the party to whom notice is to be given,
(b)
on the day of transmission if sent by facsimile/email transmission to the
facsimile number/email address given below, and telephonic confirmation of
receipt is obtained promptly after completion of transmission, (c) on the day
after delivery to Federal Express or similar overnight courier or the Express
Mail service maintained by the United States Postal Service or (d) on the fifth
day after mailing, if mailed to the party to whom notice is to be given, by
first class mail, registered or certified, postage prepaid, and properly
addressed, return receipt requested, to the party as follows:
|
|
If to the Company:
|
Millennium Quest, Inc.
Beihuan
Road
Junan
County
Shandong,
China 276600
Attn:
Mr. Si Chen, Chairman and Chief Executive Officer
Facsimile:
(0086539) 7314886 7311026
|
|
|
|
|
|
|
If to Escrow
Agent:
|
Thelen Reid Brown Raysman & Steiner
LLP
701
8
th
Street NW
Washington,
D.C. 20001
Attn.:
Louis A. Bevilacqua, Esq.
Facsimile:
(202) 508-4321
|
|
|
|
|
|
|
If to Sterne Agee:
|
Sterne
Agee & Leach, Inc.,
2901
W. Coast Highway, Ste. 230
Newport
Beach, CA 92663
Attn:
Patrick L. Winton
Facsimile:
(949) 270-2936
|
|
|
|
|
|
|
If to an Investor:
|
To
the address set forth under such Investor’s name on
its
signature page to the Purchase Agreement.
|
Any
party
may change its address for purposes of this paragraph by giving the other party
written notice of the new address in the manner set forth above.
8.
Indemnification
of Escrow Agent.
The
Company
hereby indemnifies and holds harmless the Escrow Agent from and against any
and
all loss, liability, cost, damage and expense, including, without limitation,
reasonable counsel fees, which the Escrow Agent may suffer or incur by reason
of
any action, claim or proceeding brought against the Escrow Agent arising out
of
or relating in any way to the Escrow Agreement or any transaction to which
the
Escrow Agreement relates unless such action, claim or proceeding is the result
of the willful misconduct or gross negligence of the Escrow Agent. For this
purpose, the term "attorneys' fees" includes fees payable to any counsel
retained by the Escrow Agent in connection with its services under this
Agreement and, with respect to any matter arising under this Escrow Agreement
as
to which the Escrow Agent performs legal services, if and to the extent that
the
Escrow Agent itself is a law firm, its standard hourly rates and charges then
in
effect. All of the Escrow Agent's rights of indemnification provided for in
this
Escrow Agreement shall survive the resignation of the Escrow Agent, its
replacement by a successor Escrow Agent, its delivery or deposit of the Escrow
Funds in accordance with this Escrow Agreement, the termination of this Escrow
Agreement, and any other event that occurs after this date.
9.
Successors
and Assigns.
Except
as
otherwise provided in the Escrow Agreement, no party hereto shall assign the
Escrow Agreement or any rights or obligations hereunder without the prior
written consent of the other parties hereto, and any such attempted assignment
without such prior written consent shall be void and of no force and effect.
The
Escrow Agreement shall inure to the benefit of and shall be binding upon the
successors and permitted assigns of the parties hereto.
10.
Governing
Law; Jurisdiction.
The
Escrow Agreement shall be construed, performed and enforced in accordance with,
and governed by the internal laws of the State of New York, without giving
effect to the principles of conflicts of laws thereof.
11.
Severability.
In
the
event that any part of the Escrow Agreement is declared by any court or other
judicial or administrative body to be null, void, or unenforceable, said
provision shall survive to the extent it is not so declared, and all of the
other provisions of the Escrow Agreement shall remain in full force and
effect.
12.
Amendments; Waivers.
The
Escrow Agreement may be amended or modified, and any of the terms, covenants,
representations, warranties or conditions hereof may be waived, only by a
written instrument executed by each of the Company, the Escrow Agent and Sterne
Agee. Any waiver by any party of any condition or of the breach of any
provision, term, covenant, representation or warranty contained in the Escrow
Agreement, in any one or more instances, shall not be deemed to be nor construed
as further or continuing waiver of any such condition, or of the breach of
any
other provision, term, covenant, representation or warranty of the Escrow
Agreement.
13.
Entire Agreement.
The
Escrow Agreement contains the entire understanding among the parties hereto
with
respect to the escrow contemplated hereby and supersedes and replaces all prior
and contemporaneous agreements and understandings, oral or written, with regard
to such escrow.
14.
Section Headings.
The
section headings in the Escrow Agreement are for reference purposes only and
shall not affect the meaning or interpretation of the Escrow
Agreement.
15.
Counterparts.
The
Escrow Agreement may be executed in counterparts, each of which shall be deemed
an original, but all of which shall constitute the same instrument.
16.
Resignation.
Escrow
Agent may resign upon 30 days advance written notice to the Company. If a
successor escrow agent is not appointed within the 30-day period following
such
notice, Escrow Agent may petition any court of competent jurisdiction to name
a
successor escrow agent or interplead the Escrow Funds with such court, whereupon
Escrow Agent’s duties hereunder shall terminate.
17.
Third-Party Beneficiaries.
This
Agreement is intended for the benefit of the parties hereto, the Investors
and
their respective successors and permitted assigns and is not for the benefit
of,
nor may any provision hereof be enforced by, any other person or
entity.
[Signature
page follows]
IN
WITNESS WHEREOF
,
the
parties hereto have caused the Escrow Agreement to be executed the day and
year
first set forth above.
MILLENNIUM
QUEST, INC.
/s/Si
Chen
By:
Si
Chen
Its:
Chief Executive Officer
THELEN
REID BROWN RAYSMAN & STEINER LLP
By:
/s/Louis
A. Bevilacqua
Name:
Louis A. Bevilacqua
Title:
Partner
STERNE
AGEE & LEACH, INC.
/s/Ryan
Medo
By:
Ryan
Medo
Its:
Managing Director, Capital Markets
Exhibit
10.4
CANCELLATION
AND ESCROW AGREEMENT
CANCELLATION
AND ESCROW AGREEMENT, dated May 3, 2007 (this “
Agreement
”),
by
and among, MILLENNIUM QUEST, INC., a Delaware corporation (the “
Company
”),
Halter Financial Investments, L.P., a Texas limited partnership (“
HFI
”
),
Halter
Financial Group, L.P., a Texas limited partnership (“
HFG
”),
and
Securities Transfer Corporation, as escrow agent (“
Escrow
Agent
”).
BACKGROUND
Pursuant
to a Financial Advisory Agreement, dated February 14, 2007 (the “
Financial
Advisory Agreement
”),
the
Company’s subsidiary retained HFG International, Limited (“
HFG
International
”)
as the
Company’s exclusive financial advisor. HFG consulted on the Restructuring and
Going Public Transaction, as identified therein.
HFG
International agreed that if the Company, on a consolidated basis, reports
in
its Annual Report filed with the U.S. Securities and Exchange Commission, net
income of $12.5 million for fiscal 2008, HFG International would ensure that
HFI
and HFG cancel that number of shares that will reduce the Pubco Shareholders
Ownership Percentage, as defined in the Financial Advisory Agreement, to
5.6%.
HFI
and
HFG currently hold 100,000 shares of the Company’s Series A Convertible
Preferred Stock, which are convertible into 42,856,000 shares of the Company’s
Common Stock, constituting a total of 5.22% of the Company’s issued and
outstanding common stock,
assuming
conversion of all outstanding shares of
the
Company’s
Series
A
Voting Convertible Preferred Stock and
the
Company’s
Series
B
Voting Convertible Preferred Stock into shares of common stock at the present
rate of conversion
.
The
other Pubco Shareholders, as defined in the Financial Advisory Agreement, hold
1.28% of the Company’s issued and outstanding Common Stock,
assuming
conversion of all outstanding shares of
the
Company’s
Series
A
Voting Convertible Preferred Stock and
the
Company’s
Series
B
Voting Convertible Preferred Stock into shares of common stock at the present
rate of conversion.
In
order
to reduce the 6.5% interest owned by all of the Pubco Shareholders to a 5.6%
interest, HFI and HFG would have to tender to the Company for cancellation
a
total of 229,227 shares of the Company’s common stock upon conversion of the
Series
A
Voting Convertible Preferred Stock into common stock (taking into account the
contemplated 1-for-32.84 reverse stock split and the conversion of Series B
Voting Convertible Preferred Stock into common)
(the
“
Cancellation
Shares
”).
HFI,
HFG
and the Company desire to retain the Escrow Agent to act as the escrow agent
hereunder and hold the Cancellation Shares and cancel such shares or return
such
shares to HFI and HFG in accordance with this Agreement to carry out the terms
of the Financial Advisory Agreement.
AGREEMENT
NOW,
THEREFORE, in consideration of the mutual promises herein contained and for
other good and valuable consideration, the receipt and sufficiency of which
is
hereby acknowledged, the parties hereto agree as follows:
1.
Definitions
.
(a)
Capitalized
terms used and not otherwise defined herein that are defined in the Financial
Advisory Agreement will have the meanings given such terms in the Financial
Advisory Agreement.
(b)
The
following terms have the meanings ascribed to them below:
(i)
“
After-Tax
Net Income
”
or
“
ATNI
”
means
the after-tax net income of the Company and its consolidated subsidiaries
prepared in accordance with GAAP consistently applied; provided in the event
that the release of the Cancellation Shares to the Company or HFG is deemed
to
be an expense or deduction from revenues/income of the Company for the
applicable year, as required under GAAP, then such expense or deduction shall
be
excluded for purposes of determining whether or not the 2008 Guaranteed ATNI
has
been achieved by the Company.
(ii)
“
Annual
Report
”
means
the Annual Report of the Company on Form 10-K for the fiscal year ending
December 31, 2008, as filed with the Commission.
(iii)
“
Commission
”
means
the U.S. Securities and Exchange Commission.
(iv)
“
Guaranteed
ATNI
”
means
$12,500,000.
2.
Appointment
of Escrow Agent
.
The
Company, HFI and HFG hereby appoint the
Escrow
Agent
as
escrow agent hereunder to act in accordance with the terms and conditions set
forth in this Agreement, and Escrow Agent hereby accepts such appointment and
agrees to act in accordance with such terms and conditions.
3.
Establishment
of Escrow
.
Upon
the conversion of the Series A Voting Convertible Preferred Stock held by HFI
and HFG into common stock, each of HFI and HFG shall deliver, or cause to be
delivered, to the Escrow Agent certificates evidencing the Cancellation Shares,
along with undated stock powers with Medallion guarantees (or such other signed
instrument of transfer acceptable to the Company’s Transfer Agent (as defined in
Section 5a below)).
4.
Representations
of HFI and HFG
.
Each of
HFI and HFG hereby represents and warrants to the Company as follows:
(a)
each
has
all corporate power and authority to enter into this Agreement and to carry
out
its obligations hereunder. This Agreement has been duly executed by HFI and
HFG,
and when delivered in accordance with the terms hereof, will constitute a valid
and legally binding obligation of HFI and HFG, enforceable against them in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general application.
(b)
HFI
and
HFG are the sole record and beneficial owners of all of the Cancellation
Shares.
(c)
All
of
the Cancellation Shares are free and clear of all pledges, liens and
encumbrances. Upon any transfer of the Cancellation Shares to the Company
hereunder, the Company will receive full right, title and authority to such
Cancellation Shares or, if such shares have been converted to common stock
(such
underlying shares being referred to as the “
Underlying
Shares
”)
prior
to such transfer, then the Company will receive full right, title and authority
to such Underlying Shares.
(d)
Performance
of this Agreement and compliance with the provisions hereof will not violate
any
provision of any applicable law.
5.
Disbursement
of Cancellation Shares
.
(a)
If
the
After-Tax Net Income for the fiscal year ended
December
31, 200
8
is at
least equal to the Guaranteed ATNI, HFI and HFG shall transfer to the Company,
for no additional consideration, the Cancellation Shares, within seven Business
Days after the date which the Annual Report is filed with the Commission. If
the
Company’s audited consolidated financial statements for the fiscal year ended
December 31, 2008 specify that the Guaranteed ATNI has not been achieved, no
transfer of the Cancellation Shares shall be required by this Section 5(a)
and
all Cancellation Shares deposited with the Escrow Agent shall be returned to
HFI
and HFG within seven Business Days after the date which the Annual Report is
filed with the Commission and otherwise in accordance with this Agreement.
(b)
If
the
Cancellation Shares are disbursed to the Company in accordance with this
Agreement, then the Company shall instruct the transfer agent to cancel the
Cancellation Shares. Upon written request from the Company, HFI and HFG shall
deliver to the Company a written release that releases the Company from any
obligations arising as a result of HFI’s and HFG’s ownership of the Cancellation
Shares.
(c)
Within
five business days following the conversion of the Series A Voting Convertible
Preferred Stock, HFI and HFG shall deposit the Cancellation Shares into escrow
in accordance with this Agreement along with undated stock powers with Medallion
guarantees (or with such other instruments of transfer as in accordance with
the
requirements of the Company’s transfer agent), in the form and number acceptable
to the Company.
6.
Duration
.
This
Agreement shall terminate on the sooner of (i) the distribution of all the
Cancellation Shares or (ii) May 1, 2009. The Company agrees to promptly provide
the Escrow Agent written notice of the filing with the Commission of any
financial statements or reports referenced herein.
7.
Cancellation
Shares
.
If any
Cancellation Shares are deliverable to the Company in accordance with this
Agreement, HFI and HFG shall execute all such instruments of transfer (including
stock powers and assignment documents) as are customarily executed to evidence
and consummate the transfer of the Cancellation Shares from HFI and HFG to
the
Company, to the extent not done so in accordance with Section 5. Until such
time
as (if at all) the Cancellation Shares are required to be delivered pursuant
in
accordance with this Agreement, any dividends payable in respect of the
Cancellation Shares and all voting rights applicable to the Cancellation Shares
shall be retained by HFI and HFG. Should the Escrow Agent receive dividends
or
voting materials, such items shall not be held by the Escrow Agent, but shall
be
passed immediately on to HFI and HFG and shall not be invested or held for
any
time longer than is needed to effectively re-route such items to
HFG.
8.
Interpleader
.
Should
any controversy arise among the parties hereto with respect to this Agreement
or
with respect to the right to receive the Cancellation Shares, Escrow Agent
shall
have the right to consult and hire counsel and/or to institute an appropriate
interpleader action to determine the rights of the parties. Escrow Agent is
hereby authorized to institute an appropriate interpleader action upon receipt
of a written letter of direction executed by the parties so directing the Escrow
Agent. If Escrow Agent is directed to institute an appropriate interpleader
action, it shall institute such action not prior to thirty (30) days after
receipt of such letter of direction and not later than sixty (60) days after
such date. Any interpleader action instituted in accordance with this Section
8
shall be filed in any court of competent jurisdiction in the State of New York,
and the Cancellation Shares in dispute shall be deposited with the court and
in
such event Escrow Agent shall be relieved of and discharged from any and all
obligations and liabilities under and pursuant to this Agreement with respect
to
the Cancellation Shares and any other obligations hereunder.
9.
Exculpation
and Indemnification of Escrow Agent
.
(a)
Escrow
Agent is not a party to, and is not bound by or charged with notice of any
agreement out of which this escrow may arise. Escrow Agent acts under this
Agreement as a depositary only and is not responsible or liable in any manner
whatsoever for the sufficiency, correctness, genuineness or validity of the
subject matter of the escrow, or any part thereof, or for the form or execution
of any notice given by any other party hereunder, or for the identity or
authority of any person executing any such notice. Escrow Agent will have no
duties or responsibilities other than those expressly set forth herein. Escrow
Agent will be under no liability to anyone by reason of any failure on the
part
of any party hereto (other than Escrow Agent) or any maker, endorser or other
signatory of any document to perform such person's or entity's obligations
hereunder or under any such document. Except for this Agreement and instructions
to Escrow Agent pursuant to the terms of this Agreement, Escrow Agent will
not
be obligated to recognize any agreement between or among any or all of the
persons or entities referred to herein, notwithstanding its knowledge thereof.
(b)
Escrow
Agent will not be liable for any action taken or omitted by it, or any action
suffered by it to be taken or omitted, absent gross negligence or willful
misconduct. Escrow Agent may rely conclusively on, and will be protected in
acting upon, any order, notice, demand, certificate, or opinion or advice of
counsel (including counsel chosen by Escrow Agent), statement, instrument,
report or other paper or document (not only as to its due execution and the
validity and effectiveness of its provisions, but also as to the truth and
acceptability of any information therein contained) which is reasonably believed
by Escrow Agent to be genuine and to be signed or presented by the proper person
or persons. The duties and responsibilities of the Escrow Agent hereunder shall
be determined solely by the express provisions of this Agreement and no other
or
further duties or responsibilities shall be implied, including, but not limited
to, any obligation under or imposed by any laws of the State of New York upon
fiduciaries.
THE
ESCROW AGENT SHALL NOT BE LIABLE, DIRECTLY OR INDIRECTLY, FOR ANY (I) DAMAGES,
LOSSES OR EXPENSES ARISING OUT OF THE SERVICES PROVIDED HEREUNDER, OTHER THAN
DAMAGES, LOSSES OR EXPENSES WHICH HAVE BEEN FINALLY ADJUDICATED TO HAVE DIRECTLY
RESULTED FROM THE ESCROW AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, OR (II)
SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES OR LOSSES OF ANY KIND WHATSOEVER
(INCLUDING, WITHOUT LIMITATION, LOST PROFITS), EVEN IF THE ESCROW AGENT HAS
BEEN
ADVISED OF THE POSSIBILITY OF SUCH LOSSES OR DAMAGES AND REGARDLESS OF THE
FORM
OF ACTION.
(c)
The
Company, HFI and HFG each hereby, jointly and severally, indemnify and hold
harmless each of Escrow Agent, and any of their principals, partners, agents,
employees and affiliates
from
and
against any expenses, including reasonable attorneys' fees and disbursements,
damages or losses suffered by Escrow Agent in connection with any claim or
demand, which, in any way, directly or indirectly, arises out of or relates
to
this Agreement or the services of Escrow Agent hereunder; except, that if Escrow
Agent is guilty of willful misconduct or gross negligence under this Agreement,
then Escrow Agent will bear all losses, damages and expenses arising as a result
of its own willful misconduct or gross negligence. Promptly after the receipt
by
Escrow Agent of notice of any such demand or claim or the commencement of any
action, suit or proceeding relating to such demand or claim, Escrow Agent will
notify the other parties hereto in writing. For the purposes hereof, the terms
"expense" and "loss" will include all amounts paid or payable to satisfy any
such claim or demand, or in settlement of any such claim, demand, action, suit
or proceeding settled with the express written consent of the parties hereto,
and all costs and expenses, including, but not limited to, reasonable attorneys'
fees and disbursements, paid or incurred in investigating or defending against
any such claim, demand, action, suit or proceeding. The provisions of this
Section 9 shall survive the termination of this Agreement, and the resignation
or removal of the Escrow Agent.
10.
Compensation
of Escrow Agent
.
Escrow
Agent shall be entitled to compensation for its services in the amount of
$750.00 which shall be paid by HFG. The fee agreed upon for the services
rendered hereunder is intended as full compensation for Escrow Agent's services
as contemplated by this Agreement;
provided
,
however
,
that in
the event that Escrow Agent renders any material service not contemplated in
this Agreement, or there is any assignment of interest in the subject matter
of
this Agreement, or any material modification hereof, or if any material
controversy arises hereunder, or Escrow Agent is made a party to any litigation
pertaining to this Agreement, or the subject matter hereof, then Escrow Agent
shall be reasonably compensated by the Company for such extraordinary services
and reimbursed for all costs and expenses, including reasonable attorney's
fees,
occasioned by any delay, controversy, litigation or event, and the same shall
be
recoverable from the Company.
Prior
to
incurring any costs and/or expenses in connection with the foregoing sentence,
Escrow Agent shall be required to provide written notice to the Company of
such
costs and/or expenses and the relevancy thereof and Escrow Agent shall not
be
permitted to incur any such costs and/or expenses prior to receiving written
approval from the Company, which approval shall not be unreasonably
withheld.
11.
Resignation
of Escrow Agent
.
At any
time, upon ten (10) days' written notice to the Company, HFI and HFG, Escrow
Agent may resign and be discharged from its duties as Escrow Agent hereunder.
As
soon as practicable after its resignation, Escrow Agent will promptly turn
over
to a successor escrow agent appointed by the Company, HFI and HFG the
Cancellation Shares held hereunder upon presentation of a document appointing
the new escrow agent and evidencing its acceptance thereof. If, by the end
of
the 10-day period following the giving of notice of resignation by Escrow Agent,
the Company, HFI and HFG shall have failed to appoint a successor escrow agent,
Escrow Agent may interplead the Cancellation Shares into the registry of any
court having jurisdiction.
12.
Records
.
Escrow
Agent shall maintain accurate records of all transactions hereunder. Promptly
after the termination of this Agreement or as may reasonably be requested by
the
parties hereto from time to time before such termination, Escrow Agent shall
provide the parties hereto, as the case may be, with a complete copy of such
records, certified by Escrow Agent to be a complete and accurate account of
all
such transactions. The authorized representatives of each of the parties hereto
shall have access to such books and records at all reasonable times during
normal business hours upon reasonable notice to Escrow Agent and at the
requesting party’s expense.
13.
Notice
.
All
notices, communications and instructions required or desired to be given under
this Agreement must be in writing and shall be deemed to be duly given if sent
by registered or certified mail, return receipt requested, or overnight courier,
to the addresses listed on the signature pages hereto.
14.
Execution
in Counterparts
.
This
Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
15.
Assignment
and Modification
.
This
Agreement and the rights and obligations hereunder of any of the parties hereto
may not be assigned without the prior written consent of the other parties
hereto. Subject to the foregoing, this Agreement will be binding upon and inure
to the benefit of each of the parties hereto and their respective successors
and
permitted assigns. No other person will acquire or have any rights under, or
by
virtue of, this Agreement. No portion of the Cancellation Shares shall be
subject to interference or control by any creditor of any party hereto, or
be
subject to being taken or reached by any legal or equitable process in
satisfaction of any debt or other liability of any such party hereto prior
to
the disbursement thereof to such party hereto in accordance with the provisions
of this Agreement. This Agreement may be amended or modified only in writing
signed by all of the parties hereto.
16.
Applicable
Law
.
This
Agreement shall be governed by and construed in accordance with the laws of
the
State of New York without giving effect to the principles of conflicts of laws
thereof.
17.
Headings
.
The
headings contained in this Agreement are for convenience of reference only
and
shall not affect the construction of this Agreement.
18.
Attorneys'
Fees
.
If any
action at law or in equity, including an action for declaratory relief, is
brought to enforce or interpret the provisions of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys' fees from the other
party (unless such other party is the Escrow Agent), which fees may be set
by
the court in the trial of such action or may be enforced in a separate action
brought for that purpose, and which fees shall be in addition to any other
relief that may be awarded.
19.
Merger
or Consolidation
.
Any
corporation or association into which the Escrow Agent may be converted or
merged, or with which it may be consolidated, or to which it may sell or
transfer all or substantially all of its corporate trust business and assets
as
a whole or substantially as a whole, or any corporation or association resulting
from any such conversion, sale, merger, consolidation or transfer to which
the
Escrow Agent is a party, shall be and become the successor escrow agent under
this Escrow Agreement and shall have and succeed to the rights, powers, duties,
immunities and privileges as its predecessor, without the execution or filing
of
any instrument or paper or the performance of any further act.
[
Signature
Page Follows
]
IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date
first above written.
|
|
MILLENNIUM QUEST, INC.
|
|
|
|
|
|
By:
/s/Si
Chen
Name:
Si Chen
Title:
Chief Executive Officer
ADDRESS:
Beihuan
Road
Junan
County
Shandong,
China
|
|
|
|
|
|
HALTER FINANCIAL INVESTMENTS,
L.P.
|
|
|
|
|
|
By:
/s/Timothy
P. Halter
Name:
Timothy P. Halter
Title:
Chairman
ADDRESS:
12890
Hilltop Road
Argyle,
Texas 76226
|
|
|
|
|
|
HALTER
FINANCIAL GROUP, L.P.
By:
/s/Timothy
P. Halter
Name:
Timothy P. Halter
Title:
Chairman
ADDRESS:
12890
Hilltop Road
Argyle,
Texas 76226
|
|
|
|
[
Signature
Page to Cancellation and Escrow Agreement
]
|
|
ESCROW
AGENT
:
SECURITIES
TRANSFER CORPORATION
,
as
Escrow Agent
By:
/s/
Kevin B. Halter, Jr.
Kevin B. Halter, Jr., President
Address:
2591
Dallas Parkway Suite 102
Frisco
Texas 75034
Attn:
Kevin B. Halter, Jr.
Facsimile:
(469) 633-0088
|
|
|
|
[
Signature
Page to Cancellation and Escrow Agreement
]
Exhibit
10.5
(English
Translation)
Employment
Contract
|
Party
A:
|
Shandong
Green
Foodstuff Co., Ltd
|
Legal
Representative:
Si
Chen
|
|
Party
B:
|
Si
Chen
|
Sex:
Male
|
|
Date
of Birth:
|
February
2nd, 1963
|
Education
Degree
:
Associate Degree
|
|
Graduation
School:
|
Linyi
Normal
College
|
Major:
Chemical
Education
|
Native
Place:
138#
Village,
People’s
Road
,
Junan
County,
Shandong
Province
ID
Number:
372824196302020232
According
to the Labor Law of the People’s Republic of China and relevant regulations
promulgated by the local government, both parties agree to sign this labor
contract on the principle of equality and through amicable
negotiation.
I.
From the
date this contract takes effect, Party B becomes an employee of Party A and
the
employment relation between both parties is established.
The
term
of this contract is:
|
A.
|
The
fixed term is from
March 2, 2005
to
March
1, 2010
.
|
II.
Salaries
During
the period of this contract, Party A shall pay Party B for his labor in cash.
Party A shall calculate and distribute Party A’s salaries in accordance with:
|
1.
|
the
regulations of the company’s salary
system.
|
III.
Party
A’s Responsibilities
1.
Party
A shall comply with state laws, regulations and policies and shall create a
favorable working environment to raise the staff’s enthusiasm and creativity.
2.
Party
A shall be responsible for instructing and training Party B of political
opinions, vocational ethics, production safety, and observance of laws and
disciplines as well as rules and regulations of the unit; ensure that its
employees enjoy working rights and fulfill working obligations.
3.
Party
A shall reasonably determine the labor ration and shall pay Party B salaries
no
lower than the local minimum salary standard. Once the labor relationship is
established, Party A shall provide Party B with labor insurance and pay
insurance fees for such insurance coverage as endowment insurance, unemployment
insurance and work injury insurance.
4.
Party
A may rescind the labor contract in case that party B:
(1).
is
proved to be unqualified during the probation period.
(2).
severely violates the labor disciplines or Party A’s regulations.
(3).
is
in serious breach of duty, irregularities of favoritism that do great harm
to
Party A.
(4).
is
fired or dismissed by the company or inflicted with criminal liabilities
according to laws.
(5).
is
unable to do the original job or other job arranged by Party A due to Party
B’s
diseases or non-work related injuries after the expiration of medical treatment
period.
(6).
is
unqualified for the job even after the training or post adjustment.
IV.
Party B’s Responsibilities
1.
Party
B shall comply with state laws, regulations and policies and shall protect
national interests and Party A’s interests.
2.
Party
B shall actively attend the education and training of political opinions and
vocational ethics offered by Party A, execute the safety and health regulations
and comply with the labor disciplines and vacational ethics.
3.
Party
B shall accept and finish the production tasks stipulated by Party A, meet
the
fixed target and continuously improve the professional skills.
4.
Party
B shall comply with each regulation legally instituted by Party A and obey
Party
A’s guidance and management.
5.
Party
B shall comply with personnel adjustment, able to work in any of Party A’s
company as required by Party A’s production needs.
6.
Party
B shall perform the obligations stipulated by laws, regulations and the labor
contract.
7.
Party
B may not rescind the labor contract with Party A under any of the following
circumstance:
(1).The
training expenditure is paid by Party A but the service period provided in
the
labor contract is not over yet.
(2).Party
B has not finished important tasks of production, management or scientific
researches.
(3).Party
B’s involvement in economic compensation, economic punishment and administrative
sanction is unsettled.
8.
To
rescind the labor contract, Party B shall inform Party A in written form 30
days
in advance..
9.
During
the contract period or after the rescission of the contract, regardless of
being
fired because of disobeying the disciplines or rules or leaving the factory
privately, Party B shall not do any harm to the company. In case of any offense,
Party A is entitled to recover from Party B all the economic loss.
10.
The
director, supervisor and manager as well as those who are familiar with the
company’s management, sales, product exploitation and quality control, etc. or
familiar with the commercial secrets and processing technologies, cannot
personally or jointly conduct or assist others to conduct the same or similar
business or engage any activity harmful to the company’s interests regardless of
the reason for their depart.
V.
Once
the
contract period expires, the employment relationship between both parties is
terminated. If both parties agree to continue the employment relationship,
the
contract can be renewed. One party’s decision about contract renewal shall be
informed to the other party within 30 days after the contract period
expires.
VI.
Upon
conclusion of the contract both parties shall strictly implement the contract.
The party in breach shall pay a penalty of
RMB
100,000 (One hundred thousand RMB)
.
VII.
In
the
process of implementing the contract, if any labor dispute takes place between
the two parties, it may be submitted to Party A’s mediation committee of labor
disputes for mediation, or be submitted to an authoritative arbitration
committee of labor dispute for arbitration; the arbitration decision may be
appealed to the local people’s court.
VIII.
Other
issues unsettled in this contract shall be solved according to the national or
provincial regulations. In the absence of national or provincial regulations,
the two parties may consult on supplementary provisions.
IX.
Other
negotiated issues that shall be complied with and implemented will be recorded
in the appendix or be regarded as the annex of the contract.
X.
The
contract takes effect upon both parties seal/signature.
XI.
The
contract is executed in two originals, with each party holding one
original.
XII.
Appendix
or Annex
(None)
|
Party A: Shandong Green Foodstuff Co.,
Ltd.
|
Party B: Si Chen
|
|
(Corporate Seal)
|
/s/ Si Chen
|
|
|
|
|
March 2nd, 2005
|
March 2nd,
2005
|
Exhibit
10.6
(English
Translation)
Employment
Contract
|
Party
A:
|
Shandong
Green Foodstuff Co., Ltd
|
Legal
Representative:
Si
Chen
|
|
Party
B:
|
|
Sex:
Male
|
|
Date
of Birth:
|
April
13th, 1971
|
Education
Degree
:
N/A
|
|
Graduation
School:
|
N/A
|
Major:
Accounting
|
Native
Place:
Dormitory
of Stockbreeding Bureau,
Junan
County,
Shandong
Province
ID
Number:
372824710413001
According
to the Labor Law of the People’s Republic of China and relevant regulations
promulgated by the local government, both parties agree to sign this labor
contract on the principle of equality and through amicable
negotiation.
I.
From the
date this contract takes effect, Party B becomes an employee of Party A and
the
employment relation between both parties is established.
The
term
of this contract is:
|
A.
|
The
fixed term is from
July
2nd, 2002
to
July
1st, 2008.
|
II.
Salaries
During
the period of this contract, Party A shall pay Party B for his labor in cash.
Party A shall calculate and distribute Party A’s salaries in accordance with:
|
1.
|
the
regulations of the company’s salary
system.
|
III.
Party
A’s Responsibilities
1.
Party
A shall comply with state laws, regulations and policies and shall create a
favorable working environment to raise the staff’s enthusiasm and creativity.
2.
Party
A shall be responsible for instructing and training Party B of political
opinions, vocational ethics, production safety, and observance of laws and
disciplines as well as rules and regulations of the unit; ensure that its
employees enjoy working rights and fulfill working obligations.
3.
Party
A shall reasonably determine the labor ration and shall pay Party B salaries
no
lower than the local minimum salary standard. Once the labor relationship is
established, Party A shall provide Party B with labor insurance and pay
insurance fees for such insurance coverage as endowment insurance, unemployment
insurance and work injury insurance.
4.
Party
A may rescind the labor contract in case that party B:
(1).
is
proved to be unqualified during the probation period.
(2).
severely violates the labor disciplines or Party A’s regulations.
(3).
is
in serious breach of duty, irregularities of favoritism that do great harm
to
Party A.
(4).
is
fired or dismissed by the company or inflicted with criminal liabilities
according to laws.
(5).
is
unable to do the original job or other job arranged by Party A due to Party
B’s
diseases or non-work related injuries after the expiration of medical treatment
period.
(6).
is
unqualified for the job even after the training or post adjustment.
IV.
Party B’s Responsibilities
1.
Party
B shall comply with state laws, regulations and policies and shall protect
national interests and Party A’s interests.
2.
Party
B shall actively attend the education and training of political opinions and
vocational ethics offered by Party A, execute the safety and health regulations
and comply with the labor disciplines and vacational ethics.
3.
Party
B shall accept and finish the production tasks stipulated by Party A, meet
the
fixed target and continuously improve the professional skills.
4.
Party
B shall comply with each regulation legally instituted by Party A and obey
Party
A’s guidance and management.
5.
Party
B shall comply with personnel adjustment, able to work in any of Party A’s
company as required by Party A’s production needs.
6.
Party
B shall perform the obligations stipulated by laws, regulations and the labor
contract.
7.
Party
B may not rescind the labor contract with Party A under any of the following
circumstance:
(1).The
training expenditure is paid by Party A but the service period provided in
the
labor contract is not over yet.
(2).Party
B has not finished important tasks of production, management or scientific
researches.
(3).Party
B’s involvement in economic compensation, economic punishment and administrative
sanction is unsettled.
8.
To
rescind the labor contract, Party B shall inform Party A in written form 30
days
in advance..
9.
During
the contract period or after the rescission of the contract, regardless of
being
fired because of disobeying the disciplines or rules or leaving the factory
privately, Party B shall not do any harm to the company. In case of any offense,
Party A is entitled to recover from Party B all the economic loss.
10.
The
director, supervisor and manager as well as those who are familiar with the
company’s management, sales, product exploitation and quality control, etc. or
familiar with the commercial secrets and processing technologies, cannot
personally or jointly conduct or assist others to conduct the same or similar
business or engage any activity harmful to the company’s interests regardless of
the reason for their depart.
V.
Once
the
contract period expires, the employment relationship between both parties is
terminated. If both parties agree to continue the employment relationship,
the
contract can be renewed. One party’s decision about contract renewal shall be
informed to the other party within 30 days after the contract period
expires.
VI.
Upon
conclusion of the contract both parties shall strictly implement the contract.
The party in breach shall pay a penalty of
RMB
100,000 (One hundred thousand RMB)
.
VII.
In
the
process of implementing the contract, if any labor dispute takes place between
the two parties, it may be submitted to Party A’s mediation committee of labor
disputes for mediation, or be submitted to an authoritative arbitration
committee of labor dispute for arbitration; the arbitration decision may be
appealed to the local people’s court.
VIII.
Other
issues unsettled in this contract shall be solved according to the national
or
provincial regulations. In the absence of national or provincial regulations,
the two parties may consult on supplementary provisions.
IX.
Other
negotiated issues that shall be complied with and implemented will be recorded
in the appendix or be regarded as the annex of the contract.
X.
The
contract takes effect upon both parties seal/signature.
XI.
The
contract is executed in two originals, with each party holding one
original.
XII.
Appendix
or Annex
(None)
|
Party A: Shandong Green Foodstuff
Co.,
Ltd.
|
Party B: Xiaodong Zhou
|
|
(Corporate Seal)
|
/s/ Xiaodong Zhou
|
|
|
|
|
March 2nd, 2005
|
March 2nd,
2005
|
Exhibit
10.7
(English
Translation)
Employment
Contract
|
Party
A:
|
Shandong
Green
Foodstuff Co., Ltd
|
Legal
Representative:
Si
Chen
|
|
Party
B:
|
|
Sex:
Male
|
|
Date
of Birth:
|
|
Education
Degree
:
Associate Degree
|
|
Graduation
School:
|
N/A
|
Major:
Accounting
|
Native
Place:
Junan
County,
Shandong
Province
ID
Number:
372832197110147452
According
to the Labor Law of the People’s Republic of China and relevant regulations
promulgated by the local government, both parties agree to sign this labor
contract on the principle of equality and through amicable
negotiation.
I.
From the
date this contract takes effect, Party B becomes an employee of Party A and
the
employment relation between both parties is established.
The
term
of this contract is:
|
A.
|
The
fixed term is from
December
7th, 2004
to
December
6th, 2009
.
|
II.
Salaries
During
the period of this contract, Party A shall pay Party B for his labor in cash.
Party A shall calculate and distribute Party A’s salaries in accordance with:
|
1.
|
the
regulations of the company’s salary
system.
|
III.
Party
A’s Responsibilities
1.
Party
A shall comply with state laws, regulations and policies and shall create a
favorable working environment to raise the staff’s enthusiasm and creativity.
2.
Party
A shall be responsible for instructing and training Party B of political
opinions, vocational ethics, production safety, and observance of laws and
disciplines as well as rules and regulations of the unit; ensure that its
employees enjoy working rights and fulfill working obligations.
3.
Party
A shall reasonably determine the labor ration and shall pay Party B salaries
no
lower than the local minimum salary standard. Once the labor relationship is
established, Party A shall provide Party B with labor insurance and pay
insurance fees for such insurance coverage as endowment insurance, unemployment
insurance and work injury insurance.
4.
Party
A may rescind the labor contract in case that party B:
(1).
is
proved to be unqualified during the probation period.
(2).
severely violates the labor disciplines or Party A’s regulations.
(3).
is
in serious breach of duty, irregularities of favoritism that do great harm
to
Party A.
(4).
is
fired or dismissed by the company or inflicted with criminal liabilities
according to laws.
(5).
is
unable to do the original job or other job arranged by Party A due to Party
B’s
diseases or non-work related injuries after the expiration of medical treatment
period.
(6).
is
unqualified for the job even after the training or post adjustment.
IV.
Party B’s Responsibilities
1.
Party
B shall comply with state laws, regulations and policies and shall protect
national interests and Party A’s interests.
2.
Party
B shall actively attend the education and training of political opinions and
vocational ethics offered by Party A, execute the safety and health regulations
and comply with the labor disciplines and vocational ethics.
3.
Party
B shall accept and finish the production tasks stipulated by Party A, meet
the
fixed target and continuously improve the professional skills.
4.
Party
B shall comply with each regulation legally instituted by Party A and obey
Party
A’s guidance and management.
5.
Party
B shall comply with personnel adjustment, able to work in any of Party A’s
company as required by Party A’s production needs.
6.
Party
B shall perform the obligations stipulated by laws, regulations and the labor
contract.
7.
Party
B may not rescind the labor contract with Party A under any of the following
circumstance:
(1).The
training expenditure is paid by Party A but the service period provided in
the
labor contract is not over yet.
(2).Party
B has not finished important tasks of production, management or scientific
researches.
(3).Party
B’s involvement in economic compensation, economic punishment and administrative
sanction is unsettled.
8.
To
rescind the labor contract, Party B shall inform Party A in written form 30
days
in advance..
9.
During
the contract period or after the rescission of the contract, regardless of
being
fired because of disobeying the disciplines or rules or leaving the factory
privately, Party B shall not do any harm to the company. In case of any offense,
Party A is entitled to recover from Party B all the economic loss.
10.
The
director, supervisor and manager as well as those who are familiar with the
company’s management, sales, product exploitation and quality control, etc. or
familiar with the commercial secrets and processing technologies, cannot
personally or jointly conduct or assist others to conduct the same or similar
business or engage any activity harmful to the company’s interests regardless of
the reason for their depart.
V.
Once
the
contract period expires, the employment relationship between both parties is
terminated. If both parties agree to continue the employment relationship,
the
contract can be renewed. One party’s decision about contract renewal shall be
informed to the other party within 30 days after the contract period
expires.
VI.
Upon
conclusion of the contract both parties shall strictly implement the contract.
The party in breach shall pay a penalty of
RMB
100,000 (One hundred thousand RMB)
.
VII.
In
the
process of implementing the contract, if any labor dispute takes place between
the two parties, it may be submitted to Party A’s mediation committee of labor
disputes for mediation, or be submitted to an authoritative arbitration
committee of labor dispute for arbitration; the arbitration decision may be
appealed to the local people’s court.
VIII.
Other
issues unsettled in this contract shall be solved according to the national
or
provincial regulations. In the absence of national or provincial regulations,
the two parties may consult on supplementary provisions.
IX.
Other
negotiated issues that shall be complied with and implemented will be recorded
in the appendix or be regarded as the annex of the contract.
X.
The
contract takes effect upon both parties seal/signature.
XI.
The
contract is executed in two originals, with each party holding one
original.
XII.
Appendix
or Annex
(None)
|
Party A: Shandong Green Foodstuff Co.,
Ltd.
|
Party B:
Huanxiang
Sheng
|
|
(Corporate Seal)
|
/s/
Huanxiang
Sheng
|
|
|
|
|
December
7th, 2004
|
December
7th, 2004
|
Exhibit
10.8
(English
Translation)
Cooperation
Agreement for Organic Authentication
of
Miyun/Yanshan Chestnut
Party
A:
Beijing Green FoodStuff Co., Ltd. (hereinafter referred to as Party
A)
Party
B:
Chestnut Cooperative Association, Lizhenzhai Village, Gaoling Town, Miyun County
(hereinafter referred to as Party B)
Date:
May
18th 2006.
Validity:
from May 8th 2006 to December 8th 2014.
(Copyright
of this agreement is reserved only to Beijing Green FoodStuff Co.,
Ltd.)
Article
1 General Provisions
|
1.
|
Basis
of Authentication: according to relevant policies specified in
“
Incentive
for Development of Urban Modern Agriculture and Increase of Farmers’
Income
”
issued by the government of Miyun County (Mizhengfa No. [2006] 21)
and the
developing trend of the chestnut markets both at home and abroad, in
order
to further improve the competing ability of Miyun Chestnut (Yanshan
Chestnut) in the markets both at home and abroad and to take more chestnut
market shares, to cultivate and develop the high-class brand of organic
chestnut, to raise agricultural productivity and farmers’ incomes, and to
make sustainable and healthy development of chestnut production, in
the
principles of equality and voluntary, mutual benefit and joint
development, and after discussions with the cooperative association,
this
agreement is made and entered into as
follows.
|
|
2.
|
Method
of authentication: according to the principle of “Renovation of Mechanism
and Group Development” set forth in document of Mingzhengfa No.[2006] 21,
and in consideration of production and sales of Miyun chestnuts in
recent
years as well as the construction of chestnut organic food base in
the
year 2006, the method of authentication is conducted as the market
orientation of both the enterprise and the
bases.
|
|
3.
|
Main
applicant for authentication: Beijing Green Foodstuff Co., Ltd. shall
be
the main applicant for authentication of organic chestnut growing base,
and the chestnut base of Lizhenzhai village, Gaoling town shall be
the
base to be authenticated, of which total areas are about 1,000 mu(see
appendix for numbers of trees, output and distribution of lots).
|
|
4.
|
Authentication
body: after checking authentication bodies both at home and aboard,
Organic Food Authentication Center of China Administration Bureau of
Environment Protection was selected. Fruit Tree Center of Miyun Forest
Bureau was selected to provide technical direction, in charge of making
the technical enforcing plan for chestnut organic production and of
rebuilding measures.
|
|
5.
|
Period:
it takes 8 years, starting from May 2006 to December
2014.
|
|
6.
|
Two
Parties’ Confirmation: Beijing Green FoodStuff Co., Ltd. is Party A, and
the cooperative association that owns the organic chestnut growing
base is
Party B (hereinafter separately referred to as Party A and Party B).
In
addition, a general verification team shall be set up, which consists
of
Miyun Agriculture Committee as the leader and county finance bureau,
forest bureau, Goaling Town People’s government and Beijing Green
FoodStuff Co., Ltd. as members. The team shall be responsible for daily
supervision, examination, instruction and
verification.
|
|
7.
|
Use
of Special Funds. Party A has the rights to use the authentication
fee
funds allocated by the government, and Party B has the rights to use
funds
for the planting and production activities verified by the general
verification team. Nevertheless, no fund shall be used for those chestnut
growing farms which fail to pass the verification.
|
|
8.
|
Party
A shall possess the ownership of using the organic product certificates
and logos for chestnut growing farm.
|
Article
2 Rights, Obligations and Responsibilities of Party A
|
1.
|
Party
A shall apply for organic authentication of Miyun/Yanshan chestnuts
in
accordance with the requirements of domestic and international markets
and
obtain certificates of International (OCIA), Japan (JAS), the United
States (NOP), and EU (EU2092/91) and Chinese certificates within 1-3
years.
|
|
2.
|
Party
A has the rights to manage and use the certificates, logos of transforming
organic chestnut products and the certificates and logos of formal
organic
chestnuts. Party A shall take costs of authentication and annual
inspection. In the events of cut-off, bankruptcy, change or asset transfer
occurred to Party A, Party B shall have the rights to use the certificates
and logos.
|
|
3.
|
Party
A shall take part into examination, supervision and verification of
chestnut production, management and technology implementation. It has
the
rights to participate in and to decide the environmental requirements
for
the base, the reservation of inter-plants and the training and personnel
arrangement of base inspectors.
|
|
4.
|
Determination
of the price of organic chestnuts: minimum purchasing price of the
first
class standard chestnut (110-140 nuts/KG) is 6.20RMB yuan/KG. Whenever
market price is over 6.20 yuan/KG, purchasing price of transforming
products shall be raised by 5-10% and purchasing price of organic
chestnuts shall be raised by 11-20% based on the average price of the
markets in Miyun and around. Both parties shall determine the average
market price of the current year in Miyun and
around.
|
|
5.
|
Party
A shall purchase all organic chestnuts from the farms which have passed
the verification with the price agreed. However, Party A has the rights
to
refuse all products from the base, if organic chestnuts are not produced
in accordance with organic production standard, or fraud, mixture of
poor
quality products, or any other willful activities found. Party B shall
take all the legal responsibilities and compensate Party A for any
economic losses caused by Party B
|
|
6.
|
Party
A has the rights to make claims against Party B for the failure to
protect
and fulfill Party A’s intellectual property rights (including the
authentication certificate rights, use rights of logo, copyright of
the
contract). In such circumstance, 100,000 yuan of penalty shall be charged
to Party B for each breach and Party A has the rights to terminate
the
agreement and claim against Party B.
|
Article
3 Rights, Obligations and Responsibilities of Party B
|
1.
|
Party
B shall carry out production management to chestnut growing farmers
in
accordance with the requirements of organic production management and
technical measures and 6 unifications so as to ensure the conduct of
authentication to process as planned. In detail, the 6 unifications
are
unified organization and training, unified growth of inter-plants,
unified
format of production record, unified collection, purchase, classification,
coding storage of the products, independent freight settlement, unified
execution of product quality commitment letter with farmers, and unified
implementation of technical measures.
|
|
2.
|
Subject
to local farming activities and seasons, Party B is obligated to
positively complete all kinds of organic production in accordance with
requirements of schedule, quality and quantity. It shall conduct internal
production check pursuant to organic production
standard.
|
|
3.
|
Party
B shall accept supervision, check, management and verification done
by
Party A, the authentication center, the Fruit Tree Center of Miyun
Forest
Bureau and the general verification team and so on. It shall also submit
party A relevant reports, internal check records or restructuring measures
requested by authentication body or authorities.
|
|
4.
|
Party
B shall strictly abide by the
“Rule
on Technology of Organic Food’s Production”
to
make sure that all goods put into the production in the base are in
accordance with the requirements. and ensure the quality, quantity
and
time schedule. No non-organic goods are used. In case that Party A
finds
any fraud done by Party B, it has the rights to refuse to sign the
acceptance letter.
|
|
5.
|
Party
B shall, with spirits of honesty, provide Party A with organic
transforming chestnuts or organic chestnuts. No mixture of organic
chestnuts with normal chestnuts is allowed. Without consent of Party
A,
Party B shall not sell the products to others. In the event of finding
so,
Party A has the rights to refuse to purchase Party B’s
products.
|
|
6.
|
Party
B shall promptly complete quantity of organic chestnuts as planned
by
Party A. All chestnuts purchased by Party A shall be classified under
international and domestic criterions or Party A’s standard and prices
shall be determined as per quality. Party A shall not refuse qualified
products and lower classification or reduce price. In such circumstance,
Party B has the rights to claim against Party
A.
|
|
7.
|
Payment
terms. Party B shall be responsible for sending qualified chestnuts
to
Party A’s factory. After receiving the products, Party A shall make
payment. In the event of delayed payment, penalty shall be charged
to
Party A at basis of the current interest rate of the bank.
|
Article
4 Liabilities
In
case
that any party breaches the agreement during term of the agreement and economic
loss is caused to the other Party, the parties shall solve it by negotiation.
In
the event of failure, any party has the rights to submit it to Miyun court
for
judgment.
Article
5 Miscellaneous
|
1.
|
This
agreement is written in four copies, of which each party holds one
copy,
and one copy is filed to the County Agriculture Committee and one copy
is
filed to the Fruit Center of Forest Bureau. This agreement shall become
effective at the date of signatures and stamps affixed by both
Parties.
|
|
2.
|
Pending
matters, or supplementary shall be agreed by both
parties.
|
Party
A:
Beijing Green FoodStuff Co., Ltd.
(Corporate
Seal)
Authorized
Representative: /s/ Lantao Li
Date:
May
18th 2006
Party
B:
Chestnut Cooperatives of Jiazhenzhai Village, Gaoling Town, Miyun County
(Corporate
Seal)
Legal
representative: /s/ Xianfu Li
Date:
May
18th, 2006
Exhibit
10.9
(English
Translation)
Equity
Transfer Agreement
The
Transferor: INTERNATIONAL LAOAN CO., LTD.
(Hereinafter
referred to as “Party A”)
The
Transferee: International Lorain Holding, Inc.
(Hereinafter
referred to as “Party B”)
The
agreement is entered into by and between Party A and Party B after thorough
negotiation.
Article
1
The parties of this agreement are:
1.
The
Transferor: INTERNATIONAL LAOAN CO., LTD.
Address:
Road Town, British Virgin Islands
Legal
Representative: Si Chen
Nationality:
China
2.
The
Transferee: International Lorain Holding, Inc.
Address:
4F, Scotia Center, George Town, Cayman Islands
Legal
Representative: AKAZAWA HISASHI
Nationality:
Japan
Article
2
Party A agrees to transfer to Party B its equity interest in Shandong Lorain
Foodstuff Co., Ltd., which accounts for 25% of the registered capital thereof
and amounts to 3,154,470 USD (equivalent to 25,220,000 RMB).
Article
3
Party B shall pay to Party A transfer price by credit transfer at the sum and
in
the currency set forth in Article 2 in three installments within 90 days after
this agreement takes effect.
Article
4
Party B shall possess all rights and undertake all obligations of Party A
stipulated by the Articles of Association of Shandong Lorain Foodstuff Co.,
Ltd.
Article
5
If this agreement cannot be wholly or partially performed due to one party’s
fault, the defaulting party shall assume liabilities for breach of the
agreement. If the unenforceability is caused by both parties’ fault, the two
parties shall assume their respective liabilities according to the actual
conditions. The Conclusion, effect, interpretation, performance and settlement
of disputes of this agreement shall be governed by the laws of the People’s
Republic of China. When dispute occurs, the two parties shall consult
amicably
to
settle
the dispute. If the two parties fail to solve the dispute through negotiation,
the dispute may be submitted to the People’s Court of Junan County.
Article
6
This agreement is executed in the office of Shandong Lorain Foodstuff Co.,
Ltd.
on August 15, 2006.
This
agreement takes effect upon signature of the two parties thereof.
Party
A: INTERNATIONAL LAOAN CO., LTD.
(Corporate
Seal)
Legal
Representative: (Si Chen)
/s/
Si
Chen
Party
B: International Lorain Holding, Inc.
(Corporate
Seal)
Authorized
Representative: (AKAZAWA HISASHI)
/s/
Hisaashi Akazawa
Date
August 15, 2006
Exhibit
10.10
(English
Translation)
Contract
Number: (2006) Jie Zi No. 0154
Credit
Facility Agreement
The
Creditor: Shilibao Branch of Beijing Rural Commercial Bank Co., Ltd.
(hereinafter referred to as “Party A”)
Address:
East of Shilibao Government, Miyun County, Beijing
Postal
Code: 101500
Principal
Person: Lianjun Yu
Telephone:
69044918
Fax:
69054735
The
Debtor: Beijing Green Foodstuff Co., Ltd.
(hereinafter
referred to as “Party B”)
Address:
Technical Road, Industrial Development District, Miyun County, Beijing Postal
Code: 101500
Principal
Person: Yundong Lu
Telephone:
69075881
Fax:
61085771
Deposit
Bank: Shilibao Branch of Beijing Suburban Commercial Bank
Account
Number: 1206000103000005058
Credit
Card Number: 110100000469658901
This
contract is hereby concluded by and between Party A and Party B, on the
principle of equality, free will and good faith and through amicable
consultation in accordance with relevant laws and provisions of
China.
Article
1
Loan Classification
1.
Party A
agrees to provide short-term loan to Party B according to this
contract.
Article
2
Purpose of the Loan
2.
The
loan
under this contract is to be used for
repaying
the loan of No. 3362 in 2005;
without
written approval of the Creditor, the Debtor may not use the loan for other
purposes.
Article
3
Amount and Term of the Loan
3.
The loan
amount herein is
fourteen
million eight hundred and fifty thousand
Yuan,
and
the currency is
Renminbi
(RMB) .
4.
The
period of this loan is from
September
28, 2006
to
September
27, 2007.
Before
the execution of the contract, if Party B needs to extend the loan period,
a
written application for extension shall be submitted to Party A at least 30
days
before expiration of the contract; Upon approval by Party A, the two parties
shall sign the Agreement for Term Extension.
Article
4
Calculation of Interest
5.
5.1
The
monthly interest of this loan is
7.65
‰
within
the contract period.
5.2
Once
the principal herein is put into Party A’s account according to the fixed time
in Subparagraph 6, Party A is regarded to have lent the money and Party B has
borrowed it. The interest calculation for this loan commences. On condition
that
the actual lending date is not consistent with the fixed date of the contract,
the date hereof can be determined in accordance with the date in the due bill
or
loan warrant. The due bill or loan warrant is part of this contract and is
provided with the same validity.
5.3
The
interest settlement date of each loan hereof is
on
the
20
th
of
the each quarter.
5.4
The
manner of interest accrual is
monthly
interest
(monthly
interest or quarterly interest or paying back the principal plus
interest).
5.5
In
the event that the Debtor fails to pay the interest on time, the compound
interest will accrue according to the original interest thereof. Moreover,
the
compound interest that is calculated according to the penalty interest if the
loan repaid is overdue.
5.6
In
case the loan repaid is overdue, an overdue penalty for
130%
of
the
overdue amount per day will be collected on the base of the interest stipulated
in Subparagraph 5.1.
5.7
During the loan term, in case the People’s Bank of China adjusts the loan
interest rate and manner of interest calculation, which is applicable to the
loan herein, Party A is not obliged to inform Party B and can conduct the
adjustments according to relevant provisions of People’s Bank of
China.
Article5
Draw-down
6.
Party
B
shall draw the loan:
·
in
one
lump sum on
September
28, 2006
·
for several times according to the
time and amount stipulated in Annex 2.
Article
6
Repayment of Loan
7.
7.1
Party
B shall repay the principal:
·
in one lump sum on the due
date
·
at the amount and on the date listed
in Annex 2.
7.2
Party
B shall prepare sufficient money for the payable interest and principal in
the
account opened by Party A before the stipulated interest settlement date and
interest payment date, or transfer the money from other accounts for repaying
the loan on the interest payment date herein. In the event that Party B fails
to
repay the loan, Party A is entitled to deduct the debt from the bank account
of
Party B at Party A’s branches or empower the branches of Party A to deduct the
debt from the bank account of Party B at Party A’s branches, including but not
limited to principal, interest, compound interest and penalty
interest.
7.3
Unless otherwise expressly provided for herein, the payment made by Party B
shall be used for repaying the interest at first and then for repaying the
principal within 90 days from the expiration; in case of exceeding 90 days,
repay the principal at first and then the interest.
7.4
In
the event that Party B is going to prepay the interest, a written notice shall
be sent to Party A; in case of prepaying the principal, Party B shall send
a
written application to Party A 10 working days in advance, and repay the
installment of or total principle if approved.
7.5
If
Party A approves Party B to prepay the installment of or total principal, Party
A will charge the interest from Party B according to the actual using days
and
the stipulated interest rates hereof, and Party B shall pay to Party A the
penalty calculated by the formula below:
Penalty=
prepayment amounts ×____
‰
0
×
days
ahead
8.
8.1
If
Party B fails to use the loan in accordance with the stipulations set forth
in
this contract, or to repay the interest or principal on schedule, Party A shall
have the right to announce that all the loans are due, and draw back all the
granted loans ahead of schedule and cease to grant the loan.
8.2
During the term of the contract, if any deficiency or obligation dispute or
guaranty damage or ruins occur caused by Party B’s poor management, Party A can
cease to grant the loan and draw back part of or total loans ahead of
schedule.
8.3
In
case Party B provides any false balance sheet, income statement or refuse to
accept Party A’s supervision on the loan use, production, management and finical
activities, Party A can cease to grant the loan and draw back part of or total
loans ahead of schedule.
8.4
In
case Party B fails to implement or undertake any assumed obligation hereof,
Party A can cease to grant the loan and draw back part of or total loans ahead
of schedule, and is authorized to take corresponding measures.
Article
7
Guaranty
9.
In
order
to guarantee the loans herein can be liquidated; one or some guaranties are
taken hereunder:
·
Contract Number (2006) (Guarantee),
Number (0154) Guarantee
Contract
·
Contract Number
( )
(
), Number
(
)
·
Contract Number
(
)
(
), Number
(
)
Party
B
confirms herein, that Party A has rights to carry though each right listed
in
Guaranty hereof to indemnify Party A’s claims and give up any deraignment
against Party A’s choice above.
If
the
guaranties hereof become deteriorated to Party A’s claims for liability, Party A
shall have the right to request Party B to provide mortgage and pawn secured
for
this load under this contract.
Article
8
Rights and Obligations of Both Parties
10.
Party
B’s rights and obligations are as follows:
10.1
Drawing and using the loan according to the stipulated term set forth in the
contract.
10.2
Guaranteeing the loan use of answering for law, rules as well as administrative
regulations, and attaining the admission and authorization
concerned.
10.3
Providing Party A with the true and valid documents and materials in the process
of loan checkup.
10.4
Accepting the investigation and supervision on the loan use hereof from Party
A.
10.5
Providing active assistance and cooperation for Party A’s investigation and
supervision on production, management as well as financial status, and provide
Party A with financial statements of balance sheet, incoming statement and
statement of cash flow, moreover, be liable for the truth, completeness and
validity of the provided materials.
10.6
During the term of the contract, in case of off production, out of business,
business license’s revocation, commitment of crimes by the legal representative
or directors, production and business in difficulty, deterioration of financial
status and bankruptcy as well as any serious circumstances unfavorable to
implementing the repaying obligations, a written report should be submitted
to
Party A; Party B shall fulfill the liquidating of the debts and guaranties
in
accordance with Party A’s requirements of the contract..
10.7
In
the case of Party B’s amalgamation, separation, lease, assets alienation,
affiliation, investment, joint venture, capital reduction, shareholding
alteration and other alteration of credits and debts as well as activities
influencing Party A’s interests, a written form should be sent to Party A prior
to 30 days for approval and liquidate the liability as well as guaranties hereof
according to Party A’s requirements; or else, the activities above must not be
carried through before liquidating all the loans and interest
hereof.
10.8
During the term of contract, in case of Party B’s alteration on the industrial
and commercial registration items of the legal representative, location,
business scope, a written form should be submitted to Party A within 10days
after the alterations.
10.9
Before liquidating the principal and interest to Party A, Party B cannot provide
the guaranties that exceeds the self-burden capacity to others.
10.10
On
condition that Party B has to transfer the liability hereof to the third party,
he must gain the literal agreement from Party A.
10.11
Party B should undertake the expenses herein, including but not limited to
the
expenses used for notarization, appraisal, registration and
insurance.
10.12
For
loan guarantor, in case of off-production, out-of-business, registration
cancellation, business license’s revocation, bankruptcy, business deficiency,
part of and all the guarantee capacity loss, as well as value reduction or
being
damaged or ruined by damage on guaranty and pledge, Party B should inform Party
A in a written form in time and provide Party B with other mortgage and pawn
secured for the loan.
11.
Party
A’s Rights and obligations are as follows:
11.1Party
A has taken all necessary actions to authorize the execution of the
contract.
11.2
Party A shall grant the loans on schedule in accordance with the provisions
set
forth in the contract.
11.3
Party A is liable for securing the materials about liability, finance,
production and management (except otherwise herein or law
provided).
11.4
Party A has the right to directly deduct the payable principal, interest,
penalty interest, compound interest and other payable expenses from Party B’s
accounts at Party A’s or Party A’s branches.
11.5
In
the event that Party A has to transfer the liability hereof to the third party,
it can go without Party B’s approval but should inform Party B within 15 days
when the transfer contract for claims is signed.
16.
Party
A is entitled to notify Party B’s behaviors of escaping from supervision,
defaulting principals and interest to the relevant department or unit, and
to
proclaim it on the media for collecting the debt back.
Article
9
Liability for Breach of Contract
12.
12.1
After the contract takes effect, both parties should completely implement the
obligations hereof. Any nonperformance or improper performance of obligations
shall undertake the liability for breach of contract, if any
breach.
12.2
In
the event that Party B fails to repay the due principal and pay the interest
in
accordance with the agreed term of this contract, Party A is entitled to require
Party B to liquidate in a limited term, and ask for penalty interest and
compound interest in accordance with the stipulations herein.
12.3
In
the case of a lawsuit submitted by Party A due to Party B’s breach of contract,
Party B should undertake all the legal costs, counsel fees, travel charge as
well as other expenses for attaining the claims.
12.4
If
Party B has completely performed the contract, and Party A fails to provide
Party B with loans as stipulated, Party B has the right to claim for penalty
stipulated in Clause5.1 herein by right of breach amounts and actual overdue
days.
12.5
If
Party B fails to use the loan as stipulated, Party A is entitled to draw back
part of or total loans ahead of schedule, and cease to provide the rest loans.
Penalty interest and compound interest are calculated for those overdue
loans.
12.6
In
case of failure to implement the obligations listed in Clause 10.2, 10.3, 10.4,
10.5, 10.6, 10.7, 10.8 by Party B, some remedies must be taken within 10 days
after receiving Party A’s notification, otherwise, Party A has rights to draw
back part of or total loans ahead of schedule, and cease to provide the rest
loans. Penalty interest and compound interest are calculated for those overdue
loans.
Article
10 Execution of Contract
13.
The contract comes into force in the way hereunder:
·
It is signed and sealed officially by each
party’s legal representative (directors), or the agents thereof (the power of
attorney is regarded as an annex hereof).
·
It is signed and sealed officially by each
party’s legal representative (directors), or the agents thereof (the power of
attorney is regarded as an annex hereof), and takes effect after the guaranty
contract comes into force stipulated in Subparagraph 9.
Article
11 Amendment, Cancellation and Termination of Contract
14.
14.1
Once
the contract takes effect, unless there are additional stipulations, both
parties must not amend or cancel the contract ahead of schedule. In case it
is
necessary to amend or cancel the contract, consistent negotiations as well
as a
written agreement shall be reached.
14.2
The
contract is completely performed in accordance with the stipulations hereof
until the principal, interest, penalty interest, compound interest and penalty
as well as other related expenses are liquidated.
Article
12 Settlement of Disputes
15.
Any
dispute occurring between both parties about the contract can be settled through
amicable negotiation; in case the two parties fail to reach an agreement, any
party may submit the dispute to the court with jurisdiction where Party A is
located.
Article
13 Miscellaneous Provisions
16.
Other
special items will be listed hereunder:
None.
17.
There
are 2 originals of this contract, and each party will hold 1 original, which
is
equally valid.
18.
The
contract is signed in
ShiliBao
Branch, Beijing Rural Commercial Bank
on
September
13, 2006.
Party A
has the introduction on the noticeable clauses.
Party
A (official seal) Shilibao Branch of Beijing Rural Commercial Bank Co.,
Ltd.
Representative
/s/ Yu Lian Jun
September
13, 2006
Party
B (official seal) Beijing Green Foodstuff Co., Ltd.
Legal
representative /s/ Li Lantao
September
13, 2006
Attachment
one: Manner for Party B to Draw-down
|
No.
|
|
Date
for Draw-down
|
|
Sum
(capitalized)
|
|
1
|
|
Sep.28
th
,
2006
|
|
14.85
million Yuan
|
Exhibit
10.11
(English
Translation)
Shandong
Green Foodstuff Co. Ltd.
Sales
Contract
Contract
No.: 20060513
Date:
May
13
th
2006
Place:
Junan
The
Seller: Shandong Green Foodstuff Co. Ltd.
Address:
Bei Huan Zhong Road, Junan County, Shandong, China
The
buyer: Shandong Green Safety Import and Export Co. , Ltd.
The
two
parties hereby enter into the following provisions through friendly consultation
in accordance with the Contract Law of the People’s Republic of
China:
Article
One: Name and Specifications of the Product
|
Name
|
|
Specification
|
|
Unit
price
|
|
Quantity
|
|
Price
|
|
Time
of delivery
|
|
Chestnut
In Syrup
|
|
9L/Tin
|
|
120RMB
|
|
80000tins
|
|
RMB
9,600,000.00
|
|
Time
of delivery: from May 13, 2006 to December 12, 2006. To be delivered
in 7
installments on the 10
th
day of the second month since signature of the contract and of
every
subsequent month, Quantity of delivery is 1/7 of the total quantity
of
every variety. Pay on Delivery (P.O.D). 2% of over or short of
payment and
delivery is allowed.
|
|
Frozen
Bottom-open Chestnut in Shell
|
|
Kilogram
|
|
15
RMB/kg
|
|
100tons
|
|
RMB
1,500,000.00
|
|
|
Lorain
chestnut
|
|
100g×16
bags/box
|
|
80
RMB/box
|
|
18400boxes
|
|
RMB
1,472,000.00
|
|
|
YueGuang
Rice
|
|
5kg/bag
|
|
45
RMB/box
|
|
8000bags
|
|
RMB
360,000.00
|
|
|
Egg
Food
|
|
350×240
bags/box
|
|
70
RMB/box
|
|
3000
boxes
|
|
RMB
210,000.00
|
|
|
Alga
Nutrient Egg
|
|
52/box
|
|
60
RMB/box
|
|
75000
boxes
|
|
RMB
4,500,000.00
|
|
|
The
Sweet Heart Chestnut
|
|
100g×16
bags/box
|
|
80
RMB/box
|
|
34600
boxes
|
|
RMB
2,768,000.00
|
|
|
In
total: twenty million four hundred and ten thousand RMB
|
|
RMB
20,410,000.00
|
|
Article
two: Quality Requirement: To be in conformity with national food standards
as
well as with the sample provided.
Article
three: Place of Delivery/Receipt: Junan County, Shandong Province
Article
four: Transport Cost is to be assumed by the seller.
Article
five: Standard for Acceptance: Trade standard of the People’s Republic of China
shall be applied.
Article
six: Settlement Method: Upon signature of the contract, the buyer shall pay
the
seller 10% of total price as advance payment. The rest payment shall be made
upon delivery of the product.
Article
seven: Liability for Breach of Contract: Except for force majeure, if the Seller
fails to supply the product or the Buyer returns the product after receipt,
the
party in breach shall pay to the other party liquidated damages constituting
25%
of the total price. If the liquidated damages is insufficient to make up the
loss, the other party may claim for further compensation.
Article
eight: Methods for Settling Contractual Disputes:
All
disputes arising in connection with this contract or the execution thereof
shall
be settled by way of amicable negotiation. If the two parties fail to solve
the
disputes through negotiation, the disputes may be submitted to the relevant
legal authority with jurisdiction where the Seller is located in accordance
with
the Contract Law.
The
period of validity of this contract is from May 13
th
,
2006 to
December 12
th
,
2006.
This
contract takes into effect upon signature and fax by the both
parties.
The
Sellers: Shandong Green Foodstuff Co. Ltd.
(Corporate
Seal)
Authorized
Representative /S/ Chen Si
The
Buyers: Shandong Green Safety Import and Export Co. Ltd.
(Corporate
Seal)
Authorized
Representative /S/: Ji Zhenwei
Exhibit
10.12
(English
Translation)
SHANDONG
GREEN FOODSTUFF CO.,LTD.
Sales
Contract
Contract
No:
SHINSEI-5
Date:
SEP
5,
2006
The
Seller: SHINSEI FOODS CO., LTD.
The
Seller and Buyer have agreed to close the following transactions according
to
the terms and conditions stipulated as below:
|
1
Commodity description
|
|
2
Packing
|
|
3Quantity
|
|
4
Unit Price
|
|
5
Amount
|
|
PEELED
CHESTNUTS
PRODUCTS
|
|
18L
|
|
70000.00CAN
|
|
FOB
|
|
USD
3520000.00
|
|
|
|
TOTAL
AMOUNT IN WORD:
U.S.DOLLARS
THIREE MILLON FIVE HUNDRED TWENTY THOUSAND
ONLY.
|
6.
Time
of Delivery:
NOV
30,
2006
7.
Port
of Loading:
QINGDAO
PORT
8.
Port
of Destination:
JAPAN
PORT
9.
Shipping marks:
N/M
10.
Terms
of Payment:
L/C
11.
Insurance: to be effected by
BUYER
.
12.
5
%
more or
less in quantity and amount is allowed.
13.
Quality/quantity claims: if any, quality claims should be sent to the Seller
in
written form during next 14days after discharging of merchandise; quantity
claims should be sent to the Seller in written form during next 3 days after
discharging of merchandise.
15.
Responsibilities of the parties: In case of either party’s refusal of
performance of the present contract, it pays the other party the penalty of
25%
of the amount of the covered goods and restitutes the relative losses in spite
of the penalty.
16.
Force
Majeure: The Seller shall not be held reliable for failure or delay in delivery
of the covered cargo or a portion under the present contract in consequence
of
any force majeure incidents.
17.
Arbitration: All dispute, if any, arising form or in connection with the
performance of the contract shall be settled through friendly
discussion/negotiation by both parties. otherwise, to be presented to the China
Relevant Authorities for arbitration, and the decision is the final for both
parties.
18.
Other: As per the Popular Practice and Uniforms of the International
Trade.
The
buyer: Shinsei Foods Co., Ltd.
President:
/s/ Teruyoshi Kanbara
The
seller: Shandong Green Foodstuff Co., Ltd.
/s/
Chen
Si
Exhibit
10.13
(English
Translation)
JUNAN
HONGRUN FOODSTUFF CO., LTD.
Sales
Contract
Contract
No: HR073502B
Date:
10,SEP.2006
The
Buyer: SHINSEI FOODS CO., LTD.
The
Seller: JUNAN HONGRUN FOODSTUFF CO., LTD.
The
Seller and Buyer have agreed to close the following transactions according
to
the terms and conditions stipulated as below:
|
1
Commodity description
|
|
2
Packing
|
|
3Quantity
|
|
4
Unit Price
|
|
5
Amount
|
|
PEELED
CHESTNUTS PRODUCTS
|
|
18L/
12.5KG/CAN
|
|
361MT
|
|
FOB
QINGDAO USD5000.00/MT
|
|
USD1,805,000.00
|
|
|
|
|
Total
amount: USD:ONE MILLION EIGHT HUNDRED AND FIVE THOUSAND
ONLY
|
6.
Time
of Delivery: BEFORE.30,DEC.2006
7.
Port
of Loading: CHINA PORT
8.
Port
of Destination: JAPAN PORT
9.
Shipping marks: N/M
10.
Terms
of Payment: BY T/T
11.
Insurance: to be effected by The Buyer .
12.
5 %
more or less in quantity and amount is allowed.
13.
Quality/quantity claims: if any, quality claims should be sent to the Seller
in
written form during next 14days after discharging of merchandise; quantity
claims should be sent to the Seller in written form during next 3 days after
discharging of merchandise.
14.
Responsibilities of the parties: In case of either party’s refusal of
performance of the present contract, it pays the other party the penalty of
25%
of the amount of the covered goods and restitutes the relative losses in spite
of the penalty.
15.
Force
Majeure: The Seller shall not be held reliable for failure or delay in delivery
of the covered cargo or a portion under the present contract in consequence
of
any force majeure incidents.
15.
Arbitration: All dispute, if any, arising form or in connection with the
performance of the contract shall be settled through friendly
discussion/negotiation by both parties. otherwise, to be presented to the China
Relevant Authorities for arbitration, and the decision is the final for both
parties.
17.
Other: As per the Popular Practice and Uniforms of the International
Trade.
The
buyer: Shinsei Foods Co., Ltd.
President:
/s/ Teruyoshi Kanbara
The
seller: Shandong Green Foodstuff Co., Ltd.
/s/
Chen
Si
EXHIBIT
10.14
FINANCIAL
ADVISORY AGREEMENT
THIS
FINANCIAL ADVISORY AGREEMENT (“Agreement” or “FAA”) is made and entered into on
the 14
th
of
February, 2007, by and between HFG International, Limited, a Hong Kong
corporation (“HFG”), and Shan Dong Green Foodstuff Co., Ltd., a P.R.C.
corporation (the “Company”).
W
I T N E
S S E T H:
WHEREAS,
the Company desires to engage HFG to provide certain financial advisory and
consulting services as specifically enumerated below commencing as of the date
hereof related to the Restructuring, the Going Public Transaction and the
Post-Transaction Period (each as hereinafter defined), and HFG is willing to
be
so engaged; and
WHEREAS,
HFG will also advise the Company with regard to matters related to their efforts
to complete a capital raising transaction generating targeted gross offering
proceeds of $20million USD (the “Financing”).
NOW,
THEREFORE, for and in consideration of the covenants set forth herein and the
mutual benefits to be gained by the parties hereto, and other good and valuable
consideration, the receipt and adequacy of which are now and forever
acknowledged and confessed, the parties hereto hereby agree and intend to be
legally bound as follows:
1.
Retention
.
As of
the date hereof, the Company hereby retains and HFG hereby agrees to be retained
as the Company’s
exclusive
financial advisor during the term of this Agreement. The Company acknowledges
that HFG shall have the right to engage third parties to assist it in its
efforts to satisfy its obligations hereunder. In its capacity as a financial
advisor to the Company, HFG will:
|
A.
|
Restructuring
and Going Public
Transaction.
|
(i)
consult
on the implementation of a restructuring plan (the “Restructuring”) resulting in
an organizational structure that will allow the Company to complete the Going
Public Transaction; and
(ii)
assist
the Company in evaluating the manner of effecting a going public transaction
with a public shell corporation (“Pubco”) domiciled in the United States of
America and quoted on the “OTC BB” (a “Going Public Transaction”). HFG and the
original Pubco shareholders shall hold, in the aggregate, 6.5% of Pubco’s issued
and outstanding common stock upon completion of both the Financing and the
Going
Public Transaction (the “Pubco Shareholders Ownership Percentage”). In the event
that Pubco, on a consolidated basis with the Company, reports in its Annual
Report filed with the U.S Securities and Exchange Commission, net income of
$12.5 million for fiscal 2008, HFG shall return to the Company for cancellation
that number of shares that will reduce the Pubco Shareholders Ownership
Percentage to 5.6%. At the closing of the Going Public Transaction, HFG shall
place into escrow, which escrow shall be governed by a definitive escrow
agreement, the number of shares of Pubco’s common stock that will be necessary
to allow it to satisfy its obligations under this paragraph.
FINANCIAL
ADVISORY AGREEMENT
-
Page
1
|
B.
|
Post
Transaction Period
|
Upon
consummation of the Going Public Transaction, HFG agrees to:
(i)
coordinate
and supervise a training program for the purpose of facilitating new
management’s operation of Pubco (the Company agrees that all costs and expenses
charged by third party consultants introduced by HFG and engaged by the Company
will be the sole responsibility of the Company);
(ii)
if
necessary, coordinate the preparation by the Company’s legal counsel of an
information statement to be filed with the SEC to change Pubco’s name and to in
turn assist in obtaining a new CUSIP number and stock symbol for
Pubco;
(iii)
oversee
third party development by third parties of Pubco’s investor relations efforts,
which effort shall include (a) establishing a program for communicating with
brokerage professionals, investment bankers and market makers; and (b) creating
a complete investor relations strategy to be implemented in English and Chinese.
The Company agrees that all costs and expenses charged by investor relations
and
press relations firms introduced by HFG and engaged by Pubco or the Company
will
be the sole responsibility of the Company;
(iv)
coordinate
with the Company’s legal counsel in the preparation and assembly of application
materials for the listing of Pubco’s common stock on a national exchange or
quotation medium that may include, but shall not necessarily be limited to,
the
American Stock Exchange or the NASDAQ Stock Market; and
(v)
Provide
Pubco with such additional financial advisory services as may be reasonably
requested, to the extent HFG has the expertise or legal right to render such
services.
2.
Financing
and
Financing
Conditions
.
The
Financing will be accomplished under terms and conditions that are mutually
agreeable to the issuer and the investors. HFG will seek to have the Company
receive a post money valuation of at least 11X its audited 2006 net income.
It
is anticipated that the Company will pay investment bankers involved in the
transaction a commission equal to 7% of the capital raised in the Financing
along with warrants to purchase Pubco’s common stock, the terms of which to be
agreed upon by the Company prior to the closing of the Financing. HFG will
complete the Financing within one month after the Company’s independent auditor
signs the final audit report.
The
Company acknowledges that the closing of a Financing will be contingent upon
(a)
the agreement of the Company’s shareholders to enter into a Make Good Escrow
Agreement whereby they shall agree to place into escrow an agreed upon number
of
shares of Pubco’s common stock that they will receive upon the closing of the
Going Public Transaction that shall be delivered to investors in the Financing
in the event that the Financing is completed before July, 2007, and the Company
fails to report a 60% increase in net income for fiscal 2007 over fiscal 2006,
(b) the Company’s commitment to ensure that Pubco files a registration statement
with the U.S. Securities and Exchange Commission for the purpose of registering
the Pubco shares held by HFG or its assignees, the shares purchased in the
Financing, or any security for which the purchased shares are exchanged, for
resale, with offering proceeds not to be released from escrow until the
registration statement is filed, (c) consummation of the Going Public
Transaction in accordance with this FAA, (d) the agreement by the Company that
$300,000 of the net proceeds of the Financing will be placed into escrow and
used for financial public and investor relations activities and the engagement
of a US domiciled spokesperson(s), recommended by HFG and confirmed by Company,
for a period of at least 12 months following the closing of the Financing and
(e) the agreement of the Company to have HFG act as its exclusive advisor for
any capital raising transactions undertaken by Pubco following the closing
of
the Going Public Transaction.
FINANCIAL
ADVISORY AGREEMENT
-
Page
2
3.
Non-circumvent
.
The
Company agrees that in the event that this Agreement is terminated for any
reason, other than upon the completion of a Financing, it shall not enter into
discussions or negotiations with or close a financing, regardless of terms,
with
any party introduced by HFG as a possible investor or placement agent for the
Financing, each of which shall be listed on Schedule “A” to this Agreement at
the time of introduction, for a period of one year following the date of
termination of this Agreement.
4.
Authorization
.
Subject
to the terms and conditions of this Agreement, the Company hereby appoints
HFG
to act on a best efforts basis as its exclusive consultant during the
Authorization Period (as hereinafter defined). HFG hereby accepts such appoint,
with it being expressly acknowledged that HFG is acting in the capacity of
independent contractor and not as agent of either the Company, affiliates of
the
Company resulting from the Restructuring, or Pubco.
In
addition, except in the event of an act constituting either willful misconduct
or gross negligence on the part of HFG, the Company agrees that it will not
hold
HFG responsible in the event that either the Restructuring, the Financing or
the
Going Public Transaction is not consummated, nor shall it hold HFG liable for
any damages suffered by the Company as a result of the Company’s inability to
consummate either the Restructuring, the Financing or the Going Public
Transaction. However, in the event HFG commits an act constituting either
willful misconduct or gross negligence which makes it impossible to complete
either the Financing or the Going Public Transaction, HFG shall indemnify the
Company against all costs, including legal, accounting and other fees and
expenses, arising from the Company’s efforts to complete the Financing and the
Going Public Transaction. It is expressly acknowledged by the Company that
HFG
shall not render legal or accounting advice in connection with the services
to
be provided herein. HFG shall have the right to recommend the legal and
accounting professionals for the transactions contemplated herein.
5.
Authorization
Period
.
HFG’s
engagement hereunder shall become effective on the date hereof (the “Effective
Date”) and will automatically terminate (the “Termination Date”) on the first to
occur of the following: (a) either party exercises their right of termination
as
provided for in this FAA, (b) the Company’s breach of its covenants herein, or
(c) 12 months following the completion of the Going Public Transaction. This
Agreement may be extended beyond the Termination Date if both parties mutually
agree in writing. Except as to certain obligations of the Company under
Section 3.
hereof,
this Agreement shall also terminate immediately upon the mutual decision of
the
parties not to move forward with the Restructuring, the Financing or the Going
Public Transaction.
FINANCIAL
ADVISORY AGREEMENT
-
Page
3
6.
Fees
and Expenses
.
On the
closing date of the Going Public Transaction, the Company shall pay to HFG
the
fee of $450,000.
In
addition, the Company shall reimburse HFG for all documented travel and lodging
expenses incurred by HFG personnel during the term of this Agreement.
Reimbursement is to be made within 10 days of receipt of a written request
for
reimbursement submitted to the Company.
7.
Due
Diligence and Auditabilty
.
HFG
shall have the right to perform a due diligence investigation of the Company
that demonstrates to HFG’s sole satisfaction that the Company is a suitable
candidate for the Going Public Transaction, which due diligence investigation
shall include consultation with the Company’s independent audit firm regarding
the auditablity of the Company in accordance with US GAAP. HFG shall have the
right to terminate this Agreement in the event it determines that there exists
a
material and non-curable due diligence matter. The Company shall also have
the
right to perform a due diligence investigation of Pubco.
8.
Governing
Law
.
This
Agreement shall be governed by the laws of the Peoples Republic of China and
any
dispute arising hereunder shall be submitted for binding arbitration to the
China Foreign Trade Commission Arbitration Committee in Shanghai.
It
is
understood that this Agreement will be prepared and executed in both the English
and Chinese languages. If a dispute arises as to the interpretation of a
particular provision of this Agreement because of differences between the
Chinese and English languages, the dispute shall be resolved in accordance
with
the Chinese version.
FINANCIAL
ADVISORY AGREEMENT
-
Page
4
IN
WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year
first above written.
|
|
|
|
|
|
HFG:
|
|
|
|
|
|
HFG International, Limited
|
|
|
|
|
|
By:
|
Timothy
P. Halter
|
|
|
Timothy
P. Halter,
|
|
|
Its:
President
|
|
|
|
|
|
|
The
Company:
|
|
|
|
|
|
Shang
Dong Green Foodstuff Co., Ltd.
|
|
|
|
|
|
By:
|
Si
Chen
|
|
|
Si
Chen
|
|
|
Its:
Chairman
|
FINANCIAL
ADVISORY AGREEMENT
-
Page
5
SCHEDULE
A
|
NAME
OF POTENTIAL INVESTOR
|
|
DATE
INTRODUCED
|
|
|
|
|
|
Granite
Global Ventures
|
|
2007-1-20
|
|
|
|
|
|
Hua-Mei
21
st
Century
|
|
2007-1-20
|
|
|
|
|
|
Sumitomo
Corporation Equity Asia
|
|
2007-1-20
|
FINANCIAL
ADVISORY AGREEMENT
-
Page
6
Exhibit
10.15
(English
Translation)
CONSULTING
AGREEMENT
This
Consulting Agreement (this "Agreement") is entered into as of March 8, 2007
by
and between the International Lorain Holding Inc. a holding company organized
under the laws of the Cayman Islands, (”Lorain"), and Heritage Management
Consultants, Inc., a corporation organized under the laws of South Carolina,
USA
(“Heritage” or "the "Consultant").
RECITALS
1.
Consultant is willing to provide to Lorain and its affiliated companies
(collectively, the “Company”) the consulting services identified in this
Agreement.
2.
Lorain
is willing to engage Consultant as an independent contractor, and not as an
employee, on the terms and conditions set forth herein.
AGREEMENT
In
consideration of the foregoing and of the mutual promises set forth herein,
and
intending to be legally bound, the parties hereto agree as follows:
1.
Engagement
.
Lorain
hereby engages Consultant as an independent contractor to provide outsourced
professional management services for the purpose of assisting the Company in
its
reverse merger transaction and in meeting its obligations as a US publicly
traded company. Heritage will provide an executive who will act as the Company’s
U.S. based executive (the “Spokesperson”) to the U.S. financial markets, and who
will be supported by the Heritage staff. The scope of work includes the
following:
|
·
|
The
Spokesperson will be supported by a staff financial
analyst.
|
|
·
|
Heritage
representative(s) will visit the Company’s location(s) to conduct a
detailed analysis of the Company in order to gain an understanding
of the
Company’s operations, strategies and financial
projections.
|
|
·
|
Heritage
will develop an investor presentation for use in any
transactions.
|
|
·
|
Heritage
will review and suggest edits to any written business plans in the
English
language that will be used for any
transaction.
|
|
·
|
Heritage
will provide consultation to the Company during all fund raising
activities during the term of the engagement. The Spokesperson will
make
“one on one,” web cast and teleconference presentations to investment
banks and potential investors on behalf of the Company with the Company’s
executive management in attendance. Heritage staff will coordinate
communications between investment banks, investors and the
Company.
|
|
·
|
Heritage
staff will assist the company in the construction of both historical
and
projected financial models appropriate for use with the investment
community. Heritage staff will conduct a detailed review of the financial
projections for any potential issues prior to their release to the
investment community.
|
|
·
|
On
an ongoing basis, Spokesperson will be available to make “one on one”
presentations, web cast presentation and teleconference updates to
current
investors, potential investors, and the analyst community as
appropriate
|
|
·
|
Spokesperson
will participate in investor conferences, as
appropriate.
|
|
·
|
Spokesperson
will conduct quarterly investor conference calls, as appropriate.
|
|
·
|
Spokesperson
and the Heritage staff will be readily available to receive inquiries
and
coordinate responses to potential and current investors, buy and
sell side
analysts, the financial press, and the Securities and Exchange Commission.
|
|
·
|
Heritage
will work with the Company on proactively analyzing, identifying
potential
issues or areas of concern and constructing responses to potential
questions which may result from the Company’s quarterly financial
results.
|
|
·
|
Heritage
can assist the Company in interviewing; selecting and retaining an
investor relations firm.
|
|
·
|
Heritage
will solicit independent research coverage with the sell side analyst
community.
|
|
·
|
Heritage
will review all press releases on financial results and material
company
events.
|
|
·
|
Heritage
will assist the company in the recruitment of independent directors
as
required to facilitate the company’s listing on NASDAQ or the American
Stock Exchange.
|
|
·
|
Heritage
will assist the company in putting into place the necessary internal
management resources that will enable the company to operate effectively
in the capital markets on an ongoing
basis.
|
|
·
|
Heritage
will assist the company in the arrangement of Directors and Officers
Liability Insurance coverage.
|
2.
Term
.
This
Agreement will commence on the date first written above, and unless modified
by
the mutual written agreement of the parties, shall continue for a period of
one
year.
3.
Compensation
.
a.
In
consideration of the services to be performed by Consultant, Lorain agrees
to
pay Consultant one hundred seventy five thousand U.S. dollars ($175,000.)
Payment of one hundred fifteen thousand U.S. dollars ($115,000) will be made
immediately upon the successful completion of a transaction (a “RTO”) whereby
Lorain becomes a wholly owned subsidiary of a corporation domiciled in the
United States of America., The remaining sixty thousand U.S. dollars ($60,000)
will be paid in three equal installments of twenty thousand dollars ($20,000)
at
the beginning of each calendar quarter commencing ninety (90) days after the
execution of this agreement.
b.
All
out
of pocket expenses incurred by Consultant and/or its associates shall be
reimbursed by the Company. If the RTO is not consummated, Lorain agrees to
reimburse Heritage for all out of pocket expenses incurred up to the date it
is
determined the RTO will not be effected. Travel expenses will be incurred at
a
Business Class level of service. Besides travel in the US, it is expected that
the Spokesperson will visit company’s China locations(s) two (2) times during
the term of the agreement. Maximum travel expenses will be $25,000 unless
specifically authorized by Lorain.
4.
Representations
and Warranties
.
Consultant represents and warrants (i) that Consultant has no obligations,
legal
or otherwise, inconsistent with the terms of this Agreement or with Consultant's
undertaking this relationship with the Company, (ii) that Consultant will not
use in the performance of its responsibilities under this Agreement any
confidential information or trade secrets of any other person or entity and
(iii) that Consultant has not entered into or will enter into any agreement
(whether oral or written) in conflict with this Agreement.
5
.
Indemnification
.
Company
agrees to indemnify and save harmless the Consultant, as well as Consultant’s
officers, employees, and agents from all suits, actions, losses, damages,
claims, or liability of any character, type or description, including without
limiting the generality of the foregoing all expenses of litigation, court
costs, and attorney’s fees arising out of or occasioned by the acts of Lorain,
its agents or employees, or occasioned by the acts of Consultant in the
execution or performance of the services provided by the Consultant, at any
time
from the execution date of this Agreement until such time after any pertinent
limitations period expires after the termination of this Agreement.
.
As
part
of this indemnification, Lorain agrees to defend and hold harmless Consultant
from and against any and all liabilities arising from the consulting agreement.
As such, Consultant shall not be liable to Lorain , or to anyone who may claim
any right due to its relationship with Lorain , for any acts or omissions on
the
part of the Consultant or the agents or employees of the Consultant in the
performance of Consultant’s services under this agreement. Lorain shall hold
Consultant free and harmless from any obligations, costs, claims, judgments,
attorney’s fees, or attachments arising from or growing out of the services
rendered to the Company.
Lorain
agrees to list Mr. James H. Groh, Spokesperson and Mr. Gerard Pascale on any
Directors and Officers Liability Insurance policies that the Company may retain
for a period of 6 years from the date of this Agreement.
6.
Governing
Law
.
This
Agreement shall be governed by the laws of the Peoples Republic of China and
any
dispute arising hereunder shall be submitted for binding arbitration to the
China Foreign Trade Commission Arbitration Committee in Shanghai.
It
is
understood that this Agreement will be prepared and executed in both the English
and Chinese languages, with both versions having legal efficacy. If a dispute
arises as to the interpretation of a particular provision of this Agreement
because of differences between the Chinese and English languages, the dispute
shall be resolved in accordance with the provisions of the preceding
paragraph
.
7.
Miscellaneous
.
If any
action at law or in equity is necessary to enforce or interpret the terms of
this Agreement, the prevailing party shall be entitled to reasonable attorney's
fees, costs. This Agreement shall be binding on and inure to the benefit of
the
parties to it and their respective successors and assigns.
Executed
at Hilton Head Island, SC, USA on the day and year first above written.
|
International
Lorain Holding Inc.
|
|
|
Heritage
Management Consultants, Inc
|
|
|
|
|
|
|
By
: /s/ Hisashi Akazawa
|
|
|
By: /s/ James H. Groh
|
|
Hisashi
Akazawa
|
|
|
James
H. Groh, President
|
|
|
|
|
|
|
Date
: March 8, 2007
|
|
|
March
8, 2007
|
Exhibit
14
BUSINESS
ETHICS POLICY AND
CODE
OF CONDUCT FOR
MILLENNIUM
QUEST, INC.
(As
adopted on April 30, 2007)
SCOPE:
This
Business Ethics Policy and Code of Conduct (the or this “
Policy
”)
applies to all directors on the Company’s board of directors (the “
Board
”),
officers and employees of Millennium Quest, Inc. (the “
Company
”)
and
its subsidiary entities, including all principal executive officers and
principal financial officers (collectively, the “
Covered
Persons
”).
POLICY:
All
Covered Persons must abide by the highest standards of business ethics and
avoid
any actual or apparent conflict of interest as described in this Policy. This
Policy establishes minimum standards required of all Covered Persons, which
are
in addition to the requirements of other Company policies. The Company requires
that upon commencement of employment, or election to the Board, each Covered
Persons acknowledges that he or she has read and understands this Policy and
has
reported, or will report as they arise, all potential conflicts of interest
as
required by this Policy. Failure to comply with this Policy and the procedures
established to implement it can result in disciplinary action, termination
from
employment, removal from the Board, and/or initiation of appropriate legal
action, as the Company deems appropriate.
PURPOSE:
Establishes the requirement that all Covered Persons use the highest degree
of
business ethics and provides minimum standards of business ethics and conduct.
Simply reading these standards, however, does not necessarily lead to ethical
conduct. The Covered Person must understand, support and adhere to these
standards on a daily basis, which will enable the Company to achieve both its
business objectives and strict conformity with the law. Violations of this
Policy could expose the Company and the individual involved to civil and
criminal actions, fines, revocation of licenses and other legal remedies. To
ensure on-going compliance with this Policy, the Company requires all Covered
Persons on an annual basis to acknowledge that they have read and understand
this Policy and have reported all potential conflicts of interest as required
by
the Policy.
INDEX
OF PROCEDURES OR GUIDELINES:
1.0
ORGANIZATION AND ADMINISTRATION OF THE POLICY
2.0
CONFLICTS OF INTEREST
3.0
CONFIDENTIAL INFORMATION
4.0
INSIDE INFORMATION
5.0
PROHIBITED RECEIPTS AND PAYMENTS
6.0
POLITICAL ACTIVITY AND CAMPAIGN CONTRIBUTIONS
7.0
PERSONAL USE OF COMPANY PROPERTY & SERVICES
8.0
COMPANY BOOKS AND RECORDS
9.0
COMPLIANCE WITH TAX LAWS
10.0
COMPLIANCE WITH LAWS RULES AND REGULATIONS
11.0
COMPLIANCE AND ACCOUNTABILITY
12.0
WAIVER
13.0
CONCLUSION
14.0
REPORTING NONCOMPLIANCE
15.0
NO
RETALIATION POLICY
1.0
ORGANIZATION AND ADMINISTRATION OF THE POLICY
1.1
Overall
Policy Responsibility
A.
Providing
guidance on matters of business ethics.
B.
Monitoring
compliance with this Policy and applicable laws to ensure consistency with
the
Company’s goals of promoting fair and ethical conduct and avoiding undesirable
relationships in all of its activities.
C.
Toward
that end, the Committee shall use the services of a Designated Ethics Officer
(DEO), the internal audit and legal staff and the Company’s independent public
accountants.
D.
Provide
full, fair, accurate, timely and understandable disclosure in reports and
documents the Company files with or submits to the SEC and-in other public
communications.
E.
Report
to
the DEO and/or the Audit Committee of the Board or, if no Audit Committee then
the Board (the Audit Committee or the Board, as applicable, is referred to
herein as, the “
Oversight
Authority
”),
any
conflict of interest that may arise and any material transaction or relationship
that reasonably could be expected to give rise to a conflict.
F.
Ensure
Covered Persons promptly report violations of this Policy to the Oversight
Authority.
1.2
Definitions
A.
“CEO”
-
The person designated by the Board as the Chief Executive Officer, or persons
performing similar functions.
B.
“CFO”
-
The person designated by the Board as the Chief Financial Officer, or persons
performing similar functions.
C.
“Company”
- Millennium Quest, Inc., including its subsidiaries and
affiliates.
D.
“DEO”
-
Designated Ethics Officer. The Company’s DEO shall be recommended by the CEO and
appointed to serve at the pleasure of the Board.
E.
“Covered
Persons” - All directors on the Company’s board of directors, all officers and
all employees of Millennium Quest, Inc. and its subsidiary entities, including
all principal executive officers and principal financial officers.
F.
“FCPA”
-
Foreign Corrupt Practices Act.
G.
“Officers
- The CEO, President, CFO, Chief Accounting Officer, Secretary and Treasurer,
or
persons performing similar functions and any other officer designated by the
Board as an “Officer” for purposes of this Policy.
H.
“Oversight
Authority” - The Audit Committee of the Board or, if no Audit Committee exists
then the Board.
I.
“President”
- The person designated by the Board as the President of the
Company.
J.
“Policy”
- The Company’s Business Ethics Policy and Code of Conduct.
K.
“SEC”
-
Securities and Exchange Commission.
L.
“You”
-
The Covered Person.
M.
“Your”
-
Belonging to the Covered Person.
1.3
The
DEO/Oversight Authority Relationship
The
DEO
shall report directly to the Oversight Authority. Under the Oversight
Authority’s general supervision, the DEO shall monitor compliance with this
Policy, and shall promptly report violations or threatened violations to the
Oversight Authority. The DEO shall also make recommendations to the Oversight
Authority for improving the monitoring of and compliance with this
Policy.
1.4
The
DEO’s Responsibility And Authority
The
DEO
shall direct such training and investigations as may be appropriate to ascertain
compliance with this Policy at all levels of the Company. The DEO shall also
propose for adoption by the Oversight Authority internal reporting systems
as
may be required or desirable for effective administration of the
policy.
2.0
CONFLICTS
OF INTEREST
2.1
Conflict
Of Interest Defined
Of
all
corporate activities involving employee conduct, among the most important
involves avoiding actual or potential conflicts of interest. A conflict of
interest arises when an employee’s judgment in acting on the Company’s behalf
is, or appears to be, influenced by an actual or potential personal benefit
from
an investment, business interest, or some other association or relationship.
Conflicts occur most often in cases where You or a member of Your household
or
Your immediate family (spouse, child, parent or sibling) obtains some personal
benefit at the expense of the Company’s best interests. However, they may arise
in other circumstances, as well. Keep in mind that for the purposes of this
Policy, in general, You will be regarded as having an interest in any property
owned, or any transactions entered into, by members of Your household or Your
immediate family.
2.2
Common
Conflict of Interest Situations
Conflicts
of interest can arise in many different situations, and it is not possible
to
describe all circumstances in which they may exist. The following three sections
describe common categories of conflicts of interest. They also illustrate Your
responsibility and the Company’s policy in each situation.
A.
Employee
Relationships with Parties in Company-Related Transactions.
You
must
fully disclose details when You or a member of Your household or Your immediate
family has an interest in, or a relationship with, any party that transacts
business with the Company, such as a supplier or vendor, lessor, lessee,
licensor, or licensee, when:
1.
You
are
in a position to make or influence decisions pertaining to the transactions,
and
2.
Your
interest or relationship is substantial enough to appear to a reasonable person
that Your decision-making regarding the transaction may be
affected.
3.
Examples
of these relationships include when You or a member of Your household or Your
immediate family:
a.
Has
any
position or employment, including work performed as an officer, partner,
employee, director or consultant of the other company that is a party to the
transaction;
b.
Receives
any compensation, discounts, rebates, kickbacks, credit, loans, gifts or other
perquisites from the other company;
c.
Acquires,
directly or indirectly, an interest in, or rights to the profit or income of
the
other party.
4.
You
do
not need to disclose the mere ownership or securities of the other party if
it
is listed on a national stock exchange as long as the amount You or members
of
Your household or immediate family own is less than one percent (1%) of the
class of securities outstanding, and does not equal or exceed ten percent (10%)
of Your (their) net worth.
B.
Accepting
Gifts or Favors.
You
must
not accept gifts or favors from any individual or entity that You know or should
know transacts business, or may seek to transact business with the Company,
unless the gift or favor is a common courtesy usually associated with customary
business practices. You must never accept a gift in the form of cash or a cash
equivalent. All offers of gifts or favors should be reported immediately in
writing to Your supervisor and the DEO.
C.
Nepotism.
Nepotism
occurs when preferential treatment is given on the basis of close personal
relationships, as opposed to merit. You must not grant preferential treatment
to
relatives or friends within the Company in conflict with the Company’s best
interests. You must also avoid situations in which conflicts may arise. For
example, no employee should supervise or be supervised by, or work in the same
department on the same shift as, a member of his or her immediate family.
Exceptions must be approved in writing and in advance by the Department Director
and the DEO and the CEO or CFO.
2.3
Your
Responsibility To Avoid Or Eliminate Conflicts Of Interest
You
must
avoid any relationship, influence, activity, or investment that might impair,
or
even appear to impair Your ability to make objective and fair decisions in
the
Company’s best interest. Compliance with this Policy also requires You to take
any actions regarded by the Company as necessary to eliminate or satisfactorily
regulate an actual or potential conflict of interest situation. When in doubt,
share the facts of the situation with the DEO or the Chairman of the Oversight
Authority before taking any action.
2.4
Your
Responsibility To Disclose All Possible Conflicts
Periodically,
You will be required to complete a disclosure statement setting forth any
financial interests, business and/or other relationships that might present
a
conflict of interest. In addition, You must provide full and immediate
disclosure of any interest that You may have at the time of hire or during
employment which creates, or appears to create, a possible conflict of
interest.
2.5
An
Important Note About The Company’s Disclosure Requirement
This
disclosure requirement in no way represents the Company’s intention to police or
interfere with its employees’ activities. Rather, the requirement is intended to
assist employees in realizing the fullest freedom consistent with their own
best
interests, and those of the Company and its stockholders, by protecting all
parties from the harmful effects of any subsequent revelation of activities,
associations or interests that might constitute a prohibited conflict of
interest. The disclosure requirement is merely a recognition of the fact that
very few substantial questions of conflict of interest can exist where there
is
full knowledge by the Company of all the facts. In the few instances where
such
a question might exist after full disclosure, corrective steps generally can
be
taken to avoid potential problems without interfering with the outside interests
of the employee.
2.6
Confidentiality
With
respect to any disclosure of information furnished by an employee in accordance
with this Policy, the Company will endeavor to protect such information and
handle it on a strictly confidential basis. Notwithstanding the foregoing,
disclosure by the Company to the appropriate personnel in order to avoid or
abate actual or potential conflicts of interest discovered to protect the best
interests of the Company may be required.
2.7
Related
Party Transactions
Notwithstanding
the provisions above, all related party transactions involving any Director
or
Executive Officer of the Company must be approved by the Oversight Authority
or
other designated committee of the Board.
3.0
CONFIDENTIAL
INFORMATION
3.1
Confidential
Information Defined
Confidential
information means all non-public information regarding the Company’s operations
and business activities and those of its customers and suppliers. Non-public
means any information that is not officially disclosed through means such as
press releases or other forms of publication, or is not common
knowledge.
3.2
Examples
Of Confidential Information
Confidential
information includes items such as customer lists, any and all customer
information, employee information, policies, systems and procedures, trade
secrets, financial information, business plans, contract negotiations,
contractual agreements, blueprints, marketing and promotional plans and ideas
(including new products and programs, pricing strategies and advertising
campaigns), or other information or material unique to the Company.
3.3
Your
Responsibility Regarding Confidential Information
Do
not
disclose confidential information to any unauthorized person, either during
or
after termination of Your employment. Unauthorized persons include anyone who
does not have a business need to know such information for the express benefit
of the Company, excluding: agencies which have jurisdiction over the Company,
and other authorized state and federal law enforcement officers in the course
of
their assigned duties. Do not hesitate to ask the DEO or your Department
Director if you have any question regarding a particular individual’s
authorization to obtain confidential information. Upon Your departure, You
must
not take any documents or records belonging to the Company and You must return
to your supervisor all such documents and records in Your
possession.
3.4
Your
Responsibility Not To Profit From Confidential Information
Do
not
profit from confidential information of which You have become aware during
the
course of Your employment. For example, do not acquire an interest in property
that You know the Company is considering purchasing. Similarly, You should
not
acquire any security of another entity, if You are aware that the Company is
considering purchasing that entity’s securities. These may also constitute
conflicts of interest.
3.5
Your
Responsibility Not To Compete With Company
You
must
not compete with the Company in pursuing any business opportunities which come
to Your attention during the course of Your employment with the Company. Before
personally pursuing or profiting from any venture which could be viewed as
competing with the Company, You must disclose the opportunity to the DEO or
Chairman of the Oversight Authority and obtain the Oversight Authority’s
positive written affirmation either that the venture is not in competition
with
the Company or that the Company has no interest in pursuing the
venture.
4.0
INSIDE
INFORMATION
4.1
Inside
Information Defined
Inside
information is similar to confidential information, and refers to all material
non-public information. Information is material if it could affect the market
price of a security, or if a reasonable investor would consider the information
important in deciding whether to buy, sell or hold a security. In this context,
“security” is referring to the Company’s common stock (or other securities that
may be issued by the Company in the future), or the common stock or other
securities of other companies, which due to your relationship with the Company,
you may discover is engaged in negotiations with or otherwise entering into
a
substantial business transaction with the Company. Information is considered
public only if it has been effectively disclosed to the investing public (for
example, by press release) and enough time (typically two trading days after
the
information has been announced publicly) has elapsed to permit the investment
market to absorb and evaluate the information. Inside information is not limited
to information about the Company. It also includes material norm-public
information about other corporations with which the Company has business
relationships.
4.2
Example
Of Inside Information
Examples
of inside information include, but are not limited to, non-public information
about:
A.
Earnings
results;
B.
Future
earnings, losses or stock splits as estimated or projected by the Company’s
officers;
C.
Changes
in management or dividend policies; and
D.
Events
or
business operations which are likely to affect future revenues or earnings
(for
example, the development of a new casino property; joint ventures with other
companies; mergers and acquisitions; or lawsuits and settlements).
4.3
Prohibited
Use Of Inside Information
Company
policy, state and federal laws and regulations prohibit the use of inside
information when trading in or recommending the Company’s or anyone else’s
securities. Federal securities laws impose potentially onerous civil and
criminal penalties on persons who, in connection with a purchase or sale of
securities, improperly obtain and use inside information about such securities.
Persons who fail to prevent others from using inside information may also be
liable for civil penalties under federal law.
4.4
Your
Responsibility Regarding Inside Information
You
must
not disclose inside information to persons outside the Company or other persons
within the Company who are not authorized to receive such information. It is
illegal to pass on inside information to another individual who buys or sells
a
security on the basis of that information. In fact, it is illegal to suggest
buying or selling a security while in the possession of inside information,
even
if You do not actually disclose that information.
4.5
Do
Not
Trade On Company Inside Information
You,
any
party related to You, or any party to whom You provide (improperly or otherwise)
inside information, must not trade in Company securities while possessing inside
information until the pertinent information has been disclosed by the Company
through public announcements or filings with the SEC and the public has had
sufficient time to assimilate it for not less than two full business days after
the Company has publicly disclosed the information.
4.6
Do
Not
Trade On Any Other Company Inside Information
You,
any
party related to You, or any party to whom You provide (improperly or otherwise)
inside information, must not trade in the securities of another corporation
if
the value of such securities is likely to be affected by actions of the Company
of which You are-aware and which have not been disclosed to the public. For
example, if a vendor is developing and testing a new product in conjunction
with
the Company, employees should not trade in the securities of that vendor until
such information becomes public knowledge.
4.7
Prevent
Others From Insider Trading
It
is
also illegal for certain persons to fail to prevent insider trading by others.
Individual employees with managerial or supervisory responsibilities over an
employee and, in some cases, officers, directors, and controlling stock holders
of the Company (collectively referred to as “controlling persons”), may be
liable for civil penalties under insider trading laws for the violations of
an
employee if the controlling person knew or recklessly disregarded the fact
that
the employee was likely to engage in a violation, and failed to take appropriate
steps to prevent that violation before it occurred.
4.8
Questions
Regarding Inside Information
Before
disclosing or using information in Your possession which could be considered
inside information and, therefore, subject to this Policy, You must obtain
the
written approval from the DEO, CEO or CFO. If such approval is not given, then
you should not use or disclose such information.
5.0
PROHIBITED
RECEIPTS AND PAYMENTS
5.1
Your
Use Of Company Assets
The
use
of Company funds or assets for any unlawful purpose is strictly prohibited.
You
must not establish undisclosed or unrecorded funds or assets of the Company
for
any purpose, or engage in any arrangement that results in prohibited acts.
No
payments shall be approved or made with the intention or understanding that
any
part of such payment is to be used for any purpose other than that described
by
the materials supporting the disbursement.
5.2
Your
Authorization To Use Company Assets
You
must
not authorize or make any payment, whether in money, property or services,
either Company or personal, for a bribe, kickback, or any other similar payment,
to any person or organization designed to secure favored treatment for the
Company. These payments are highly improper and could adversely reflect on
the
Company’s integrity and reputation.
5.3
Your
Responsibility To Report Prohibited Act
If
You
have information regarding any prohibited act or payments, You must promptly
report the matter to the DEO or Chairman of the Oversight
Authority.
6.0
POLITICAL ACTIVITY AND CAMPAIGN CONTRIBUTIONS
6.1
Political
Campaign Contributions Defined
Political
campaign contributions mean:
A.
Direct
expenditures or contributions, in cash or property, to candidates for nomination
or election to public office or to political parties; and
B.
Indirect
assistance or support, such as the furnishing of goods, services or equipment,
or other political fund raising support.
6.2
Prohibited
Domestic Political Contributions
The
Company does not make political contributions for candidates for federal office
and in the United States it would be a crime for the Company to do so. It is
also Company policy not to make political contributions for candidates for
state
and local office, except in those states where such payments are legal and
such
payments have been authorized in writing, in advance, by the Company
Co-Chairs.
6.3
Prohibited
Foreign Political Contributions
It
is
Company policy not to make political contributions to foreign political parties
or candidates for public office except in countries where such payments are
legal under local law, and have been approved in writing, in advance, by the
Company Co-Chairs.
6.4
Individual Employee Political Participation
The
Company encourages political participation by employees in their individual
capacities, including the making of voluntary contributions to candidates of
the
employee’s choice in accordance with legal limitations. In compliance with
federal laws and regulations, the Company will not reimburse any employee
directly or indirectly for any political contributions made by the employee.
Furthermore, employees must not engage in political activities during working
hours.
6.5
International
Business
In
addition to the general principles set out in this section, the Company has
detailed policies governing compliance with laws and regulations concerning
exports, economic sanctions, international boycotts, the United States Foreign
Corrupt Practices Act (“
FCPA
”),
gifts
to and entertainment of foreign officials, and other aspects of international
business operations. Some of these policies are summarized below. If You are
involved in the Company’s international business activities, You are required to
familiarize yourself with, and comply with, all Company policies relating to
international business operations.
A.
Foreign
Corrupt Practices Act and International Bribery Laws
The
FCPA
prohibits the offer or payment of money or anything of value to an official
of a
foreign country or public international organization, foreign political party
or
official thereof, or any candidate for political office of a foreign country
(each a “
foreign
official
”)
with
the intent or purpose of inducing the foreign official to use his or her
influence to affect a government act or decision in order to obtain, retain
or
direct any business or to obtain any other improper advantage. The prohibition
applies both to offers and to payments made directly by the Company, and to
any
offers or payments made indirectly through intermediaries such as marketing
agents, brokers, distributors, joint venture partners and similar parties.
Directors, officers and employees of government-owned or controlled companies,
and members of royal families may be considered to be foreign officials subject
to these restrictions. Prohibited offers or payments can include entertainment
and gifts, as well as money. Actions that violate the FCPA may also violate
the
laws of the foreign countries in which the Company does business. Violation
of
any of these laws can result in severe criminal or civil penalties for the
Company and for the individuals involved, including imprisonment.
Because
determining whether international business dealings are compliant with foreign
and domestic laws is complicated, You must consult with the DEO before
initiating any direct or indirect business relationships with foreign companies,
foreign officials, and foreign nationals, and obtain prior written approval
for
any expenses You incur in connection with such business relationships.
B.
United
States Sanctions Restricting Exports and Transactions
United
States economic sanctions laws and regulations also restrict exports and other
transactions with the governments of, and persons and entities associated with,
sanctioned countries such as Cuba, Iran, Libya, and North Korea, among others,
and with specially designated individuals and entities affiliated with these
and
other countries. It is against Company policy to engage in exports to or other
transactions with sanctioned countries, entities or individuals.
C.
United
States Anti-boycott Laws and Regulations
The
United States anti-boycott laws prohibit the Company from complying with or
supporting a country’s boycott of another country that is “friendly” to the
United States. Even when a company refuses to comply with a prohibited boycott,
United States law requires companies to report promptly to the United States
government any request that the company receives to support or furnish
information regarding a boycott. The rules governing the Company’s obligations
under the United States anti-boycott laws are complex, and the penalties for
violating them are severe. You should be attentive to situations where boycott
requests may occur and should inform the DEO if any such situations
arise.
7.0
PERSONAL
USE OF COMPANY PROPERTY AND SERVICES
7.1
Your
Use Of Company Property
The
use
of Company owned land, materials, equipment, or other property, and the use
of
services provided by Company employees on Company time under any other
circumstances are strictly prohibited, except as approved in advance by the
person to whom such approval authority has been delegated. For instance, you
may
not use Company employees to perform home improvement or any other personal
work
for Your benefit on Company time.
7.2
Your
Responsibility To Obtain Authorization
You
must
not sell, loan, give away or otherwise dispose of Company property, regardless
of condition or value, except with proper prior authorization.
7.3
Your
Responsibility Not To Profit From Company Time Or Property
You
may
not engage in activities on Company time or use, or cause to be used, Company
facilities, equipment, materials or supplies for Your personal
profit.
8.0
COMPANY
BOOKS AND RECORDS
8.1
Your
Responsibility Regarding Company Books And Records
It
is
Company policy that all books and records of the Company be maintained so that
they fully and fairly reflect all of the Company’s receipts and expenditures,
assets and liabilities. The integrity of the Company’s records and other
business information is based on the accuracy and completeness of the
information supporting the entries to the Company’s books of account. The
integrity of the Company’s products is dependent upon the accuracy of the
Company’s records and business information derived from its operations.
Therefore, if You are involved in creating, processing or recording such
information, You are responsible for its accuracy and completeness. You must
not
make false or artificial entries in the books and records of the Company for
any
reason.
You
must
not establish any funds or accounts outside the books and records of the
Company. All bank accounts set up on behalf of the company, foreign or domestic,
must be approved by the CFO and shall be controlled, recorded and reconciled
under the direction of the CFO.
8.2
Your
Responsibility For Full Disclosure
Federal
laws prohibit materially false or misleading statements or omission of facts
by
officers and directors in connection with the audit or examination of the
Company’s financial statements or the preparation of its required SEC
(Securities and Exchange Commission) filings. The FCPA requires the Company
to
develop and maintain a system of internal accounting controls to help assure
the
Company’s books and records accurately reflect its transactions and dispositions
of assets. The FCPA and securities laws apply to indirect as well as direct
falsification, misrepresentation or omission. Federal laws impose civil and
criminal penalties on individuals and companies who violate these requirements.
If Your duties include participation in the preparation of Company press
releases or filings with the SEC, You must use Your best efforts to assure
that
such press releases and/or SEC filings fully, fairly and accurately disclose
the
material information required to be contained therein.
No
employee, officer or director shall make any statement to (i) any stockholder,
director, officer or employee of the Company, (ii) any auditor, lawyer or
accountant retained by the Company, or (iii) any government agency, if the
statement relates to the Company’s business and the employee, officer or
director knows or has reason to believe that such statement is false or
misleading in any material respect.
Direct
or
indirect falsification of documents, whether by alteration, destruction,
intentional omission, misstatement or otherwise, is strictly prohibited and
is
grounds for immediate termination of employment or service to the
Company.
9.0
COMPLIANCE
WITH TAX LAWS
9.1
Your
Responsibility Regarding Personal Taxes
It
is
against Company policy for any employee, with fraudulent intent, to misrepresent
any employee’s income, fail to withhold applicable income taxes as required by
law, or to take any other action to illegally evade taxes on, or with respect
to, income from the Company.
9.2
Your
Responsibility Regarding Company Taxes
It
also
is Company policy to comply with all applicable tax statutes and regulations.
It
is a violation of Company policy for any employee to take any action for the
purpose of illegally evading taxes due on the Company’s operations.
9.3
Questions
Regarding Tax Compliance
Any
questions in this regard must be reviewed in advance with the CFO.
10.0
COMPLIANCE
WITH LAWS, RULES AND REGULATIONS
10.1
Your
Responsibility Regarding All Applicable Laws. Rules and
Regulations
It
is
against Company policy for any employee, with intent, to violate any applicable
law, rule or regulation issued by a governmental body. Notwithstanding the
foregoing, good faith efforts to contest laws, rules and/or regulations as
permitted by law and authorized by management of the Company shall not be
prohibited.
10.2
Questions
Regarding Legal Compliance
Any
questions in this regard must be reviewed in advance with the DEO.
11.0
COMPLIANCE
AND ACCOUNTABILITY
This
Policy is not intended as a comprehensive review of laws related to the
principles and practices regulating all Covered Persons and the policies and
practices related to conflicts of interests, relationships with public
officials, prohibited receipts and payments and antitrust laws. This Policy
is
not a substitute for expert advice. If any Covered Person has questions
concerning a specific situation, the Covered Person should contact the DEO
and/or the Oversight Authority or the Company’s general counsel or corporate
counsel before taking action.
12.0
WAIVER
Any
Request for a waiver of any provision of this Policy must be in writing and
addressed to the DEO and/or Oversight Authority. Any waiver of this Policy
with
respect to an officer or director on the Board must be approved by the Board,
after consultation with the Company’s corporate or outside counsel, and will be
disclosed promptly on Form 8-K or any other means approved by the
SEC.
13.0
CONCLUSION
13.1
Your
Responsibility For Business Ethics
You
must
maintain the highest standards of ethical conduct in all Your business dealings.
The Board adopted this Policy to help You achieve and maintain that vital goal.
You must endeavor to read, understand, and abide by it.
13.2
Required
Acknowledgment
You
are
required to complete the “Business Ethics Policy Acknowledgment and conflict of
Interest Statement” (see Attachment 1) upon accepting any appointment as
director, beginning employment or upon the institution of this Policy, and
on an
annual basis thereafter.
14.0
REPORTING NON-COMPLIANCE
14.1
Reporting
Actual or Suspected Violations
All
Covered Persons have a duty to report promptly, verbally or in writing, any
evidence of any improper practice of which they are aware in connection with
the
operations or activities of the Company or any of its subsidiaries. This
obligation requires that any Covered Person who becomes aware of any actual
or
suspected violation of this Policy, any applicable law, or any of the Company's
policies or procedures must report it promptly to his or her supervisor, to
the
DEO or the Oversight Authority.
You
may
submit a report by phone or in writing.
All
reports will be treated in a confidential manner, except where disclosure is
required to properly investigate the matter or is mandated by law.
The
Company prefers that you identify yourself when reporting violations so that
we
may follow up with you, as necessary, for additional information. If you prefer
to submit your report anonymously, however, you may do so by phone or in
writing. Both telephone reports and reports in writing will remain anonymous
if
anonymity has been requested.
14.2
Receipt
of a Report
Based
on
the nature of the comment provided, an alert will be sent to the appropriate
Company representative(s), who will review the reported issue, concern or
complaint. If the alleged violation involves an executive officer or a director,
the Chief Executive Officer and Board of Directors will be informed of the
alleged violation. The responsible party or parties will determine whether
it is
necessary to conduct an informal inquiry or a formal investigation and, if
so,
will initiate such inquiry or investigation. The results of any such inquiry
or
investigation, together with a recommendation as to disposition of the matter,
will be provided to the Company's senior management team (or a designated
committee) or, if the alleged violation involves an executive officer or a
director, to the Board (or a committee thereof). Senior management (or a
designated committee), or, if an executive officer or director is involved,
the
Board (or a committee thereof), will determine whether there has been a
violation and, if so, shall determine the disciplinary measures to be taken
against any employee, officer or director who has violated this
Policy.
Any
employee who has concerns regarding questionable accounting or auditing matters
or complaints regarding accounting, internal accounting controls or auditing
matters may confidentially, and anonymously if they wish, submit such concerns
or complaints to the DEO or the Oversight Authority.
14.3
Cooperation
and Commitment
Employees,
officers and directors are expected to cooperate fully with any inquiry or
investigation by the Company regarding an alleged violation of this Policy.
Failure to cooperate with any such inquiry or investigation may result in
disciplinary action, up to and including discharge.
Because
it is impossible to describe every potential situation that relates to our
standards of conduct and business ethics, the Company relies on the commitment
of its employees, officers and directors to exercise sound judgment, to seek
advice when appropriate and to adhere to the highest ethical standards in the
conduct of professional and personal affairs.
Customary
day-to-day issues (such as questions or concerns regarding paid time off, your
compensation, or employee relations) typically should be addressed to your
supervisor or to the Human Resources Department.
15.0
NO RETALIATION POLICY
The
Company will not discriminate against or retaliate against any employee, officer
or director who reports a complaint or concern, unless it is determined that
the
report was made with knowledge that it was false. This Policy should not be
construed to prohibit you from testifying, participating or otherwise assisting
in any state or federal administrative, judicial or legislative proceeding
or
investigation.
Exhibit
21
List
of Subsidiaries
|
Name
of Subsidiary
|
|
Jurisdiction
of Organization
|
|
%
Beneficially Owned
|
|
Shandong Green Foodstuff
CO., LTD.
|
|
Foreign-Chinese
owned,
PRC
company
|
|
80.2
%
|
|
Junan
Hongrun Foodstuff CO., LTD.
|
|
Foreign-owned,
PRC
company
|
|
100%
|
|
Beijing Green Foodstuff
CO., LTD.
|
|
Foreign-Chinese
owned,
PRC
company
|
|
100%
|
|
Luotian Green Foodstuff
CO., LTD.
|
|
Foreign-owned,
PRC
company
|
|
100%
|
The
registered capital of Shandong Green Foodstuff Co., Ltd. is RMB 100, 86 million,
and the paid-in capital of this company is RMB90, 8825 million.
International
Lorain owns 80.2% equity interest in Shandong Green Foodstuff Co., Ltd., and
the
remaining 19.8% is held by Shandong Economic Investment and Development Co.,
Ltd.
Exhibit
99.1
|
FOR
IMMEDIATE RELEASE
|
|
CONTACT: Mr. Sheldon Saidman
(719-548-9963)
|
Millennium
Quest, Inc.
Shandong
Province
People’s
Republic of China
NEWS
RELEASE
INTERNATIONAL
LORAIN HOLDING, INC. UTILIZES APO
sm
SERVICE
TO GO PUBLIC AND COMPLETE PRIVATE FINANCING
Junan
County, Shandong Province, May 3, 2007 - Millennium Quest, Inc., a Delaware
corporation (“Millennium”) (OTCBB: MLQT.OB) announced the closing of a share
exchange transaction with the shareholders of International Lorain Holding,
Inc., a Cayman Islands company (“Lorain”) and a related private placement
financing transaction. Millennium will operate through its consolidated indirect
Chinese subsidiaries to execute the current business plan of those
subsidiaries.
Under
the
terms of the share exchange transaction, Lorain’s shareholders were issued
697,663 shares of Millennium’s Series B Voting Convertible Preferred Stock in
exchange for 100% of the issued and outstanding shares of Lorain. If converted
into common stock of Millennium at the current conversion rate for conversion
of
the Series B Voting Convertible Preferred Stock into common stock and if all
Series A Voting Convertible Preferred Stock of Millennium is converted into
common stock at the current conversion rate for converting Series A Voting
Convertible Preferred Stock into common stock, the shares of Series B Voting
Convertible Preferred Stock received by the shareholders of Lorain after
conversion to common stock will represent approximately 65.43% of the total
issued and outstanding common stock of Millennium (after the closing of the
private placement described below).
In
conjunction with the stock exchange transaction, a private placement financing
transaction was completed in which Millennium issued 299,055.78 shares of its
Series B Voting Convertible Preferred Stock, along with warrants for the
purchase of an additional 59,811.16 Series B Voting Convertible Preferred Stock,
at a rate equivalent to $4.25 per common share post conversion and post reverse
split (as described herein), in exchange for approximately $19.8
million
in
gross
offering proceeds, before payment of commissions and fees. Also, warrants for
the purchase of an additional 20,933.90 of Series B Voting Convertible Preferred
Stock have been issued to Sterne, Agee & Leach, Inc. and its designees. The
shares of Series B Voting Convertible Preferred Stock issued to investors in
the
financing transaction represent approximately 27.13% of the total issued common
stock of Millennium if converted into common stock of Millennium at the current
conversion rate of the Series B Voting Convertible Preferred Stock and if all
Series A Voting Convertible Preferred Stock of Millennium is converted into
common stock of at the current conversion rate the Series A Voting Convertible
Preferred Stock.
Following
the consummation of the share exchange transaction and the private placement,
and assuming conversion of all outstanding shares of Series A Voting Convertible
Preferred Stock and Series B Voting Convertible Preferred Stock into shares
of
common stock at the present rate of conversion and the exercise of all warrants
issued, the number of issued and outstanding shares of common stock of
Millennium, on a fully diluted, basis is 26,810,593.
The
combined $19.8 million transaction includes “make good” provisions based on the
achievement of certain net income targets for Millennium’s 2007 and 2008 fiscal
years. Should Millennium, on a consolidated basis, not achieve
$9.266
million
in fiscal 2007 net income, purchasing shareholders in this transaction will
receive up to 3,533,552 shares of common stock (after shares have been adjusted
for the reverse split discussed herein) from original Lorain shareholders.
Should Millennium not achieve $
12.956
million
in fiscal 2008 net income, purchasing shareholders in this transaction will
receive up to 3,533,552 shares of common stock (after the shares have been
adjusted for the reverse split discussed herein) from original Lorain
shareholders. Lorain expects to achieve gross revenues of approximately $80.6
million and $110.7 million in fiscal 2007 and 2008, respectively, to support
achievement of these “make good” net income targets.
Lorain
is
a Cayman Islands holding company that only operates through its subsidiaries,
which are based in the People’s Republic of China. As a result of this exchange
transaction, Si Chen, Lorain’s principal executive officer was appointed to the
Board of Directors of Millennium and senior officers of Lorain were elected
as
executive officers of Millennium. The companies will operate on a consolidated
basis, executing upon the current business plan of Lorain, under Mr. Chen’s
leadership.
Mr.
Chen,
the new Chief Executive Officer of Millennium stated, "We want to thank our
financial advisor, HFG International, Limited, for facilitating our efforts
in
connection with our private financing and the going public transaction. These
transactions have given us access to the US capital markets, with the intent
of
capitalizing on significant growth opportunities.” Sterne, Agee & Leach,
Inc, acted as the placement agents in the approximately $19.8 million financing
transaction. Heritage Management Consultants, Inc. provides professional and
management and advisory services to Millennium.
Millennium’s
shares are listed on the Over-the-Counter (OTC) Bulletin Board under the symbol,
MLQT.OB.
Lorain
is
a leading food processing company engaging in the development, manufacture
and
sale of food products worldwide. Formed in 1994, the company produces hundreds
of varieties of food products, categorized into three interrelated divisions:
chestnut products, processed food, including frozen, canned and packaged goods,
and convenience foods, consisting of meals ready to eat (MRE) and ready to
cook
(RTC). Lorain, headquartered in Junan County, Shandong Province, owns and
operates four manufacturing facilities, two in Junan County, one in Luotian
Hubei Province and one in Beijing. In addition to serving the growing food
market in China, Lorain sells its products in 23 countries under both the
“Lorain” brand and under private labels. Lorain currently employs over 1250
people, and sells its products through a distribution network of wholesalers,
trading companies and supermarket chains. For the twelve months ended December
31, 2006, Lorain reported consolidated net sales of approximately
$49.1
million
and consolidated net income of approximately
$5.9
million.
Lorain
is
investing about $16.8 million to meet the growing international and domestic
demand for their products, and using about $1 million to pay off an existing
bridge loan. Lorain also plans to expand its production capacity by extending
the current space for workshops used in raw material preparation, adding new
processing and packaging lines and increasing storage facilities.
As
a
result of the consummation of the share exchange and private placement
transactions, Millennium intends to file within two days of this release, a
preliminary information statement on Schedule 14C with the U.S. Securities
and
Exchange Commission. The Schedule 14C relates to the approval by Millennium’s
Board of Directors and stockholders of Millennium’s Amended and Restated
Certificate of Incorporation which:
|
·
|
Increases
the number of Millennium’s authorized common
stock;
|
|
·
|
Effectuates
a 1 for 32.84 reverse stock split of Millennium’s common stock;
and
|
|
·
|
Changes
the name of the company to American Lorain
Corporation.
|
The
action to increase Millennium’s authorized common stock is designed primarily to
accommodate the conversion of Millennium’s Series A Voting Convertible Preferred
Stock and Series B Voting Convertible Preferred Stock into common stock. After
the amendment and restatement of Millennium’s Certificate of Incorporation, the
authorized common stock of Millennium will be increased from 20,000,000 to
200,000,000 shares. Shares of Series A Voting Convertible Preferred Stock
convert into shares of common stock on a 428.56 common shares for 1 Series
A
Voting Convertible Preferred Stock share basis, and shares of Series B Voting
Convertible Preferred Stock convert into shares of common stock on a
767.635
common
shares for 1 Series A Voting Convertible Preferred Stock share basis, and,
thereafter, all common stock will be subject to the 1 for 32.84 reverse stock
split
described
in the next paragraph.
The
preliminary Schedule 14C information statement also described the 1 for 32.84
reverse split of Millennium’s common stock, which has been approved by
Millennium’s Board of Directors and stockholders and will be effectuated by
operation of the Amended and Restated Certificate of Incorporation. The 1 for
32.84 Reverse Split will reduce the number of issued and outstanding shares
of
Millennium’s common stock and number of shares of its common stock issuable upon
conversion of the shares of Millennium’s preferred stock, and effectively
increases the number of authorized and unissued capital stock available for
future issuance. The 1 for 32.84 Reverse Split will become effective when the
Amended and Restated Certificate of Incorporation are filed with the Secretary
of State of Delaware following the expiration of the 20-day period mandated
by
Rule 14c of the Securities Exchange Act of 1934. All outstanding warrants and
conversion rights will be adjusted to reflect the stock split such that a
warrant for 1 pre-reverse split common share would be valid for .03045067
post-reverse split common shares.
When
the
reverse split becomes effective, each share of common stock will automatically
become .03045067 shares of the new common stock.
The
table
below illustrates the current capital structure of Millennium and upon
effectiveness of the amendment to and restatement of Millennium’s Certificate of
Incorporation, after giving effect to the conversion of the Series A and B
Preferred Stock into common stock and the reverse stock split:
|
|
|
Before
Conversion of Preferred Stock and Reverse Stock
Split
|
|
After
Conversion of Preferred Stock and Reverse Stock
Split
|
|
Title
of Issued and Outstanding Shares
|
|
Number
of
Shares
|
|
%
Total
Capital Stock
|
|
Number
of Shares of Common Stock
|
|
%
Total
Capital Stock
|
|
Common
Stock
|
|
10,508,643
|
|
1.3%
|
|
24,923,178
|
|
100%
|
|
Series
A Preferred Stock
|
|
100,000
|
|
5.2%
|
|
-
|
|
0%
|
|
Series
B Preferred Stock
|
|
996,718.78
|
|
93.5%
|
|
-
|
|
0%
|
|
Total
|
|
|
|
100%
|
|
|
|
100%
|
The
approval by Millennium’s Board of Directors and stockholders of the Amended and
Restated Certificate of Incorporation also operates to change the name of the
company from “Millennium Quest, Inc.” to “American Lorain Corporation”. The name
change to “American Lorain Corporation” will more accurately reflect the
anticipated future business operations.
Additional
information regarding the increase in Millennium’s authorized common stock, its
1 for 32.84 reverse stock split
and
the
name change as well as a copy of Millennium’s Amended and Restated Certificate
of Incorporation, can be found in Millennium’s Preliminary Information Statement
on Schedule 14C and its Current Report on Form 8-K.
FORWARD
LOOKING STATEMENTS
This
release contains certain “forward-looking statements” relating to the business
of Millennium and its subsidiary companies, which can be identified by the
use
of forward-looking terminology such as “believes, expects” or similar
expressions. Such forward looking statements involve known and unknown risks
and
uncertainties, including all business uncertainties relating to product
development, marketing, concentration in a single customer, raw material costs,
market acceptance, future capital requirements, competition in general and
other
factors that may cause actual results to be materially different from those
described herein as anticipated, believed, estimated or expected. Certain of
these risks and uncertainties are or will be described in greater detail in
our
filings with the Securities and Exchange Commission. Millennium is under no
obligation to (and expressly disclaims any such obligation to) update or alter
its forward-looking statements whether as a result of new information, future
events or otherwise.
###
