UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C
INFORMATION
Information Statement
Pursuant to Section 14(c)
of the Securities
Exchange Act of 1934
Check the appropriate box:
o
|
Preliminary
Information Statement
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o
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Confidential,
for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))
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x
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Definitive
Information Statement
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CHINA XD PLASTICS COMPANY LIMITED
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(Name of Registrant as Specified In Its Charter)
|
(Name of Person(s) Filing Proxy
Statement if other than the Registrant)
Payment of Filing Fee (Check the
appropriate box):
x
No fee required.
o
Fee computed on table below per
Exchange Act Rules 14c-5(g)
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(1)
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Title
of each class of securities to which transaction applies:
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(2)
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Aggregate
number of securities to which transaction applies:
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(3)
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Per
unit price or other underlying value of transaction computed pursuant to Exchange Act
Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it
was determined):
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(4)
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Proposed
maximum aggregate value of transaction:
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o
Fee paid previously with
preliminary materials.
o
Check box if any part of the fee is
offset as provided by Exchange Act Rule O-11(a)(2) and identify the filing for which the
offsetting fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
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(1)
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Amount
previously paid:
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(2)
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Form,
Schedule, or Registration Statement No.:
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CHINA XD PLASTICS COMPANY LIMITED
No. 9 Qinling Road, Yingbin Road Centralized Industrial Park
Harbin Development Zone, Heilongjiang, China 150078
March 12, 2009
Dear Stockholders:
The enclosed Information Statement is
being furnished to the holders of record of shares of the common stock (the Common
Stock) and Series B preferred stock (the Series B Preferred Stock) of
China XD Plastics Company Limited f/k/a NB
Telecom, Inc., a Nevada corporation (the Company), as of the close of business
on the record date, January 9, 2009. The purpose of the Information Statement is to notify
our stockholders that on January 8, 2009, the Company received a written consent in lieu
of a meeting of stockholders (the Written Consent) from one stockholder which
has 70.22% of the total voting power holding 405,864 shares of Common Stock and 1,000,000
shares of Series B Preferred Stock, representing 50.36%, of the issued and outstanding
shares of Common Stock and 100% of the issued and outstanding shares of Series B Preferred
Stock with 40% of the total voting power, respectively, representing 70.22% of the voting
power of the combined classes of stock. The Written Consent adopted the following
resolutions, which authorized the Company to amend the Companys Articles of
Incorporation for the purpose of increasing the authorized capital from 10,805,802 shares,
consisting of 805,802 shares of common stock, par value $0.0001 and 10,000,000 shares of
preferred stock, par value $0.0001 to 550,000,000 authorized capital, consisting of
500,000,000 shares of common stock, par value $0.0001, and 50,000,000 shares of preferred
stock, par value $0.0001.
You are urged to read the Information
Statement in its entirety for a description of the actions taken by the majority
stockholder of the Company. The resolutions will become effective twenty calendar days
after this Information Statement is first mailed to our stockholders.
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
No action is required by you. The
enclosed Information Statement is being furnished to you to inform you that the foregoing
actions have been approved by the holder of at least a majority of the outstanding shares
of all voting stock of the Company. Because a stockholder holding at least a majority of
the voting rights of our outstanding Common Stock and Series B Preferred Stock has voted
in favor of the foregoing actions, and has sufficient voting power to approve such actions
through his ownership of Common Stock and Series B Preferred Stock, no other stockholder
consents will be solicited in connection with the transactions described in this
Information Statement. The Board is not soliciting your proxy in connection with the
adoption of these resolutions and proxies are not requested from stocks.
This Information Statement is being
mailed on or about March 17, 2009 to stockholders of record on January 9, 2009.
Sincerely,
/s/ Jie Han
Jie Han
President
CHINA XD PLASTICS COMPANY LIMITED
No. 9 Qinling Road, Yingbin Road Centralized Industrial Park
Harbin Development Zone, Heilongjiang, China 150078
INFORMATION STATEMENT
PURSUANT TO SECTION 14(C)
OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14C-2 THEREUNDER
NO VOTE OR OTHER
ACTION OF THE
COMPANY'S STOCKHOLDERS IS
REQUIRED IN CONNECTION WITH THIS
INFORMATION STATEMENT.
WE ARE NOT ASKING YOU
FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A
PROXY
This Information Statement is being furnished
to the holders of record of shares of the common stock (the Common Stock) of
China XD Plastics Company Limited f/k/a
NB Telecom, Inc., a Nevada corporation (the Company), as of the close of
business on the record date, January 9, 2009. The purpose of the Information Statement is
to notify our stockholders that on January 8, 2009, the Company received a written consent
in lieu of a meeting of stockholders (the Written Consent) from the holder of
405,864 shares of Common Stock and 1,000,000 shares of Series B Preferred Stock,
representing 50.36%, of the issued and outstanding shares of Common Stock and 100% of the
issued and outstanding shares of Series B Preferred Stock, respectively, representing
70.22% of the voting power of the combined classes of stock which is calculated as
follows: the 805,802 shares of Common Stock of the Company represents 60% of the voting
power and the 1,000,000 shares of Series B Preferred Stock represents 40% of the voting
power. Therefore, the stockholder which owns 405,864 shares of Common Stock and 1,000,000
shares of Series B Preferred Stock accounts for (a) 50.36% of the Common Stock 60% voting
block or 50.36% multiplied by 60%, which equates to 30.22% of the total voting power of
the Company, and (b) 100% of the Series B Preferred Stock voting block or 100% multiplied
by 40% which equates to 40% of the total voting power of the Company. The aggregate voting
power from the two classes of stock is 30.22% and 40% which equals 70.22% total. The
stockholder acquired its shares of Common Stock and Series B Preferred Stock of the
Company pursuant to that certain Agreement and Plan of Merger, dated December 24, 2008
entered into by the Company. The Written Consent adopted the following resolutions, which
authorized the Company to amend the Companys Articles of Incorporation for the
purpose of increasing the authorized capital from 10,805,802 shares, consisting of 805,802
shares of common stock, par value $0.0001 and 10,000,000 shares of preferred stock, par
value $0.0001 to 550,000,000 authorized capital, consisting of 500,000,000 shares of
common stock, par value $0.0001, and 50,000,000 shares of preferred stock, par value
$0.0001.
Because a stockholder holding at
least a majority of the voting rights of our outstanding Common Stock and Series B
Preferred Stock has voted in favor of the foregoing resolutions, and has sufficient voting
power to approve such actions through his ownership of common stock, no other shareholder
consents will be solicited in connection with the transactions described in this
Information Statement. The Board is not soliciting proxies in connection with the adoption
of these resolutions and proxies are not requested from stockholders.
In accordance with our bylaws, our
board of directors has fixed the close of business on January 9, 2009 as the record date
for determining the stockholders entitled to notice of the above noted actions. This
Information Statement is being mailed on or about March 17, 2009 to stockholders of
record on the record date.
DISTRIBUTION AND COSTS
We will pay all costs associated with
the distribution of this Information Statement, including the costs of printing and
mailing. In addition, we will only deliver one information statement to multiple security
holders sharing an address, unless we have received contrary instructions from one or more
of the security holders. Also, we will promptly deliver a separate copy of this
information statement and future stockholder communication documents to any security
holder at a shared address to which a single copy of this information statement was
delivered, or deliver a single copy of this information statement and future stockholder
communication documents to any security holder or holders sharing an address to which
multiple copies are now delivered, upon written request to us at our address noted above.
Security holders may also address
future requests regarding delivery of information statements by contacting us at the
address noted above.
Also, please note that this
Information Statement is available over the internet at www.vfnotice.com/chinaxd.
VOTE REQUIRED; MANNER OF
APPROVAL
Approval to amend the current
Articles of Incorporation of the Company under the Nevada Revised Statutes
(NRS) Section 78.390 (the Amendment) require the affirmative vote
of the holders of a majority of the voting power of the Company. Accordingly, the holders
of a majority of the voting power of the Company must approve the Amendment.
In addition, NRS 78.320 provides in
substance that stockholders may take action without a meeting of the stockholders and
without prior notice if a consent or consents in writing, setting forth the action so
taken, is signed by the holders of the outstanding voting shares holding not less than the
minimum number of votes that would be necessary to approve such action at a stockholders
meeting. This action is effective when written consents from holders of record of a
majority of the outstanding shares of voting stock are executed and delivered to the
Company.
The Company has two classes of voting
stock outstanding consisting of Common Stock and Series B Preferred Stock. There are
currently 805,802 shares of Common Stock issued and outstanding, and each share of Common
Stock is entitled to 1 vote. The holder of the Series B Preferred Stock has voting power
equivalent to 40% of the total voting power of all Common Stock holders of the Company.
Accordingly, by way of example, the vote or written consent of (1) the stockholders
holding at least 671,502 shares of the Common Stock or (2) the stockholder holding at
least the 1,000,000 shares of the Series B Preferred Stock issued and outstanding and at
least an additional 134,301 shares of the Common Stock is necessary to approve the filing
of the Certificate of Amendment. In accordance with our bylaws, our board of directors has
fixed the close of business on January 9, 2009 as the record date for determining the
stockholders entitled to vote or give written consent.
2
On January 8, 2009, a stockholder
holding 405,864 shares of Common Stock and 1,000,000 shares of Series B Preferred Stock,
representing 50.36%, of the issued and outstanding shares of Common Stock and 100% of the
issued and outstanding shares of Series B Preferred Stock (representing 70.22% of the
voting power of the combined classes of stock) executed and delivered to the Company the
Written Consent. Accordingly, in compliance with the NRS, at least a majority of the
outstanding shares has approved the Amendment. As a result, no vote or proxy is required
by the stockholders to approve the adoption of the foregoing resolutions.
Under Rule 14c-2 promulgated under
the Securities Exchange Act of 1934, as amended (the Act), the Articles of
Amendment may not be filed with the Nevada Secretary of State until twenty calendar days
after this Information Statement is first mailed to our stockholders. As mentioned earlier
the Amendment will become effective upon the filing of the Articles of Amendment with the
Secretary of State of the State of Nevada, which is anticipated to be on or about April 6,
2009, twenty days after the mailing of this Information Statement.
PURPOSES AND EFFECT OF
THE CHANGE
On January 8, 2009, the Company
received a written consent in lieu of a meeting of stockholders (the
Written Consent) from the holder of 405,864 shares of Common Stock
and 1,000,000 shares of Series B Preferred Stock, representing 50.36%, of the
issued and outstanding shares of Common Stock and 100% of the issued and
outstanding shares of Series B Preferred Stock having a total voting power of
40%, respectively, representing 70.22% of the voting power of the combined
classes of stock which is calculated as follows: the 805,802 shares of Common
Stock of the Company represents 60% of the voting power and the 1,000,000 shares
of Series B Preferred Stock represents 40% of the voting power. Therefore, the
stockholder which owns 405,864 shares of Common Stock and 1,000,000 shares of
Series B Preferred Stock accounts for (a) 50.36% of the Common Stock 60% voting
block or 50.36% multiplied by 60%, which equates to 30.22% of the total voting
power of the Company, and (b) 100% of the Series B Preferred Stock voting block
or 100% multiplied by 40% which equates to 40% of the total voting power of the
Company. The aggregate voting power from the two classes of stock is 30.22% and
40% which equals 70.22% total. The Written Consent adopted the resolutions,
which authorized the Company to amend the Companys Articles of
Incorporation for the purpose of increasing the authorized capital from
10,805,802 shares, consisting of 805,802 shares of common stock, par value
$0.0001 and 10,000,000 shares of preferred stock, par value $0.0001 to
550,000,000 authorized capital, consisting of 500,000,000 shares of common stock
par value $0.0001, and 50,000,000 shares of preferred stock, par value $0.0001.
The text of the proposed Amendment to the Articles of Incorporation which
contains the increase in the authorized capital is attached hereto as Appendix
I. This Amendment will not affect total stockholder equity but will increase the
authorized capitalization of the Company. Subsequent to the Amendment and the
conversion of the 1,000,000 shares of the convertible Series A Preferred Stock,
there will be approximately 39,000,000 shares of Common Stock of the Company
issued and outstanding.
3
Our Board of Directors believes
that by increasing the number of authorized capital of the Company will
give the Company more flexibility to meet its obligations. Currently, the Company does not have
sufficient shares of Common Stock authorized to (a) honor certain post merger contractual obligations
under that certain Agreement and Plan of Merger the Company entered into on December 24, 2008 whereby
there are 1,000,000 shares of convertible Series A preferred stock of the Company convertible into
approximately 1:38.2 into 38,194,072 shares of Common Stock of the Company, and (b) allow for future
transactions to raise the working capital funds of the Company. Accordingly, the Company needs to
increase its authorized share capital. Subsequent to the Amendment and the conversion of the 1,000,000
shares of the convertible Series A Preferred Stock, there will be approximately 39,000,000 shares of
Common Stock of the Company issued and outstanding. Management of the Company currently does not have
any loans, proposals or arrangements with respect to future transactions to raise the working capital
funds of the Company as referenced above.
The additional Common Stock
authorized by the proposed amendment would have rights identical to our currently
outstanding Common Stock. Holders of our Common Stock are entitled to 1 vote per share.
The additional Series B Preferred Stock authorized by the proposed amendment would have
rights identical to our currently outstanding Series B Preferred Stock such that holders
of Series B Preferred Stock have voting power equivalent to 40% of the total voting power
of all Common Stock holders of the Company. Holders of our Common Stock and Series B
Preferred Stock are entitled to vote on all matters submitted to a vote of our
stockholders, including the election of directors, and except as otherwise required by
law, the holders of such shares will exclusively possess all voting power. Holders of
Common Stock and Series B Preferred Stock do not have the right to cumulative voting for
the election of directors. Subject to the preferential rights of any outstanding series
of preferred stock, the holders of Common Stock and Series B Preferred Stock will be
entitled to such dividends as may be declared from time to time by our Board from funds
legally available therefore and will be entitled to receive pro rata all of our assets
available for distribution to such holders upon liquidation. The Board further believes
that it is in Companys best interests to increase the number of authorized shares
of Common Stock in order to provide the Company with the flexibility to issue Common
Stock without further action by the Companys stockholders (unless required by law
or regulation) for such other corporate purposes as the Board may deem advisable. These
purposes may include, among other things, the sale of shares to obtain additional capital
funds, the purchase of property, the use of additional shares for various equity
compensation and other employee benefit plans of the Company or of acquired companies,
the acquisition of other companies, and other bona fide purposes.
TRANSACTION INFORMATION:
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|
On
December 24, 2008, the NB Telecom, Inc. (the Company) entered into an
Agreement and Plan of Merger (the Agreement) by and among its wholly owned
acquisition subsidiary China XD Plastics Company Limited (the Merger Sub), a
Nevada corporation, Favor Sea Limited (Favor Sea), a corporation formed under
the laws of the British Virgin Islands, and the shareholders of Favor Sea including the
principal shareholder, XD. Engineering Plastics Company Limited (XD), a
British Virgin Islands corporation.
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4
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In
connection with the acquisition, and in exchange for the outstanding stock of Favor Sea,
the shareholders of Favor Sea received 50,367,778 shares of the common stock of the
Company and 1,000,000 shares of convertible Series A preferred stock of the Company, and
XD individually received 1,000,000 shares of Series B preferred stock of the Company (the
Merger).
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The
50,367,778 shares of common stock were converted into 805,802 shares post a reverse stock
split of 124.1:1 for 1.
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The
1,000,000 shares of convertible Series A preferred stock of the Company are convertible
into approximately 1:38.2 into 38,194,072 shares of the common stock of the Company.
Assuming the conversion of the Series A preferred stock of the Company, the shareholders
of Favor Sea will own approximately 99% of the Common Stock of the Company.
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Subsequent
to the Merger and as a direct consequence, the name of the Company was changed to China
XD Plastics Company Limited.
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Contact information for both NB
Telecom, Inc. and China XD Plastics Company Limited is:
NB Telecom, Inc./China XD
Plastics Company Limited
No. 9 Qinling Road,
Yingbin Road Centralized Industrial
Park Harbin Development Zone,
Heilongjiang, China 150078
NB Telecom, Inc. (the
Company) is a provider of both privately owned and company owned payphones and
stations in Pennsylvania. The Company receives revenues from the collection of the
payphone coinage, a portion of usage of service from each payphone and a percentage of
long distance calls placed from each payphone from the telecommunications service
providers. In addition, the Company also receives revenues from the service and repair of
privately owned payphones, sales of payphone units and the sales of prepaid phone cards.
China XD Plastics Company Limited
(the Merger Sub) is a wholly-owned subsidiary of the Company which has been
established solely for the purpose of this transaction and does not have any business,
assets, liabilities or operations.
Favor Sea Limited is a holding
company whose only asset, held through a subsidiary, is 100% of the registered capital of
Harbin Xinda Macromolecule Material Co., Ltd., a limited liability company organized under
the laws of the Peoples Republic of China.
5
Harbin Xinda Macromolecule Material
Co. Ltd. (Xinda) is a high-tech company that was founded in September 2004
under the laws of the Peoples Republic of China with registered capital of 20
million RMB (US$2,416,451). Xindas executive offices and manufacturing facility are
located at No. 9 Qinling Road, Yingbin Road Centralized Industrial Park, Harbin
Development Zone, Heilongjiang Province, in northeast China. Xinda engages in the
development, manufacture, and distribution of modified plastic, primarily for use in
automobiles. The technology that has enabled us to become Chinas leading producer of
automotive modified plastics is carried in our wholly-owned research laboratory, Harbin
Xinda Macromolecule Material Research Institute (the Research Institute), a
subsidiary established in 2007. The Research Institute has developed into a leader in
research and development for Chinas macromolecular industry. The Research Institute
is outfitted with more than 80 sets of testing, analytical and production equipment used
to analyze the physical and mechanical properties of the heat resistances, durability,
stability, and environmental performance exhibited by modified plastics.
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(4)
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Terms
of the Transaction.
|
On December 24, 2008, the Company
entered into an Agreement and Plan of Merger (the Agreement) by and among its
wholly owned acquisition subsidiary China XD Plastics Company Limited (the Merger
Sub), a Nevada corporation, Favor Sea Limited (Favor Sea), a corporation
formed under the laws of the British Virgin Islands, and the shareholders of Favor Sea
including the principal shareholder, XD. Engineering Plastics Company Limited
(XD), a British Virgin Islands corporation.
The Company engaged in the transaction to improve shareholders values based on the lackluster
performance of the Companys existing operations. The acquired entity, Favor Sea and its principal
shareholder, XD, entered into the transaction to become a U.S. listed company based on their
cost-benefit analysis which was made before the financial meltdown of the U.S.
As disclosed in the Current Report
on Form 8-K, filed with the Securities and Exchange Commission on December 31, 2008,
pursuant to the Agreement, the Company acquired all of the outstanding capital stock of
Favor Sea, through the Merger Sub. Favor Sea is a holding company whose only asset, held
through a subsidiary, is 100% of the registered capital of Harbin Xinda Macromolecule
Material Co., Ltd. (Xinda), a limited liability company organized under the
laws of the Peoples Republic of China. In connection with the acquisition, and in
exchange for the outstanding stock of Favor Sea the shareholders of Favor Sea received
50,367,778 shares of the common stock of the Company and 1,000,000 shares of convertible
Series A preferred stock of the Company, and XD individually received 1,000,000 shares of
Series B preferred stock of the Company (the Merger). Subsequent to the Merger
and as a direct consequence, the name of the Company was changed to China XD
Plastics Company Limited pursuant to Chapter 92A the Revised Nevada Statutes in
connection with the Merger. The 50,367,778 shares of common stock were converted into
805,802 shares post a reverse stock split of 124.1:1 for 1 pursuant to Nevada Revised
Statutes Section 78.207 for both the total number of authorized shares of common stock and
the total number of issued and outstanding shares of common stock. The 1,000,000 shares of
convertible Series A preferred stock of the Company are convertible into approximately
1:38.2 into 38,194,072 shares of the common stock of the Company. Assuming the conversion
of the Series A preferred stock of the Company, the shareholders of Favor Sea will own
approximately 99% of the Common Stock of the Company.
6
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(5)
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Regulatory
Approvals:
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The Company has obtained the relevant approval for the merger, the name change and the reverse split
from the Secretary of State of Nevada.
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(6)
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Reports,
opinions, appraisals:
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Not applicable.
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(7)
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Past
contacts, transactions or negotiations:
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For the
previous two years the Company has no negotiations or any contacts concerning
any matters with Favor Sea Limited, whatsoever. The only negotiations that took
place between the parties resulted in the merger transaction which was described
and disclosed in the Form 8-K filed on December 31, 2008. Favor Sea Limited,
after due diligence based on public filings, identified and approached the
Company for a merger. The transaction was negotiated and closed in the month of
December 2008.
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(8)
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Selected
financial data:
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Not applicable.
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(9)
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Pro
Forma Information:
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Summary
Selected Pro Forma Condensed Consolidated Financial Data
The
following summary selected unaudited pro forma condensed consolidated balance sheet has
been presented with consolidated subsidiaries at September 30, 2008. The following summary
selected unaudited pro forma condensed consolidated statement of income for the nine
months ended September 30, 2008 and for the year ended December 31, 2007 has been
presented as if the acquisition had occurred January 1, 2007.
The
unaudited pro forma condensed consolidated statements do not necessarily represent the
actual results that would have been achieved had the companies been combined at the
beginning of the year, nor may they be indicative of future operations. These unaudited
pro forma condensed financial statements should be read in conjunction with the
companies respective historical financial statements and notes included thereto.
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Year ended
December 31, 2007
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Nine months ended
September 30, 2008
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Income Statement Data
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Net Revenues
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$
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34,177,415
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$
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55,802,003
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Gross profit
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$
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6,347,442
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$
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13,921,235
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Income from operations
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$
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5,622,507
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$
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12,019,405
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|
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Net income
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$
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5,272,502
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$
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11,437,903
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Net income per common sharebasic
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$
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0.12
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$
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0.25
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|
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Weighted average number of shares used in
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|
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calculating net income per sharebasic
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|
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49,632,222
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|
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49,632,222
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7
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As at September 30, 2008
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Balance Sheet Data
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Current assets
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$
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47,191,190
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Total assets
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$
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60,083,321
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Current liabilities
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|
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$
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38,148,515
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Total liabilities
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|
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$
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38,148,515
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Minority interests
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|
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$
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0
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Stockholders' equity
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|
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$
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21,934,806
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|
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(10)
|
Pro
Forma Information:
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Historical
and Pro Forma Per Share Data
|
The following table sets forth the
historical and pro forma per share data of Favor Sea and pro forma historical and
equivalent pro forma data of the Company:
9/30/2008
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Favor Sea
Historical
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NB Telecom, Inc.
Historical
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NB Telecom, Inc.
Pro Forma Combined
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Favor Sea
Pro Forma Equivalent
|
|
|
|
|
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Book value
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|
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60,083,321
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|
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5,877
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|
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60,083,321
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|
|
|
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Shares used in calculation
|
|
|
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40,000
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|
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49,632,222
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|
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49,632,222
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Book value per share
|
|
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1,502
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|
|
0.00
|
|
|
1.21
|
|
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1,524.108696
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|
Earnings (loss) per share
|
|
|
|
285.95
|
|
|
0.00
|
|
|
0.25
|
|
|
314.75
|
|
Dividends
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Dividends per share
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
FOR THE YEAR ENDED 12/31/2007
|
|
|
Earnings (loss) per share
|
|
|
|
131.81
|
|
|
0
|
|
|
0.12
|
|
|
151.08
|
|
Dividends
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Dividends per share
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(11)
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Pro
Forma Information
:
|
See the unaudited pro forma condensed
consolidated financial statements of the Company at the end of this Information Statement.
8
Common equity and related stockholder
matters
All
the authorized and issued securities of Favor Sea consist of shares of common stock. The
common stock of Favor Sea is not traded on any public trading market, domestic or foreign.
The value of one share of common stock as of December 16, 2008 was $1.00. As of December
23, 2008, there were approximately 130 shareholder of Favor Sea common stock holding an
aggregate of 40,000 shares. As described in the section entitled Transaction
Information on page 4 of this Information Statement, all the shares of Favor Sea
were exchanged for shares of NB Telecom, Inc. in connection with the merger.
We
currently intend to retain all future earnings for use in the operation and expansion of
our business. We do not intend to pay any cash dividends in the foreseeable future but
will review this policy as circumstances dictate. Should we decide in the future to do so,
as a holding company, our ability to pay dividends and meet other obligations depends upon
the receipt of dividends or other payments from our operating subsidiaries based in the
PRC. Our operating subsidiaries, from time to time, may be subject to restrictions on its
ability to make distributions to us, including restrictions on the conversion of local
currency into U.S. dollars or other hard currency and other regulatory restrictions.
Favor
Sea does not have any Equity Compensation Plans in effect.
RISK FACTORS
Our Chief Executive
Officer has a large degree of control on us through his position and stock ownership and
his
interests may differ from other stockholders.
Our Chief Executive Officer, Mr. Jie
Han has an option on XD. Engineering Plastics Company Limiteds shares. As a result,
Mr. Han will be able to influence the outcome of stockholder votes on various matters,
including the election of directors and extraordinary corporate transactions such as
business combinations. Mr. Hans interests may differ from that of other
stockholders.
Risks Related To Series
B Preferred Stock.
There are now 1,000,000 shares of
Series B Preferred Stock issued to XD. Engineering Plastics Company Limited with 40% of
the total voting power of the Companys common stock put together and other consent
rights on mergers and acquisitions, significant acquisition or disposition of assets and
change of control, among others. This gives XD. Engineering Plastics Company Limited
significant voting power. Such voting power may enable XD. Engineering Plastics Company
Limited to block actions that may benefit the common stockholders thus reduce the value of
their holdings.
Existing shareholders
will experience dilution from the conversion of Series A Convertible Preferred Stock
Assuming the conversion of the 1,000,000
shares of convertible Series A Preferred Stock, the percentage ownership of the existing
shareholders who do not hold such shares of convertible Series A Preferred Stock will be
reduced. Such existing shareholders will experience subsequent dilution, however such
newly issued securities will not have rights, preferences and privileges senior to those
of the existing shareholders.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists, as of
January 7, 2009, the number of shares of common stock beneficially owned by (i) each
person or entity known to the Company to be the beneficial owner of more than 5% of the
outstanding common stock; (ii) each officer and director of the Company, and (iii) all
officers and directors as a group. Information relating to beneficial ownership of common
stock by our principal stockholders and management is based upon information furnished by
each person using beneficial ownership concepts under the rules of the
Securities and Exchange Commission. Under these rules, a person is deemed to be a
beneficial owner of a security if that person has or shares voting power, which includes
the power to vote or direct the voting of the security, or investment power, which
includes the power to vote or direct the voting of the security. The person is also deemed
to be a beneficial owner of any security of which that person has a right to acquire
beneficial ownership within 60 days. Under the Securities and Exchange Commission rules,
more than one person may be deemed to be a beneficial owner of the same securities, and a
person may be deemed to be a beneficial owner of securities as to which he or she may not
have any pecuniary beneficial interest. Except as noted below, each person has sole voting
and investment power.
The Certificate of Change to
effectuating the 124.1 to 1 reverse split of the issued and outstanding shares of common
stock, while correspondingly reducing the Companys authorized capital, was filed
with the Secretary of State of Nevada on January 6, 2009. As of such date, the Company had
110,000,000 shares of stock authorized, of which 100,000,000 shares of common stock were
authorized, issued and outstanding and 10,000,000 shares of preferred stock were
authorized, of which 1,000,000 shares of Series A Preferred Stock were issued and
outstanding and 1,000,000 shares of Series B Preferred Stock were issued and outstanding.
There are no options or warrants
convertible into shares of Common Stock. There are 1,000,000 shares of convertible Series
A preferred stock of the Company convertible approximately 1:38.2 into 38,194,072 shares
of Common Stock of the Company.
9
Name and Address of
Beneficial Owner
(1)
|
|
Amount and Nature
of Beneficial
Ownership
(2)
|
|
Percentage
of Class
|
|
|
|
|
|
|
|
Paul Kelly
|
|
|
|
0
|
|
|
|
|
Craig Burton
|
|
|
|
0
|
|
|
|
|
Leonard Battaglia
|
|
|
|
0
|
|
All officers and directors
|
|
|
as a group (3 persons)
|
|
|
|
0
|
|
|
|
|
|
|
|
XD. Engineering Plastics Company Limited
|
|
|
|
405,864
|
|
|
50.36%
|
(3)
|
P.O. Box 957, Offshore Incorporations Centre
|
|
|
Road Town, Tortola, British Virgin Islands
|
|
|
(1)
|
Except
as otherwise noted, each shareholder's address is No. 9 Qinling Road, Yingbin Road
Centralized Industrial Park, Harbin Development Zone, Heilongjiang, China 150078.
|
(2)
|
Except
as otherwise noted, all shares are owned of record and beneficially.
|
(3)
|
XD
is the holder of 1,000,000 shares of convertible Series A preferred stock of the Company
convertible approximately 1:38.2 into 38,194,072 shares of Common Stock of the
Company. XD also is the holder of 1,000,000 shares of Series B Preferred Stock
which has voting power equivalent to 40% of the total
|
10
EXECUTIVE COMPENSATION
The following is a summary of the
compensation paid to our executive officers for the two years ending
December 31, 2007.
SUMMARY COMPENSATION TABLE
|
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock Awards
|
Option Awards
|
Nonequity Incentive Plan Compensation
|
Nonqualified Deferred Compensation Earnings
|
All Other Compensation
|
Total ($)
|
Paul Kelly
President
|
2006
|
$33,448
|
$0
|
$0
|
$0
|
0
|
$0
|
$0
|
$33,448
|
|
2007
|
$23,270
|
$0
|
$0
|
$0
|
0
|
$0
|
$0
|
$23,270
|
Craig Burton
|
2006
|
$0
|
$0
|
$0
|
$0
|
0
|
$0
|
$0
|
$0
|
|
2007
|
$0
|
$0
|
$0
|
$0
|
0
|
$0
|
$300
|
$300
|
11
The following is a summary of all
options, unvested stock and equity incentive plans for our Executive Officers for the
year ending December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
|
|
Option Awards
|
Stock Awards
|
Name
|
Number of Securities Underlying Unexercised Options Exercisable
|
Number of Securities Underlying Un-Exercised Options Un-Exercisable
|
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
|
Option Exercise Price
|
Option Expiration Date
|
Number of Shares or Units of Stock That Have Not Vested
|
Market Value of Shares or Units of Stock That Have Not Vested
|
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
|
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
|
Paul Kelly
|
0
|
0
|
0
|
N/A
|
N/A
|
0
|
0
|
0
|
0
|
Craig Burton
|
0
|
0
|
0
|
N/A
|
N/A
|
0
|
0
|
0
|
0
|
The following is a summary of the
compensation paid to our Directors for the period ending December 31, 2007.
|
|
|
|
|
|
|
|
DIRECTOR COMPENSATION
|
Name
|
Fees Earned or Paid in Cash
|
Stock Awards
|
Option Awards
|
Non-Equity Incentive Plan Compensation
|
Nonqualified Deferred Compensation Earnings
|
All Other Compensation
|
Total
|
Paul Kelly
|
23,270
|
0
|
0
|
0
|
0
|
0
|
23,270
|
Craig Burton
|
300
|
0
|
0
|
0
|
0
|
0
|
300
|
Leonard J. Battaglia
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
12
CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
Other than as described in this
Information Statement, none of the following parties has, since the date of incorporation
of the Company, had any material interest, direct or indirect, in any transaction with the
Company or in any presently proposed transaction that has or will materially affect us:
|
|
any
of our directors or officers;
|
|
|
any
person proposed as a nominee for election as a director;
|
|
|
any
person who beneficially owns, directly or indirectly, shares carrying more than 10% of
the voting rights attached to our outstanding shares of common stock; or
|
|
|
any
relative or spouse of any of the foregoing persons who has the same house as such person.
|
INTEREST OF CERTAIN
PERSONS IN OR IN OPPOSITION TO MATTERS TO BE ACTED UPON
No director, executive officer,
associate of any officer or director or executive officer, or any other person has any
interest, direct or indirect, by security holdings or otherwise, in the Amendment to the
Articles of Incorporation or reverse split which is not shared by all other stockholders.
OTHER MATTERS
The Board knows of no other matters
other than those described in this Information Statement which have been approved or
considered by the holders of a majority of the shares of the Companys voting stock.
INVESTOR INFORMATION
All reports filed by the Company
with the SEC are available free of charge via EDGAR through the SEC website at
www.sec.gov. In addition, the public may read and copy materials filed by the Company
with the SEC at the SEC's public reference room located at 100 F Street, N.E.,
Washington, D.C. 20549. You can obtain information about the operation of the SEC's
Public Reference Room by calling the SEC at 1-800-SEC-0330.
IF YOU HAVE ANY QUESTIONS
REGARDING THIS INFORMATION STATEMENT AND/OR THE ARTICLES OF AMENDMENT, PLEASE CONTACT:
CHINA XD PLASTICS COMPANY LIMITED
No. 9 Qinling Road,
Yingbin Road Centralized Industrial Park
Harbin Development Zone, Heilongjiang, China
150078
By Order of the Board of
Directors,
/s/ Jie Han
Jie Han
President
13
INFORMATION RELATED TO
THE MERGER
Item 1.01
|
Entry
into a Material Definitive Agreement
|
Item 2.01
|
Completion
of Acquisition of Assets
|
Item 3.02
|
Unregistered
Sale of Equity Securities
|
Item 3.03
|
Material
Modification to Rights of Security holders
|
Item 5.01
|
Changes
in Control of Registrant
|
Item 5.02
|
Departure
of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers
|
On
December 24, 2008, NB Telecom, Inc. (the Company) acquired all of the
outstanding capital stock of Favor Sea Limited, a British Virgin Islands corporation,
through China XD Plastics Company Limited, a Nevada corporation (the Merger
Sub) wholly owned by the Company. Favor Sea Limited is a holding company whose only
asset, held through a subsidiary, is 100% of the registered capital of Harbin Xinda
Macromolecule Material Co., Ltd. (Xinda), a limited liability company
organized under the laws of the Peoples Republic of China (China or
PRC). Xinda is engaged in the development, manufacture and marketing of
modified plastics, primarily for use in the automotive industry. Xindas offices and
manufacturing facilities are located in China.
In
connection with the acquisition, the following transactions took place:
|
|
The
Merger Sub issued 10 shares of the common stock of the Merger Sub which constituted no
more than 10% ownership interest in the Merger Sub and 1,000,000 shares of convertible
Series A preferred stock of the Company to the shareholders of Favor Sea Limited, and
also 1,000,000 shares of Series B preferred stock to XD. Engineering Plastics Company
Limited, a British Virgin Islands corporation, the principal shareholder of Favor Sea
Limited (XD), in exchange for the outstanding stock of Favor Sea Limited (the
Share Exchange or Merger). The 10 shares of the common stock of
the Merger Sub were converted into approximately 50,367,778 shares of the common stock of
the Company prior to and approximately 405,928 post a reverse stock split of 124.1 for 1
pursuant to Nevada Revised Statutes Section 78.207 for both the total number of
authorized shares of common stock and the total number of issued and outstanding shares
of common stock (Reverse Split), and the 1,000,000 shares of convertible
Series A preferred stock of the Company shall convert approximately 1:38.2 into
38,194,072 shares of the common stock of the Company after the completion of the Merger
so that eventually the shareholders of Favor Sea Limited own approximately 99% of the
common stock of the Company.
|
|
|
The
record date for the Reverse Split is set for December 31, 2008. The record holders of the
Companys common stock on the date of December 31, 2008 shall be subject to a
124.1:1 reverse split with fractional shares to be rounded up to one hundred round lot,
with the round-up shares to be deducted from certain designated shareholders by the
Company.
|
14
|
|
Paul
Kelly, Craig Burton and Leonard J. Battagha resigned from our Board of Directors
effective December 31, 2008.
|
|
|
Jie
Han, the Chairman of Xinda, was elected to serve on our Board of Directors.
He will be appointed as the
Chief Executive Officer and Chief Financial Officer of the Company.
|
|
|
Qingwei
Ma and Junjie Ma were elected to serve on the Board. They will be appointed as officers of the Company.
|
|
|
As
part of the Merger, the Companys name is changed from NB Telecom, Inc. to
the Merger Subs name China XD Plastics Company Limited.The Company is
communicating with NASDAQ for the name change and trading symbol change on the OTC
Bulletin Board.
|
As
a result of these transactions, persons affiliated with Xinda now own securities that
represent 99% of the equity in the Company. In addition, persons affiliated with Xinda
will control the Board of Directors of the Company ten days after the notice pursuant to
Rule 14f-1 is mailed to the shareholders of record.
New Management
Within
the next few days, the Company will file with the Securities and Exchange Commission
(SEC) and mail to its shareholders of record an information statement prepared
in accordance with SEC Rule 14f-1, containing information about Jie Han, Qingwei Ma and
Junjie Ma among other things. Ten days after the information statement is mailed to the
shareholders of record, Jie Han, Qingwei Ma and Junjie Ma will take office on the Board.
At that time, the executive officers and directors of the Company will be:
Name
|
|
Age
|
|
Positions with the Company
|
|
|
|
|
|
|
|
Jie Han
|
|
|
|
43
|
|
Chairman, Chief Executive Officer and Chief Financial Officer
|
|
|
|
|
|
Qingwei Ma
|
|
|
|
34
|
|
Director, Chief Operating Officer
|
|
|
|
|
|
Junjie Ma
|
|
|
|
33
|
|
Director, Head of Research Institute
|
|
|
All directors hold office until the
next annual meeting of our shareholders and until their successors have been elected and
qualify. Officers serve at the pleasure of the Board of Directors.
15
Jie Han.
Mr. Han co-founded
Xinda in 2004, and has been employed by Xinda since that time. In January 2008 Mr. Han was
appointed Chairman and Chief Executive Officer of Xinda. Prior to organizing Xinda
High-tech, which was founded in 2003, Mr. Han had been associated with the Harbin Xinda
Nylon Factory, which he founded in 1985. With 24 years of experiences in the industry, Mr.
Jie Han is an expert in the management and financial works dealing with the manufacture
and distribution of modified plastic products. Mr. Han currently serves as an executive
director of China Plastic Processing Industry Association and is also a director of the
Heilongjiang Industry and Commerce Association. In addition, Mr. Han serves as a deputy to
the Harbin Municipal Peoples Congress.
Qingwei Ma.
Mr. Ma has been
employed as General Manager of Xinda since it was founded in 2004. In 2008 he was promoted
to Chief Operating Officer. Prior to joining Xinda, Mr. Ma was employed for six years by
Harbin Xinda Nylon Factory as Manager of Quality Assurance, then as Manager of Research
and Development, and finally as Production Manager. In 1997 Mr. Ma was awarded a
bachelors degree by the Northern China Technology University, where he specialized
in the chemical engineering of high polymers. Mr. Ma has 11 years of experiences in the
industry. He also published two articles in Chinas key journals in the areas of
modified plastic industry. In 2001 Mr. Ma was selected as Harbin Quality Work
Advanced Enterprise and Advanced Worker; in 2004 he was awarded the Heilongjiang
First Professional Manager Qualification Certificate. One of his inventions,
compound nano modified materials dedicated to the automobile bumper won the
Science and Technology Progress Awards issued by Harbin Municipality.
Junjie Ma.
Mr. Ma graduated from
Beijing University of Science and Technology, majored in Polymer materials and
engineering. He was a technician of Harbin Longjiang Electrical Plant from 1997 to 2004
and was a supervisor and manager of Harbin Xinda Macromolecule Material Inc. from 2004 to
2007. Since 2008, he was elected to be Head of Research Institute of Harbin Xinda
Macromolecule Material Co., Ltd. Mr. Junjie Ma is a polymer materials engineers and has
developed more than 120 plastic additives, modified plastics for automobiles and
engineering plastics among which 50 products have been approved by auto enterprises. A
number of products have been awarded as the National Torch Program projects, Spark
Projects and Harbin City Important New Products project.
16
Principal Shareholders
Upon
completion of the Share Exchange and post the reverse split, there will be approximately
39,000,000 shares of the Companys common stock issued and outstanding. In addition,
there will be 1,000,000 shares of non-convertible Series B Convertible Preferred Stock
issued and outstanding, The holders of the Series B Preferred Stock have voting power
equivalent to 40% of the total voting power of all common stock holders of the Company.
The
following table sets forth information known to us with respect to the beneficial
ownership of our common stock as of December 31, 2008 by the following:
|
|
each
shareholder who beneficially owns more than 5% of our common stock (on a fully-diluted
basis);
|
|
|
Jie
Han, our Chief Executive Officer
|
|
|
each
of the members of the Board of Directors; and
|
|
|
all
of our officers and directors as a group.
|
Name and Address of
Beneficial Owner(1)
|
|
Amount and Nature
of Beneficial
Ownership(2)
|
|
Percentage
of Class
|
|
|
|
|
|
|
|
Jie Han
|
|
|
|
0
|
(3)
|
|
|
|
Qingwei Ma
|
|
|
|
0
|
|
|
|
|
Junjie Ma
|
|
|
|
0
|
|
|
|
|
|
|
|
All officers and directors
|
|
|
as a group (3 persons)
|
|
|
|
0
|
(3)
|
|
|
|
|
|
|
XD. Engineering Plastics Company Limited(4)
|
|
|
P.O. Box 957, Offshore Incorporations Centre
|
|
|
|
32,462,600
|
(3)
|
|
83.23%
|
|
Road Town, Tortola, British Virgin Islands
|
|
|
(1)
|
Except
as otherwise noted, each shareholders address is c/o Harbin Xinda
Macromolecule Material Co., Ltd., No. 9 Qinling Road, Yingbin Road
Centralized Industrial Park, Harbin Development Zone, Heilongjiang
Province, P.R. China.
|
(2)
|
Except
as otherwise noted, all shares are owned of record and beneficially.
|
(3)
|
Jie
Han and Qiuyao Piao, the sole shareholder of XD,
are parties to
an Option Agreement dated May 16, 2008. The agreement provides that
Mr. Han may purchase XD
from Ms. Piao for a nominal price
if Xinda achieves certain revenue thresholds. Mr. Han may purchase
25% of XD
if Xindas revenues during the first three
quarters of 2008 exceed $40 million. He may purchase 14% of XD if
Xindas revenues during the first three quarters of 2009 exceed
$70 million. And he may purchase 61% of XD if Xindas revenues
during the first three quarters of 2010 exceed $110 million.
|
(4)
|
Qiuyao
Piao and Jie Han are the directors of XD. Qiuyao Piao is the chairwoman
and Chief Executive Officer of XD. By agreement between them, only
Ms. Piao has the authority to vote and dispose of the shares held by
XD.
|
17
INFORMATION REGARDING
THE ACQUIRED COMPANIES
Favor
Sea Limited
Favor
Sea Limited (Favor Sea) was organized under the laws of the British Virgin
Islands on May 2, 2008. It has initiated no business activity. On August 11, 2008, Favor
Sea acquired 100% of the outstanding shares of Hong Kong Engineering Plastics Company
Limited, in exchange for debt. Those shares represent the only asset of Favor Sea.
Hong
Kong Engineering Plastics Company Limited
Hong
Kong Engineering Plastics Company Limited (HK Engineering Plastics) was
organized under the laws of the Hong Kong Special Administrative Region on May 27, 2008.
It has initiated no business activity. On July 28, 2008, HK Engineering Plastics acquired
100% of the registered capital of Harbin Xinda Macromolecule Material Co. That ownership
interest represents the only asset of HK Engineering Plastics.
Harbin
Xinda Macromolecule Material Co., Ltd.
Harbin
Xinda Macromolecule Material Co. Ltd. (Xinda) is a high-tech company that was
founded in September 2004 under the laws of the Peoples Republic of China with
registered capital of 20 million RMB (US$2,416,451). Xindas executive offices and
manufacturing facility are located at No. 9 Qinling Road, Yingbin Road Centralized
Industrial Park, Harbin Development Zone, Heilongjiang Province, in northeast China. Xinda
engages in the development, manufacture, and distribution of modified plastic, primarily
for use in automobiles. The technology that has enabled us to become Chinas leading
producer of automotive modified plastics is carried in our wholly-owned research
laboratory, Harbin Xinda Macromolecule Material Research Institute (the Research
Institute), a subsidiary established in 2007. The Research Institute has developed
into a leader in research and development for Chinas macromolecular industry. The
Research Institute is outfitted with more than 80 sets of testing, analytical and
production equipment used to analyze the physical and mechanical properties of the heat
resistances, durability, stability, and environmental performance exhibited by modified
plastics.
Modified
plastic is produced by changing the physical and/or chemical characteristics of ordinary
resin materials. In order for plastics to be used in the automobile environment, they must
satisfy certain physical criteria in terms of electro-magnetic characteristics, reaction
to light and heat, durability, flame resistance, and mechanical functionality.
Xindas unique formulas and processing techniques enable us to produce low-cost
high-quality modified plastic materials, which have been accepted by many of the major
automobile manufacturers in China. In addition, we also provide specially engineered
plastics and environment-friendly plastics for use in the assembly of equipment for
oilfields, mining, ship power, power station equipment, and other industries.
18
Xindas
primary market is the rapidly expanding Chinese automotive industry. In 2007 8.88 million
automobiles were sold in China, which increased by 22% than previous year. It is
estimated that the Chinese auto market will be growing by 15% annually in the coming
years.ach automobile requires 100kg to 150 kg of modified plastic, which means that by
2010 the demand for modified plastic in the Chinese automobile industry will be
approximately 1.2 million tons annually. Xindas existing facility has an annual
production capacity of 40,000 tons. If we complete the acquisition of an additional 19
production lines, discussed below, our annual capacity will reach 100,000 tons.
Our
specialized plastics are utilized in the exterior and interior trim and in the functional
components of more than 30 automobile brands manufactured in China, including Audi, Red
Flag, Volkswagen and Mazda. At present, Xinda manufactures approximately 145 types of
automobile-specific modified plastic products, 117 of which have been certified for use by
one or more of the automobile manufacturers in China. The automotive applications for our
plastics include exteriors (automobile bumpers, rear- and side- view mirrors, license
plate), interiors (door panels, dashboard, steering wheel, glove compartment and safety
belt components), and functional components (air conditioner casing, heating and
ventilation casing, engine covers, and air ducts).
Our
145 products are organized into seven categories, based on their physical characteristics:
Modified Polypropylene:
|
COMPNIPER:
a form of modified polypropylene that exhibits high fluidity and impact resistance. These
products are primarily used for the interior automobile parts, such as the inner panels,
instrument panels, and box lids. 27 of these products have been certified for use in the
Chinese auto industry.
|
|
COMPWIPER:
a form of modified polypropylene that exhibits low-temperature-resistance and impact
resistance. These products are primarily used for external automobile parts, such as the
front and back bumpers and mudguards. 23 of these products have been certified for use in
the Chinese auto industry.
|
|
COMPGOPER:
a form of modified polypropylene that exhibits high-temperature-resistance and resistance
to static. These products are used primarily for automobile functional components, such
as the unit heater shells and air conditioner shells. 33 of these products have been
certified for use in the Chinese auto industry.
|
|
MOALLOLY:
a form of modified ABS (acrylonitrile butadiene styreme) plastic that exhibits high
gloss, high rigidity, and size stability. These products are primarily used for
automobile functional components, such as the heat dissipating grid and wheel covers. 6
of these products have been certified for use in the Chinese auto industry.
|
19
|
POLGPAMR:
a form of modified nylon that exhibits high wear and heat resistance. These products are
primarily used for automotive parts requiring high flame and heat resistance. 10 of these
products have been certified for use in the Chinese auto industry.
|
|
MOAMIOLY:
a wear-resistant form of engineering plastic. These products are primarily used for the
engine hood, intake manifold, and bearings. 7 of these products have been certified
for use in the Chinese auto industry.
|
|
BRBSPCL:
a form of alloy plastic. These products are used primarily for the rearview mirror,
grille, automotive electronics and other components. The products can also be used in
computers, plasma TVs, mobile phones and other electronic and electrical consumer
products. 7 of these products have been certified for use in the Chinese auto industry.
|
|
Environment-friendly
Modified Plastic
|
|
POLGBSMR:
an environment-friendly form of modified plastic, is used in automobiles with
environmental standard requirements. 4 of these products have been certified for use in
the Chinese auto industry.
|
|
Modified
Plastic for Special Engineering
PEEK: a special engineering form of modified plastics
that can be used in communication and transportation, electronic and electric appliance,
machinery, medical equipment and analytical equipment. Xinda is developing products in
this field based on the yearsresearch findings. However, none of these products has
been certified for use in the auto industry.
|
Physical
Plant and Production
Our
executive offices and production facilities are located in the Harbin Development Zone in
the City of Harbin, which is the provincial capital of Heilongjiang Province in northeast
China. Our facility has a total usable area of 7,359 square meters (79,212 square feet).
The facility includes six buildings with one office building attached by one workshop, one
workshop, one storage room, one transformer station, and two guard rooms, with a usable
area of 7,359 square meters (79,212 square feet). All the companys properties are
insured by China Pacific Property Insurances Co., Ltd.
20
The
land on which our facility is located measures 14,715 square meters (158,391 square feet).
The land use right was issued to Xinda by the City of Harbin. The right will expire in
2053. Compliance with Chinese environmental regulations currently cost us 30,000 RMB
($4,392) annually. However during 2008 we are engaged in a ground remediation project to
comply with new regulations. The cost of the project in 2008 will be 10,180,000 RMB ($1.5
million). As a result of the new regulations, our annual environmental compliance cost is
expected to increase to 1,018,000 RMB ($150,000).
The
process of manufacturing modified plastic consists of modifying a standard plastic
(polypropylene, ABS, PA6, PA66, etc.) by adding various agents and additives that will
alter the physical and/or functional characteristics of the plastic. Catalysts are added
that facilitate the desired chemical reactions, all of which occurs in a specially
designed equipment. The resulting plastics are then extracted from the equipment by an
extraction technique that is proprietary to Xinda. Further processing may involve
additional blending, extrusion, cooling and cutting, homogenizing and packing, as needed
to meet the customers requirements.
In addition to its unique extraction technology, Xinda has developed its own
techniques and equipment for many of the steps in the production process. Among the
aspects of production for which Xinda has proprietary technology are product formulae, a
technique for combining extruder screws, and certain stuffing techniques
.
With
these unique formulas and techniques, our products can satisfy often clients
standard requirements at a lower cost than competitive products.
Our
facilities have been certified under the following international qualifications criteria:
ISO9001: 2000 quality management system certification and ISO/TS16949: 2002 international
auto parts industry quality systems certification. The government of China has designated
Xinda as a National Torch Project and a National Spark Plan Project, and has given Xinda
the Most Valuable High Tech in China award. Xinda is an executive member of
the Council of the Chinese Automobile Parts Association, a member of the Chinese Modified
Plastics Professional Committee, and a member of the Chinese Plastics Engineering
Committee.
Asset Purchase Agreement
With
the acceleration of the localization of China auto parts industry and the rapid increase
of sales of special modified plastics for automobiles, it is estimated that the demand of
special modified plastics for automobiles will increase from 0.728 million tons in 2006 to
1.20 million tons in 2010. Because of this, Xindas production capacity of automotive
special modified plastics cannot meet with customers increasing order demand, and
Xinda decides to achieve 0.1 million tons of special modified plastics for automobiles by
2010 through the form of acquiring all Xinda High-techs assets which is used to
produce modified plastics for automobiles. Xinda and Xinda High-tech entered into an
Assets Purchase Agreement on September 20, 2008.
21
Pursuant
to the Assets Purchase Agreement, Xinda will purchase 6 buildings including office
building, 19 full automatic production lines and related lands and subsidiary facilities.
Xinda High-tech sold all facilities to Xinda at the price of 240 million RMB ($35
million). Xinda will pay all funds before the end of September, 2009.
Raw
Materials
The
principal raw materials used for the production of the Companys products are plastic
resins such as polypropylene, ABS and nylon. Nearly 60% of these raw materials come from
overseas petrochemical enterprises, and 40% from domestic petrochemical enterprises. All
of our contracts for raw materials are one-year renewable contracts.
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Polypropylene
is a chemical compound manufactured from petroleum.
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Acrylonitrile
Butadiene Styrene (ABS), is a common thermoplastic used to make light, rigid, molded
products such as automotive body parts and wheel covers.
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Nylon
is a thermoplastic silky material.
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Currently
we have adequate access to these raw materials by dealing with major suppliers in the
industry. Xinda has one-year renewable contracts with each of suppliers. Because the raw
materials are mostly petroleum products, the rise of oil price will directly affect the
cost for the raw materials. However, in that event, we should be able to pass the cost to
our customers by raising the price for our products.
Because
raw materials constitute a substantial part of the cost of our products, we seek to reduce
the cost of raw materials by dealing with two major suppliers: Dalian Free Trade Zone
Mankeri International Trade Co., Ltd. (Mankeri), and Dalian Lanhai
International Trade Co., Ltd. During the nine months ended on September 30, 2008, Xinda
purchased approximately 70% of its raw materials from Mankeri and 20% from Dalian Lanhai
International Trade Co., Ltd. In 2007 we purchased 86% of our raw materials from Mankeri,
and 80% in 2006. By dealing with these major suppliers, Xinda obtains reduced prices for
raw materials, and thus reduces the cost of our products. If we were unable to purchase
from Mankeri, we would still have adequate sources of raw materials from other
petrochemical dealers, but the cost would increase by 1-2%.
Intellectual
Property
Our
Research Institute, Xinda Macromolecule Material Research Institute,was organized to
provide us with ongoing additions to our technology, which represents the key to our
competitive success. Our goal is to utilize state-of-the-art methods and equipment to
produce plastics of the highest quality that are cost-efficient for our customers. Toward
this end, we have staffed the Research Institute with 38 researcher employees, over 90% of
whom have advanced degrees or specialized undergraduate training.
22
To
supplement the efforts of our Research Institute, we have developed cooperative research
programs with a number of the leading technology centers in China, including the Changchun
Institute of Applied Chemistry of the Chinese Academy of Science, the Beijing Chemical
Engineering Institute, the Harbin Institute of Technology, the Northeast Forestry
University, Jilin University, and the Korea HEP Institute. Besides providing specialized
research and development skills, these relationships help us to formulate cutting edge
research programs aimed at addressing developing issues in plastics engineering.
All
our significant research and developmen
t
activities are overseen by the members of
our Scientific Advisory Board, which we have assembled from among the leaders in
Chinas chemical engineering industry. Currently, the members of the Scientific
Advisory Board are:
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Jin
Yong: The member of the Chinese Academy of Engineering, director of the Research
Institute of Chemical Engineering Science and Technology at Tsinghua University.
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Wu
Zhongwen: Director of the Research Institute of Special Plastics Engineering of Jilin
University.
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Zheng
Kai: Secretary General of China's Plastics Engineering Industry Association.
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Huang
Yudong: Dean of the Chemical Engineering Department at Harbin Industrial University
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Li
Bin: Dean of the Science Department at Eastern Forest Industry University.
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Xing
Yuqing: Director of the Teaching and Research Section of the Chemical Engineering
Department at Harbin Industrial University
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Jiang
Zhenhua: Director of the Engineering Research Center of the Special Plastics Engineering
Education Department of Jilin University
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As
a result of our collection of academic and technological expertise, we have a portfolio of
10 patents for which we have applications pending in China.
23
No.
|
Patent Name
|
Patent
Application No.
|
Application Date and Status
|
1
|
Measures for efficient recycl
ing
and circulating usage of waste and old plastics
|
200510010540.90
|
2005.11.15
Pending
|
2
|
S
pecial engineering plastics dedicated to military industry products
|
200510010543.20
|
2005.11.15
Pending
|
3
|
Special materials for wall tubes of polyethylene winding structure of tube inbuilt technology without opening tank lid
|
200510010541.30
|
2005.11.15
Pending
|
4
|
Stuffing master batch material dedicated to polypropylene resin
|
200510010542.80
|
2005.11.15
Pending
|
5
|
Special
materials for air inflow manifold of automobile engine
|
200710072563.10
|
2007.7.25
Pending
|
6
|
High-lustre low shrinkage ratio nano polypropylene modified compound and its manufacturing methods
|
200510010539.60
|
2005.11.15
Pending
|
7
|
Strengthened toughened aging resistant polypropylene/nano calcium carbonate compound material and its manufacturing methods
|
200510010538.10
|
2005.11.15
Pending
|
8
|
Green inflaming
-
retar
dant
ABS alloy
|
200610009836.30
|
2006.03.21
Pending
|
9
|
Compound nano
special
materials dedicated to automobile bumper
|
200510010066.x
|
2005.06.06
Pending
|
1
0
|
High-performance
special
polypropylene materials dedicated to automobile
|
200610009837.80
|
2006.3.21
Pending
|
Trademark
We
own the trademarks for our graphic logo and Chinese characters of (Xinda),
which we use in packaging our products and marketing ourselves. Currently the two
trademarks are under the application for Companys name change due to the change of
our name from Harbin Xinda Macromolecule Material Inc. to Harbin Xinda Macromolecule
Material Co., Ltd.
Marketing
Currently
Xindas sales network covers the northeastern and eastern regions of China. Xinda has
two sales branches: one in Changchun City where the largest portion of the automobile
manufacturing industry in China is located, and the other in Ningbo City in the eastern
part of China where the second largest portion of such industry known as Shanghai Region
is located. Xinda has a sales team of 18 persons, each with more than three years of sales
experiences. In 2007, 93% of our sales were derived from the northeastern market, with
continuing expansion into the northern and eastern regions of China.
Xinda
sells directly to its customers or indirectly through sales agents. Xinda rates potential
customers based on its Customer Estimation Management System. For those customers who can
make payment within our collection period, Xinda sells products directly to them, and
provides full after-sale services. These customers are usually the major automobile
manufacturers who have certified our products. For potential customers who may not be able
to make payment within our collection period, we assign a local sales agent to market to
them.
24
We
enter into Sales Agency Agreements with local agents in areas where large automobile
manufacturers are located. The sales agents are responsible for developing the markets for
our products and collecting payments from our customers. In distributing our products
during the agency period, the agents are required to use Xindas product certificate,
brand and package standards set by us. They must also reimburse us the amount of payment
that the customers fail to make within our collection period. After the termination of the
agency relationship, the customers developed by the agents are proprietary to Xinda.
During
the past three years, the Company has sold most of its products in the three northeastern
provinces of China: Heilongjiang, Jilin, and Liaoning. We expect to develop more customers
in the cities and provinces located in the Eastern part of China, such as Shanghai and
Zhejiang Province.
No
single customer accounted for more than 10% of our sales during the nine months ended on
September 30, 2008, or during 2007 or 2006.
Competition
Currently
Xindas primary Chinese competitor in the automobile industry is a large industrial
company named Guangzhou Kingfa Science & Technology Co., Ltd. (Guangzhou
Kingfa). Guangzhou Kingfa entered the market in 2006 and its facilities with a
manufacturing capacity of 100,000 tons are under construction. Guangzhou Kingfa has much
larger financial resources than Xinda. Currently, however, it has fewer certified products
and sells less modified plastic to the automobile industry than Xinda.
The
Chinese auto market is dominated, however, by modified plastic manufactured overseas or in
factories controlled by foreign companies. Almost 60% of the modified plastic used in
Chinese automobiles is manufactured by non-Chinese fabricators, primarily manufacturers
from Germany, the Netherlands and Japan. Although Xinda and its Chinese competitors
compare very favourably with these foreign competitors in terms of price, service and
delivery times, the lack of production capacity in the Chinese modified plastics industry
has allowed the foreign competition to remain dominant in that industry.
Employees
Xindas
operations are organized into seven operational departments such as technologies, sales,
supply, R&D and finance. There are currently 296 full-time employees, including 94 in
manufacturing, 38 in R&D, 32 in management, 13 in financial department, 18 in sales,
purchasing and marketing and 132 in other departments.
25
Risk
Factors
You
should carefully consider the risks described below before buying our common stock. If any
of the risks described below were realized, that event could cause the trading price of
our common stock to decline, and you could lose all or part of your investment.
Risks related to doing
business in China
Our business operations are conducted
entirely in China. Because Chinas economy and its laws, regulations and policies are
different from those typically found in the west and are continually changing, we will
face risks including those summarized below.
China is a developing
nation governed by a one-party government and may be more susceptible to political, economic,
and social upheaval than other nations.
China is a developing country
governed by a one-party government. China is also a country with an extremely large
population, widening income gaps between rich and poor and between urban and rural
residents, minority ethnic and religious populations, and growing access to information
about the different social, economic, and political systems to be found in other
countries. China has also experienced extremely rapid economic growth over the last
decade, and its legal and regulatory systems have changed rapidly to accommodate this
growth. These conditions make China unique and may make it susceptible to major structural
changes. Such changes could include a reversal of Chinas movement to encourage
private economic activity, labor disruptions or other organized protests, nationalization
of private businesses, internal conflicts between the police or military and the
citizenry, and international political or military conflict. If any of these events were
to occur, it could shut down Chinas economy and cause us to temporarily or
permanently cease operations.
The PRCs laws,
regulations and policies, and changes to them, may limit our ability to operate
profitably or prevent us from operating at all.
Our stores and distribution centers,
as well as our suppliers and the agricultural producers on whom they depend, are located
in China. The PRC government has exercised and continues to exercise substantial control
over virtually every sector of the Chinese economy, including the production, distribution
and sale of our merchandise. In particular, we are subject to regulation by local and
national branches of the Ministries of Commerce and Transportation, as well as the General
Administration of Quality Supervision, the State Administration of Foreign Exchange, and
other regulatory bodies. In order to operate under PRC law, we require valid licenses,
certificates and permits, which must be renewed from time to time. If we were to fail to
obtain the necessary renewals for any reason, including sudden or unexplained changes in
local regulatory practice, we could be required to shut down all or part of our operations
temporarily or permanently.
26
Our ability to operate in China may
be harmed by changes in its laws and regulations, including those relating to agriculture,
taxation, land use rights and other matters. Such changes could be made at the national or
local level and in the form of: farm subsidies; corporate tax rates; employee benefits;
leaseholder or land-use rights; enforceability of contracts; intellectual property; or
retail pricing. The effects of such changes on our business cannot be predicted but could
be significant.
All of our assets are
located in China. So any dividends or proceeds from liquidation are subject to the approval
of the relevant Chinese government agencies.
Our
assets are located inside China. Under the laws governing FIEs in China, dividend
distribution and liquidation are allowed but subject to special procedures under the
relevant laws and rules. Any dividend payment will be subject to the decision of the board
of directors and subject to foreign exchange rules governing such repatriation. Any
liquidation is subject to both the relevant government agencys approval and
supervision as well the foreign exchange control. This may generate additional risk for
our investors in case of dividend payment or liquidation.
Because our funds are
held in banks which do not provide insurance, the failure of any bank in which we deposit our
funds could affect our ability to continue in business.
Banks and other financial
institutions in the Peoples Republic of China do not provide insurance for funds
held on deposit. As a result, in the event of a bank failure, we may not have access to
funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our
inability to have access to our cash could impair our operations, and, if we are not able
to access funds to pay our suppliers, employees and other creditors, we may be unable to
continue in business.
Anti-inflation measures
may be ineffective or harm our ability to do business in China.
In recent years, the PRC government
has instituted anti-inflationary measures to curb the risk of an overheated economy
characterized by debilitating inflation. These measures have included devaluations of the
renminbi, restrictions on the availability of domestic credit, and limited
re-centralization of the approval process for some international transactions. These
austerity measures may not succeed in slowing down the economys excessive expansion
or control inflation, or they may slow the economy below a healthy growth rate and lead to
economic stagnation or recession; in the worst-case scenario, the measures could slow the
economy without curbing inflation. The PRC government could adopt additional measures to
further combat inflation, including the establishment of price freezes or moratoriums
certain projects or transactions. Such measures could harm the economy generally and hurt
our business by limiting the income of our customers available to purchase our
merchandise, by forcing us to lower our profit margins, and by limiting our ability to
obtain credit or other financing to pursue our expansion plans or maintain our business.
27
Governmental control of
currency conversions may affect the value of your investment.
All of our revenue is earned in
renminbi, and any future restrictions on currency conversions may limit our ability to use
revenue generated in renminbi to make dividend or other payments in U.S. dollars. Although
the PRC government introduced regulations in 1996 to allow greater convertibility of the
renminbi for current account transactions, significant restrictions still remain,
including primarily the restriction that foreign-invested enterprises like us may buy,
sell or remit foreign currencies only after providing valid commercial documents at a PRC
banks specifically authorized to conduct foreign-exchange business.
In addition, conversion of renminbi
for capital account items, including direct investment and loans, is subject to
governmental approval in the PRC, and companies are required to open and maintain separate
foreign-exchange accounts for capital account items. There is no guarantee that PRC
regulatory authorities will not impose additional restrictions on the convertibility of
the renminbi. Such restrictions could prevent us from distributing dividends and thereby
reduce the value of our stock.
The fluctuation of the
exchange rate of the renminbi against the dollar could reduce the value of your
investment.
The value of our common stock will be
affected by the foreign exchange rate between U.S. dollars and renminbi. For example, to
the extent that we need to convert U.S. dollars we receive from an offering of our
securities into renminbi for our operations, appreciation of the renminbi against the U.S.
Dollar could reduce the value in renminbi of our funds. Conversely, if we decide to
convert our renminbi into U.S. dollars for the purpose of declaring dividends on our
common stock or for other business purposes and the U.S. dollar appreciates against the
renminbi, the U.S. dollar equivalent of our earnings from The Company, our subsidiary in
China, would be reduced. In addition, the depreciation of significant U.S.
Dollar-denominated assets could result in a charge to our income statement and a reduction
in the value of these assets.
28
On July 21, 2005, the PRC government
changed its decade-old policy of pegging the value of the renminbi to the U.S. Dollar.
Under the new policy, the renminbi is permitted to fluctuate within a narrow and managed
band against a basket of certain foreign currencies. This change in policy has resulted in
an appreciation of the renminbi against the U.S. dollar of approximately 12% as of the
date of this report. While the international reaction to the renminbi revaluation has
generally been positive, there remains significant international pressure on the PRC
government to adopt an even more flexible currency policy, which could result in a further
andmoresignificant appreciation of the renminbi against the U.S. Dollar.
We receive all of our revenues in
renminbi. The PRC government imposes controls on the convertibility of renminbi into
foreign currencies and, in certain cases, the remittance of currency out of the China.
Shortages in the availability of foreign currency may restrict our ability to remit
sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency
denominated obligations. Under existing PRC foreign exchange regulations, payments of
current account items, including profit distributions, interest payments and expenditures
from the transaction, can be made in foreign currencies without prior approval from the
PRC State Administration of Foreign Exchange (SAFE) by complying with certain
procedural requirements. However, approval from appropriate governmental authorities is
required where renminbi are to be converted into foreign currency and remitted out of the
PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign
currencies
.
The PRC government could also
restrict access in the future to foreign currencies for current account transactions. If
the foreign exchange control system prevents us from obtaining sufficient foreign currency
to satisfy our currency demands, we may not be able to pay certain expenses as they come
due.
Recently-modified SAFE
regulations may restrict our ability to remit profits out of China as dividends.
SAFE Regulations regarding offshore
financing activities by PRC residents have recently undergone a number of changes which
may increase the administrative burdens we face. The failure of our stockholders who are
PRC residents to make any required applications and filings pursuant to these regulations
may prevent us from being able to distribute profits and could expose us and our
PRC-resident stockholders to liability under PRC law.
SAFE issued a public notice (the
October Notice), effective as of November 1, 2005, and implementation rules in
May 2007, which require registration with SAFE by the PRC-resident stockholders of any
foreign holding company of a PRC entity. These regulations apply to our stockholders who
are PRC residents. In the absence of such registration, the PRC entity cannot remit any of
its profits out of the PRC as dividends or otherwise.
29
In the event that our PRC-resident
stockholders have not followed the procedures required under the October Notice and its
implementation rules, we could lose the ability to remit monies outside of the PRC and
would therefore be unable to pay dividends or make other distributions, and we could face
liability for evasion of foreign-exchange regulations. Such consequences could affect our
good standing under PRC regulations and our ability to operate in the PRC, and could
therefore diminish the value of your investment.
Chinas legal and
judicial system may not adequately protect our business and operations and the rights of foreign
investors.
Chinas legal and judicial
system may negatively impact foreign investors. In 1982, the National Peoples
Congress amended the Constitution of China to authorize foreign investment and guarantee
the lawful rights and interests of foreign investors in the China. However,
the Chinas system of laws is not yet comprehensive. The legal and judicial systems
in the China are still rudimentary, and enforcement of existing laws is inconsistent. Many
judges in the China lack the depth of legal training and experience that would be expected
of a judge in a more developed country. Because the China judiciary is relatively
inexperienced in enforcing the laws that do exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed country. It
may be impossible to obtain swift and equitable enforcement of laws that do exist, or to
obtain enforcement of the judgment of one court by a court of another jurisdiction. The
Chinas legal system is based on civil law, or written statutes; a decision by one
judge does not set a legal precedent that must be followed by judges in other cases. In
addition, the interpretation of Chinese laws may vary to reflect domestic political
changes.
As a matter of substantive law, the
foreign-invested enterprise laws provide significant protection from government
interference. In addition, these laws guarantee the full enjoyment of the benefits of
corporate articles and contracts to foreign-invested enterprise participants. These laws,
however, do impose standards concerning corporate formation and governance, which are
qualitatively different from the general corporation laws of the United States. Similarly,
the PRC accounting laws mandate accounting practices that are not consistent with U.S.
generally accepted accounting principles. PRC accounting laws require that an annual
statutory audit be performed in accordance with PRC accounting standards and
that the books of account of foreign-invested enterprises are maintained in accordance
with Chinese accounting laws. Article 14 of the PRC Wholly Foreign-Owned Enterprise Law
requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business license
revocation. Our subsidiary, Harbin Xinda Macromolecule Material Co, Ltd., is a wholly
foreign-owned enterprise and is subject to these regulations.
30
As a matter of enforcement, although
the enforcement of substantive rights may appear less clear than in the U.S.,
foreign-invested enterprises and wholly foreign-owned enterprises are PRC-registered
companies, which enjoy the same status as other PRC-registered companies in
business-to-business dispute resolution. Because the Articles of Association of the
Company do not specify a method for the resolution of business disputes, the Company and
other parties involved in any business dispute are free to proceed either in the Chinese
courts or, if they are in agreement, through arbitration. Under PRC law, any award
rendered by an arbitration tribunal is enforceable in accordance with the United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Therefore, PRC
laws relating to business-to-business dispute resolution should not work to the
disadvantage of foreign-invested enterprises such as the Company.
However, the PRC laws and regulations
governing our current business operations are sometimes vague and uncertain. There are
substantial uncertainties regarding the interpretation and application of PRC laws and
regulations, including but not limited to the laws and regulations governing our business
and the enforcement and performance of our arrangements with suppliers in the event of the
imposition of statutory liens, death, bankruptcy and criminal proceedings. We and any
future subsidiaries are considered foreign persons or foreign-invested enterprises under
PRC laws, and as a result, we are required to comply with PRC laws and regulations. These
laws and regulations are sometimes vague and may be subject to future changes, and their
official interpretation and enforcement may involve substantial uncertainty. The
effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting
in detrimental reliance by foreign investors. New laws and regulations that affect
existing and proposed future businesses may also be applied retroactively. We cannot
predict what effect the interpretation of existing or new PRC laws or regulations may have
on our business.
In addition, some of our present and
future executive officers and directors, most notably Mr. Jie Han, may be residents of the
PRC and not of the United States, and substantially all the assets of these persons are
located outside the United States. As a result, it could be difficult for investors to
effect service of process in the United States, or to enforce a judgment obtained in the
United States against us or any of these persons.
31
Risks related to our
business
Our limited operating
history makes it difficult to evaluate our future prospects and results of operations.
We have a limited operating history.
Accordingly, you should consider our future prospects in light of the risks and
uncertainties experienced by early-stage companies in evolving markets such as China. Some
of these risks and uncertainties relate to our ability to:
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offer
new products to attract and retain a larger customer base;
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increase
awareness of our brand and continue to develop customer loyalty;
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respond
to competitive market conditions;
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respond
to changes in our regulatory environment;
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manage
risks associated with intellectual property rights;
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maintain
effective control of our costs and expenses;
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raise
sufficient capital to sustain and expand our business; and
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attract,
retain and motivate qualified personnel
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Because we are a relatively new
company, we may not be experienced enough to address all the risks in our business or in
our expansion. If we are unsuccessful in addressing any of these risks and uncertainties,
our business may be materially and adversely affected.
We expect to incur costs
related to our planned expansion and growth into new plants and ventures which may not
prove to be profitable. Moreover, any delays in our expansion plans could cause our
profits to decline and jeopardize our business.
We anticipate that our proposed
expansion of our plants may include the construction of new or additional facilities. Our
cost estimates and projected completion dates for construction of new production
facilities may change significantly as the projects progress. In addition, our projects
will entail significant construction risks, including shortages of materials or skilled
labor, unforeseen environmental or engineering problems, weather interferences and
unanticipated cost increases, any of which could have a material adverse effect on the
projects and could delay their scheduled openings. A delay in scheduled openings will
delay our receipt of increased sales revenues, which, when coupled with the increased
costs and expenses of our expansion, could cause a decline in our profits.
Our plans to finance, develop, and
expand our facilities will be subject to the many risks inherent in the rapid expansion of
a high growth business enterprise, including unanticipated design, construction,
regulatory and operating problems, and the significant risks commonly associated with
implementing a marketing strategy in changing and expanding markets. These projects may
not become operational within their estimated time frames and budgets as projected at the
time the Company enters into a particular agreement, or at all. In addition, the Company
may develop projects as joint ventures in an effort to reduce its financial commitment to
individual projects. The significant expenditures required to expand our production plants
may not ultimately result in increased profits.
32
Our business and
operations are growing rapid. If we fail to effectively manage our operation, our
business and operating results could be harmed.
To
date we have experienced, and continue to experience, rapid growth in our operations. This
has placed, and will continue to place, significant demands on our management, and on our
operational and financial infrastructure. If we do not effectively manage our operations,
the quality of our products and services will suffer, which would negatively affect our
operating results. If the necessary funding can be obtained, we will be able to improve
our operational, financial and management controls and our reporting systems and
procedures. The complexity of this undertaking means that we are likely to face many
challenges, some of which are not yet foreseeable. Problems may occur with our raw
material acquisition, with the roll-out of efficient manufacturing processes, and with our
ability to sell our products to our customers. If we are not able to obtain the necessary
funding and operate efficiently, our business plan may fall short of its goals, and our
ability to manage our growth could be hurt.
The capital investments
that we plan may result in dilution of the equity of our present shareholders.
We
have entered into an Asset Purchase Agreement that contemplates that we will pay
approximately $35 million to acquire additional production assets, in order to increase
our production capacity from 40,000 tons to 100,000 tons. We intend to raise a large
portion of the necessary funds by selling equity in our company. At present we have no
commitment from any source for those funds. We cannot determine, therefore, the terms on
which we will be able to raise the necessary funds. It is possible that we will be
required to dilute the value of our current shareholders equity in order to obtain
the funds. If, however, we are unable to raise the necessary funds, our growth will be
limited, as will our ability to compete effectively.
We operate in a highly
competitive marketplace, which could adversely affect our sales and financial condition.
We
compete on the basis of quality, price, product availability and security of supply,
product development and customer service. Some competitors are larger than us in certain
markets and may have greater financial resources that allow them to be in a better
position to withstand changes in the industry. Our competitors may introduce new products
based on more competitive alternative technologies that may be causing us to lose
customers which would result in a decline in our sales volume and earnings. Our customers
demand high quality and low cost products and services. The cost and availability of
energy and strategic raw materials may continue to deteriorate domestically while
improving in the international market, thus advantaging our foreign competition. Any such
change in the global market could adversely impact the demand for our products.
Competition could cause us to lose market share and certain lines of business, or increase
expenditures or reduce pricing, each of which would have an adverse effect on our results
of operations, cash flows and financial condition.
33
Related party
transactions may pose risks to our inventory.
Currently the Company has an Asset
Purchase Agreement with Mr. Hans, the Companys Chairman and CEO, wife to
acquire certain production assets at below historical cost value. There may be occasions
in which additional related party transactions may take place. Even the Company will do
its utmost to minimize such transactions and conduct such transactions in the best
interest of its public shareholders, there may exist serious conflict of interest and
damage to the public shareholders. Such conflict of interest and potential harm to public
shareholders and investors interest may negatively impact on the value of the
Company.
An inability to protect
our intellectual property rights could reduce the value of our products, services and brand
.
Our
unique technologies and techniques are important assets for us. We have applied to the
Chinese government for intellectual property right protection for some of the technologies
that we own. However, this legal effort may sometimes not be sufficient or effective, due
to the lack of effective legal enforcement in China. Any significant impairment of our
intellectual property rights could harm our business or our ability to compete. In
addition, since protection of our intellectual property rights is costly and time
consuming, any unauthorized use of our to-be-patented technologies could increase our cost
of business and eventually harm our operating results. Moreover, since we only registered
intellectual property rights for our technologies in China, our technologies may not be
well protected in other countries in which our products may be sold in the future.
An increase in raw
material prices could increase Xindas costs and decrease its profits.
Changes
in the cost of raw materials could significantly affect Xindas business. Since cost
for raw materials constitute a substantial part of our product price, increase in the cost
of raw materials will decrease our profit margin. Although we may offset such deduction of
our profit by increasing the price for our products, unforeseeable events in the market
may occur to prevent the effectiveness of this method. We also rely on one major supplier
to provide such raw materials. Failure to maintain business relationship with this one
major supplier may make the raw materials inaccessible, and thus hurt our operation
result.
Our
performance and planned growth depend on raw material supply and related costs .
34
We
rely on Mr. Jie Han, Our Chairman and Chief Executive Officer, for the management of our
business, and the loss of his services could significantly harm our business and
prospects.
We
depend, to a large extent, on the abilities and participation of our current management
team, but have a particular reliance upon Mr. Jie Han, our Chairman and Chief Executive
Officer and President, for the direction of our business. The loss of the services of Mr.
Han for any reason could have a material adverse effect on our business and prospects. We
cannot assure you that the services of Mr. Han will continue to be available to us, or
that we will be able to find a suitable replacement for Mr. Han. We have entered into an
employment contract with Mr. Han, but that agreement does not guarantee Mr. Hans
continuing to manage the Company. We do not have key man insurance on Mr. Han, and if he
were to die and we were unable to replace him for a prolonged period of time, we could be
unable to carry out our long-term business plan, and our future prospects for growth, and
our business, could be harmed.
Difficulties with hiring,
employee training and other labor issues could disrupt our operations.
We may not be able to successfully
hire and train new team members or integrate those team members into the programs and
policies of the Company. Any such difficulties would reduce our operating efficiency and
increase our costs of operations.
Increased environmental
regulation in China could increase our costs of operation.
Certain
processes utilized in the production of modified plastics result in toxic by-products. To
date, the Chinese government has imposed only limited regulation on the production of
these by-products, and enforcement of the regulations has been sparse. Recently, however,
there is a substantial increase in focus on the Chinese environment, which has inspired
considerable new regulation. Because Xinda plans to export plastics to the U.S. and Europe
in coming years, Xinda has developed sufficient safeguards in its manufacturing processes
to assure compliance with the environmental regulations imposed by European and U.S
regulators. This compliance regimen brings us into compliance with all Chinese
environmental regulations. Additional regulation, however, could increase our cost of
doing business, which would impair our profitability.
We may have difficulty
establishing adequate management and financial controls in China.
The
Peoples Republic of China has only recently begun to adopt the management and
financial reporting concepts and practices that investors in the United States are
familiar with. We may have difficulty in hiring and retaining employees in China who have
the experience necessary to implement the kind of management and financial controls that
are expected of a United States public company. If we cannot establish such controls, we
may experience difficulty in collecting financial data and preparing financial statements,
books of account and corporate records and instituting business practices that meet U.S.
standards.
35
We may incur significant
costs to ensure compliance with U.S. corporate governance and accounting requirements.
We
may incur significant costs associated with our public company reporting requirements,
costs associated with newly applicable corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and other rules
implemented by the Securities and Exchange Commission. We expect all of these applicable
rules and regulations to increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. We also expect that these applicable rules
and regulations may make it more difficult and more expensive for us to obtain director
and officer liability insurance and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar coverage. As a
result, it may be more difficult for us to attract and retain qualified individuals to
serve on our board of directors, on committees of our board of directors or as executive
officers.
As
a public company, we are required to comply with rules and regulations of the SEC,
including expanded disclosure, accelerated reporting requirements and more complex
accounting rules. This will continue to require additional cost management resources. We
will need to continue to implement additional finance and accounting systems, procedures
and controls as we grow to satisfy these reporting requirements. In addition, we may need
to hire additional legal and accounting staff with appropriate experience and technical
knowledge, and we cannot assure you that if additional staffing is necessary that we will
be able to do so in a timely fashion. If we are unable to complete the required annual
assessment as to the adequacy of our internal reporting or if our independent registered
public accounting firm is unable to provide us with a qualified report as to the
effectiveness of our internal controls over financial reporting in the future, we could
incur significant costs to become compliant.
We rely on highly skilled
personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel,
we may not be able to grow effectively.
Our
performance largely depends on the talents and efforts of highly skilled individuals. Our
future success depends on our continuing ability to identify, hire, develop, motivate and
retain highly skilled personnel for all areas of our organization. Our continued ability
to compete effectively depends on our ability to attract new technology developers and to
retain and motivate our existing contractors.
36
We have limited business
insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance companies
in China offer limited business insurance products, and do not, to our knowledge, offer
business liability insurance. As a result, we do not have any business liability insurance
coverage for our operations. Moreover, while business disruption insurance is available,
we have determined that the risks of disruption and cost of the insurance are such that we
do not require it at this time. Any business disruption, litigation or natural disaster
might result in substantial costs and diversion of resources.
The Company is not likely
to hold annual shareholder meetings in the next few years.
Management
does not expect to hold annual meetings of shareholders in the next few years, due to the
expense involved. The current members of the Board of Directors were appointed to that
position by the previous directors. If other directors are added to the Board in the
future, it is likely that the current directors will appoint them. As a result, the
shareholders of the Company will have no effective means of exercising control over the
operations of the Company.
Risks related to an
investment in our common stock
Our Chief Executive
Officer has a large degree of control on us through his position and stock ownership and
his interests may differ from other stockholders.
Our Chief Executive Officer, Mr. Jie
Han has option on XDs shares. As a result, Mr. Han will be able to influence the
outcome of stockholder votes on various matters, including the election of directors and
extraordinary corporate transactions such as business combinations. Mr. Hans
interests may differ from that of other stockholders.
Risks related to Series
B Preferred Stock.
There are now 1,000,000 Series B
Preferred Stock issued to XD with 40% of the total voting power of the Companys
common stock put together and other consent rights on mergers and acquisitions,
significant acquisition or disposition of assets and change of control, among others. This
gives XD significant voting power. Such voting power may enable XD to block actions that
may benefit the common stockholders thus reduce the value of their holdings.
We do not intend to pay
cash dividends in the foreseeable future.
We currently intend to retain all
future earnings for use in the operation and expansion of our business. We do not intend
to pay any cash dividends in the foreseeable future but will review this policy as
circumstances dictate. Should we decide in the future to do so, as a holding company, our
ability to pay dividends and meet other obligations depends upon the receipt of dividends
or other payments from our operating subsidiaries based in the PRC. Our operating
subsidiaries, from time to time, may be subject to restrictions on its ability to make
distributions to us, including restrictions on the conversion of local currency into U.S.
dollars or other hard currency and other regulatory restrictions. See Risks related
to doing business in the Peoples Republic of China above.
37
There is currently a very
limited trading market for our common stock.
Because we were formerly a shell
company, our bid and ask quotations have not regularly appeared on the OTC Bulletin Board
for any extended period of time. There is a limited trading market for our common stock
and our common stock may never be included for trading on any stock exchange or through
any other quotation system, including the NASDAQ Stock Market. You may not be able to sell
your shares due to the absence of an established trading market.
Our common stock is
subject to the Penny Stock Regulations.
Our common stock is, and will
continue to be subject to the SECs penny stock rules to the extent that
the price remains less than $5.00. Those rules, which require delivery of a schedule
explaining the penny stock market and the associated risks before any sale, may further
limit your ability to sell your shares.
The SEC has adopted regulations which
generally define penny stock to be an equity security that has a market price
of less than $5.00 per share. Our common stock, when and if a trading market develops, may
fall within the definition of penny stock and subject to rules that impose additional
sales practice requirements on broker-dealers who sell such securities to persons other
than established customers and accredited investors (generally those with assets in excess
of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their
spouse).
For transactions covered by these
rules, the broker-dealer must make a special suitability determination for the purchase of
such securities and have received the purchasers prior written consent to the
transaction. Additionally, for any transaction, other than exempt transactions, involving
a penny stock, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealers presumed control over the market. Finally, monthly statements must be
sent disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. Consequently, the penny
stock rules may restrict the ability of broker-dealers to sell our common stock and
may affect the ability of investors to sell their common stock in the secondary market.
38
Our common stock is
illiquid and subject to price volatility unrelated to our operations.
The market price of our common stock
could fluctuate substantially due to a variety of factors, including market perception of
our ability to achieve our planned growth, quarterly operating results of other companies
in the same industry, trading volume in our common stock, changes in general conditions in
the economy and the financial markets or other developments affecting our competitors or
us. In addition, the stock market is subject to extreme price and volume fluctuations.
This volatility has had a significant effect on the market price of securities issued by
many companies for reasons unrelated to their operating performance and could have the
same effect on our common stock.
A large number of shares of common
stock will be issuable for future sale which will dilute the ownership percentage of our
current holders of common stock. The availability for public resale of those shares may
depress our stock price.
Also as a result, there will be a
significant number of new shares of common stock on the market in addition to the current
public float. Sales of substantial amounts of common stock, or the perception that such
sales could occur, and the existence of warrants to purchase shares of common stock at
prices that may be below the then current market price of the common stock, could
adversely affect the market price of our common stock and could impair our ability to
raise capital through the sale of our equity securities.
Enforcement against us or
our directors and officers may be difficult.
Because our principal assets are
located outside of the U.S. and some or all our directors and officers, both present
and future, reside outside of the U.S., it may be difficult for you to enforce your rights
based on U.S. federal securities laws against us and our officers and some directors or to
enforce a U.S. court judgment against us or them in the PRC.
In addition, our operating company is
located in the PRC and substantially all of its assets are located outside of the U.S. It
may therefore be difficult for investors in the U.S. to enforce their legal rights based
on the civil liability provisions of the U.S. Federal securities laws against us in the
courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S.
courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition
treaties now in effect between the U.S. and the PRC would permit effective enforcement
against us or our officers and directors of criminal penalties under the U.S. Federal
securities laws or otherwise.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We were originally incorporated as NB
Payphones Ltd. under the laws of the state of Pennsylvania on November 16, 1999. On
December 27, 2005, we migrated our state of organization to the state of Nevada and
effective March 23, 2006, our name changed to NB Telecom, Inc.
On December 24, 2008, we acquired all
of the outstanding capital stock of Favor Sea Limited, a British Virgin Islands
corporation, through China XD Plastics Company Limited, a Nevada corporation (the
Merger Sub) wholly owned by the Company. Favor Sea Limited is a holding
company whose only asset, held through a subsidiary, is 100% of the registered capital of
Harbin Xinda Macromolecule Material Co., Ltd. (Xinda).
Xinda is a manufacturer and developer
of modified plastics. We believe that Xinda is one of the primary automotive plastics
manufacturers in the PRC, developing and producing made-to-order modified plastics and
providing after-sales services to such automotive brands as Audi, Red Flag, VW Gulf, and
Mazda6. Founded in September 2004, we currently operate 31 manufacturing lines with a
total production capacity of up to 100,000 tons.
Results of Operations
The following table sets forth
information from our statements of operations for the years ended December 31, 2007 and
2006 and the nine months ended September 30, 2008 and 2007, in dollars and as a percentage
of sales:
|
Nine Months Ended September 30,
|
|
The Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Net sales
|
|
|
$
|
55,802,003
|
|
$
|
20,098,712
|
|
$
|
34,177,415
|
|
$
|
13,415,434
|
|
Cost of sales
|
|
|
|
41,880,768
|
|
|
15,925,484
|
|
$
|
27,829,973
|
|
$
|
10,604,429
|
|
Gross profit
|
|
|
|
13,921,235
|
|
|
4,173,228
|
|
$
|
6,347,442
|
|
$
|
2,811,005
|
|
Operating expenses
|
|
|
|
1,901,830
|
|
|
321,310
|
|
$
|
724,935
|
|
$
|
557,845
|
|
Operating income
|
|
|
|
12,019,405
|
|
|
3,851,918
|
|
$
|
5,622,507
|
|
$
|
2,253,160
|
|
Other income
|
|
|
|
25,665
|
|
|
6,598
|
|
$
|
(197,252
|
)
|
$
|
25,999
|
|
Interest expense
|
|
|
|
481,875
|
|
|
117,939
|
|
$
|
152,684
|
|
$
|
95,854
|
|
Net income
|
|
|
|
11,437,903
|
|
|
3,668,432
|
|
$
|
5,272,570
|
|
$
|
2,183,375
|
|
Comprehensive income
|
|
|
|
12,468,983
|
|
|
3,905,631
|
|
$
|
5,755,502
|
|
$
|
2,279,284
|
|
40
Nine Months Ended
September 30, 2008 compared to Nine Months Ended September 30, 2007
Net sales
During the nine months ended
September 30, 2008 we had net sales of $ 55,802,003 as compared to net sales of
$20,098,712 during the nine months ended September 30, 2007, an increase of $35,703,291,
or 178%. The increase was largely a result of our increased and expanded sale to the
existing and new customers in 2008.
Cost of sales & gross
margin
During the nine months ended
September 30, 2008, our cost of sales was $41,880,768, as compared to cost of sales of
$15,925,484 during the nine months ended September 30, 2007, an increase of $25,955,284,
or 163%. The percentage of our increase in cost of sales was slightly less than that of
the increase in sales. As a result, our gross margin increased from 21% during the nine
months ended September 30, 2007 as compared to 25% during nine months ended September 30,
2008. The increase in our gross margin was mainly attributed to the decreasing oil price
in 2008 so we were able to purchase our raw materials at a lower price.
Operating income and
expense
Operating expenses, which consist of
selling, general and administrative expenses, and research and development expenses,
totaled $1,901,830 during nine months ended September 30, 2008 as compared to $321,310
during the nine months ended September 30, 2007. Selling expenses increased from $29,040
during the nine months ended September 30, 2007 to $241,823 during the nine months ended
September 30, 2008. The increase of the selling expenses was in proportion to the increase
in overall sales. General and administrative expense increased from $199,831 during the
nine months ended September 30, 2007 to $1,102,261 during the nine months ended September
30, 2008. The increase in general and administrative expense was mainly due to increase in
our payroll and administrative costs. Research and development expenses increased from
$92,439 to $557,746 due to the expansion of the Harbin Xinda Macromolecule Material
Research Institute, the subsidiary of the company. Overall, our operating income was
$12,019,405 during the nine months ended September 30, 2008, as compared to $3,851,918
during the nine months ended September 30, 2007.
Other income
During the nine months ended
September 30, 2008, we had other income of $25,665, as compared with $6,598 during the
nine months ended September 30, 2007. The increase in other income was due to the sale of
our unused materials in 2008.
Interest expense
Interest expense increased by
$363,936 from $117,939 during the nine months ended September 30, 2007 to $481,875 for the
same period in 2008. The increase interest expense resulted from the sizable increase in
our loans and notes payable during 2008, as we borrowed to fund the rapid growth in our
sales and the development of our manufacturing facility.
41
Net Income
As a result of the factors described
above, we had net income of $11,437,903 during the nine months ended September 30, 2008,
as compared with $3,668,432 during the nine months ended September 30, 2007. The increase
in net income was mainly attributed to our increase in sales.
Comprehensive Income
Our business operates primarily in
Chinese Renminbi (RMB), but we report our results in U.S. Dollars. The
conversion of our accounts from RMB to U.S. Dollars results in translation adjustments. As
a result of a currency translation adjustment, our comprehensive income was $12,468,983
during the nine months ended September 30, 2008, as compared with $3,905,631during the
nine months ended September 30, 2007. The increase is due to significant currency exchange
fluctuation of Chinese RMB to US Dollar for the periods.
Liquidity and Capital
Resources
As of September 30, 2008, we had
$2,167,016 in cash and cash equivalents, compared to $8,157,419 on September 30, 2007.
There was a net decrease in cash and cash equivalent of $5,990,403 for the nine months
ended September 30, 2008. The net decrease in cash and cash equivalents for the period was
mainly due to the increase in working capital and advance payments made to our suppliers.
Operations
Cash used in operating activities
totaled $9,487,060 for the nine months ended September 30, 2008 as compared to $20,830,030
provided by operating activities for the nine months ended September 30, 2007. Decrease in
our cash provided by operations is due to our increased account receivable, other
receivables, inventory and advances to suppliers, which accounted for $25,561,004 of cash
used in operating activities, compared with $672,845 of cash used for the same period
of the previous year. As we saw the increased prices of raw materials at the
beginning of the year, we paid more to suppliers to secure the supplies.
Investments
Cash used in investing activities was
$ 4,993,288 for the nine months ended September 30, 2008 as compared to $6,153,163 for the
nine months ended September 30, 2007. Decrease of cash used in investing activities is due
to decrease of loan made to related party, which accounted for $6,205,635 of cash used in
investing activities for the period in previous year, compared with $110,228 collection of
loan for the same period of this year.
Financing
Cash provided by financing activities
totaled $16,513,064 for the nine months ended September 30, 2008 as compared to $6,982,124
used in financing activities for the nine months ended September 30, 2007. Increase in
cash provided by financing activities is due to the increased proceeds from short term
loan and decrease of payment to bank acceptance note payable, which accounted for
$15,893,064 of cash provided by financing activities, compared with $6,982,124 of cash
used in the same period of the previous year.
42
Year Ended December 31,
2007 Compared to Year Ended December 31, 2006
Net sales
During the year ended December 31,
2007, we had net sales of $34.2 million, as compared with net sales of $13.42 million
during the year ended December 31, 2006, an increase of approximately $20.8 million, or
155% due to our increased and expanded sale to the existing and new customers in 2007.
Cost of sales & gross
margin
During the year ended December 31,
2007, we had cost of sales of $27.8 million, as compared with cost of sales of $10.6
million, an increase of approximately $17.2 million, or 162%, reflecting the increase in
net sales. The gross profit rose to $6.3million, or a 125% increase during the year ended
December 31, 2007 compared with the year ended December 31, 2006. Our gross margin
decreased from 21.0% during the year ended December 31, 2006 to 18.6% during the year
ended December 31, 2007. The decrease was mainly attributed to the increase in price of
our raw materials.
Operating Expenses
Our operating expenses were $724,935
during the year ended December 31, 2007, compared with $557,845 during the year ended
December 31, 2006, an increase of $167,090, or approximately 29.95%. The increase in
operating expenses was principally due to the increased depreciation expenses and payroll
expenses. Selling expenses increased from $121,403 during the year ended December 31, 2006
to $131,772 during the year ended December 31, 2007, due to our increase in sales. General
and administrative expenses increased modestly, from $341,645 during the year ended
December 31, 2006 to $403,834 the year ended December 31, 2007, reflecting the increased
salary expense and depreciation expense. Research and development expenses were increased
during the year ended December 31, 2006 to the year ended December 31, 2007. As a result,
our operating income increased to $5,622,507 during the year ended December 31, 2007 from
$2,253,160 during the year ended December 31, 2006.
Interest Expense
Interest expense increased $56,830
from $95,854 during the year ended December 31, 2006 to $152,684 for the year ended
December 31, 2007. The increase interest expense resulted from the increase in our loans
and notes payable during 2007, as we borrowed to fund the rapid growth in our sales and
the development of our manufacturing facility.
Net Income
As a result of the factors described
above, we had net income of $5,272,570 during the year ended December 31, 2007, compared
with $2,183,375 during the year ended December 31, 2006.
43
Comprehensive Income
As a result of a currency translation
adjustment, our comprehensive income was $5,755,502 during the year ended December 31,
2007, compared with $2,279,284 during the year ended December 31, 2006. The change is due
to the significant currency exchange fluctuation.
Liquidity and Capital
Resources
As of December 31, 2007, we had
only $87,455 in cash and cash equivalents, compared to $328,492 on December 31, 2006.
There was a net decrease in cash and cash equivalent of $241,037 for the year ended
December 31, 2007. The net decrease in cash and cash equivalents for the period was mainly
due to the increase in working capital and advance payments made to our suppliers.
Operations
For the year ended December 31, 2007,
our operations generated cash in the total amount of $1,914,644, as opposed to $6,217,922
used in operating activities for the year ended December 31, 2006. Increase in our cash
liquidity is due to our significant decreased amounts in account receivable, other
receivables, restricted and cash, which accounted for only $445,679 of cash used in
operating activities, compared with $8,160,567 of cash used for the same period
of 2006.
Investments
Cash used in investing activities was
$4,249,292 for the year ended December 31, 2007 as compared to only $861,623 for the year
ended December 31, 2006. We have invested heavily in purchases of new production
equipments, which accounted for all of the cash used in investing activities, compared
with only $867,819 for the same period of 2006.
Financing
For the year ended December 31, 2007,
we have financed a total amount of $1,890,656 from the bank loans as compared to
$7,294,095 provided by financing activities for the year ended December 31, 2006. Decrease
in cash provided by financing activities is due to the increased payment to short term
loans and decrease of proceeds from bank acceptance note payable.
Off-Balance
Sheet Arrangements
Neither
Favor Sea, HK Engineering Plastics, nor Xinda has any off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on their financial
condition or results of operations.
Executive Compensation
Information
regarding the compensation paid to the executive officers of the Company during the past
three fiscal years is set forth in Part III, Item 11 of the Companys Annual Report
on Form 10-K/A (Amendment No. 1), which was filed with the Securities and Exchange
Commission on December 17, 2008. None of the individuals who served as officers of
the Company during the past three fiscal years will remain an officer or director of the
Company after the Share Exchange.
44
The
table below itemizes the compensation paid to Jie Han by Xinda for services during the
three fiscal years since Harbin Xinda was organized.
There was no officer of Harbin
Xinda whose salary and bonus for services rendered during the year ended December 31, 2008
exceeded $100,000.
|
|
Fiscal Year
|
|
Salary
|
|
Other Compensation
|
|
|
|
|
|
|
|
|
|
Jie Han
|
|
|
2008
|
|
|
$
|
87,000
|
|
|
|
|
Jie Han
|
|
|
2007
|
|
|
|
0
|
|
|
|
|
Jie Han
|
|
|
2006
|
|
|
|
0
|
|
|
|
|
Employment
Agreements
All
of our officers and directors serve on an at-will basis.
Related Party Transactions
Jie Han,
our Chief Executive Officer, is affiliated with two companies that have engaged in
transactions with Xinda during the past two years. Mr. Han has used these two companies as
a source of raw materials and equipment financing for Xinda, in order to reduce
Xindas working capital expenses.
Harbin
Xinda High-Tech Co., Ltd. (Xinda High-Tech) was founded by incumbent president of
Xinda, Mr. Jie Han, in July 2003. Xinda Hegh-Tech is mainly engaged in production of
electrical wire and wire harness and transactions of plastic materials. Mr. Jie Han
transferred 89.29% shares he held in Xinda High-Tech to his wife Mrs. Limei Sun. However,
High-Tech does not manufacture modified plastics in competition with Xinda. Xinda has
engaged in transactions with Xinda High-Tech since 2007. The relationship has three
aspects: an Asset Purchase Agreement, a lease contract and certain product purchases.
On
September 20, 2008, Xinda signed the Asset Purchase Agreement with Xinda High-Tech that
was discussed in the Business section of this Report. The Asset Purchase
Agreement provides that Xinda will purchase from Xinda High-Tech six buildings, 19
assembly lines, and the related land use right. The buildings were recently built by Xinda
High-Tech; the assembly lines were recently purchased by Xinda High-Tech, and have never
been used.
Xinda
High-Tech made the purchase for the benefit of Xinda because Xinda High-Tech is eligible
to receive low-cost government financing that is not available to Xinda.
45
At
the beginning of 2008, Mr. Han decided that Xinda should lease the plant and facilities of
Xinda High-Techs newly-built automotive modified plastics production base. The
parties entered into a lease contract for premises located at No. 9, Dalian North Road,
Haping Road Centralized Industrial Park, Harbin Development Zone, Heilongjiang Province,
China, with an area of 23,893.53 square meters. The lease term was from May 1, 2008 to
April 30, 2011. The lease payment was 2 million RMB per year.
In
September 2008, as a result of the adjustment of Chinese industrial policy, the influence
of international financial situation and the credit squeeze policy of the financial
institutions, Xinda High-Techs lending bank requires Xinda High-Tech to pay all the
due loans by the end of 2009. If Xinda High-Tech defaults, the bank will consider
foreclosure based on the negotiation results of the parties. Considering Xindas
overall business interest, Mr. Han decided that Xinda should purchase from Xinda High-Tech
all assets related to the production of automotive modified plastics.
The
purchase price paid by Xinda to Xinda High-Tech will be 240 million RMB (currently,
USD$35,139,092). Payment of 50 million RMB by Xinda is due at the end of December 2008;
the remaining 190 million is due at the end of September 2009. If Xinda is unable to make
the payment scheduled for the end of 2008, the parties expect that the due date will be
extended. However, Xinda will be responsible for any accumulated interests related to such
past due payments. Xina High-Tech also agreed not to engage in the relevant production and
sales in competition of Xindas major business.
Xinda
High-Tech paid 265 million RMB (USD$38 million) to purchase the equipments and facilities
for the production of automotive modified plastics. The purchase price of Xinda is RMB 240
million, which is 10% lower that the assets original history cost. By using
acquisition to expand production capacity, Xinda has realized its sales plan two years
earlier than constructing the plant itself. The acquisition also saves the costs increased
by price inflation. Due to the increased value of Chinas property and land usage,
the assets have great potential of increasing in value.
From
time to time, Xinda and Xinda High-Tech have provided working capital to each other. At
the end of June 2008 Xinda owed $82,518 to Xinda High-Tech by reason of such working
capital loans. The loans are unsecured and bear no interest.
At the end of September 2008, Xinda has paid off all the loans to Xinda High-Tech.
During
the nine months ended September 30, 2008, Xinda purchased raw materials from Xinda
High-Tech for a purchase price of $1,063,008. Such raw materials are used to test the new
equipments Xinda High-Tech recently purchased. The purchase price represents the cost
incurred by Xinda High-Tech for the goods.
46
Heilongjiang
Xinda Hyundai Engineering Plastics Co, Ltd (Heilongjiang Xinda Hyundai).
Heilongjiang
Xinda Hyundai Engineering Plastics Co, Ltd. is a company owned 25% by
Hyundai Engineering Plastics Co, Ltd, and 75% by Xinda High-Tech. Since its
organization, Heilongjiang Xinda Hyundai has no operations other than the sale of small
amounts of raw materials for the plastics. In October of 2008, the Board approved the
resolution to liquidate the company. Under this circumstance, Heilongjiang Xinda Hyundai
agreed to sell its raw materials to Xinda at their purchase prices. During 2007 Xinda paid
$440,554 to Hyundai Engineering Plastics Co, Ltd. for these raw materials, and during the
first nine months of 2008 Xinda paid $963,082 to the same company. The purchase prices
represent the cost incurred by Hyundai Engineering Plastics Co, Ltd. for the raw
materials.
Other
than the aforesaid relationships, none of our officers or directors has engaged in any
transaction during the past fiscal year or the current fiscal year that had a transaction
value in excess of $60,000.
For
risks associated with the related-party transactions, please see Risk Factors at page 14.
Description
of Securities
The
Board of Directors of the Company is authorized to issue:
|
|
100,000,000
shares of Common Stock, $.001 par value per share, of which 49,632,222 shares were
outstanding before the Merger;
|
|
|
10,000,000
shares of Series A Convertible Preferred Stock, of which 1,000,000 shares was issued and
will be converted into 38,194,072 shares of the common stock of the Company after the
Company conducts an amendment to its charter to increase the authorized shares of the
Companys common stock to allow such conversion after the Merger (the Company will
also amend its charter to increase the authorized shares of the preferred stock to
50,000,000); and
|
|
|
1,000,000
shares of Series B Preferred Stock which were issued and outstanding during the Merger.
|
Common
Stock
. Holders of the Company are entitled to one vote for each share in
the election of directors and in all other matters to be voted on by the stockholders.
There is no cumulative voting in the election of directors. Holders of Common Stock are
entitled to receive such dividends as may be declared from time to time by the Board of
Directors with respect to the Common Stock out of funds legally available therefor and, in
the event of liquidation, dissolution or winding up of the Company, to share rateably in
all assets remaining after payment of liabilities. The holders of Common Stock have no
pre-emptive or conversion rights and are not subject to further calls or assessments.
There are no redemption or sinking fund provisions applicable to the Common Stock.
Preferred
Stock
. The Board of Directors of the Company is authorized to designate the
preferred stock in classes, and to determine the rights, privileges and limitations of the
shares in each class.
47
Series
A Convertible Preferred Stockholders of the Company are not entitled to voting rights in
any and all matters including the election of directors. Holders of Series A Convertible
Preferred Stock are not entitled to receive any such dividends as may be declared from
time to time by the Board of Directors with respect to the Common Stock of the Company. In
the event of liquidation, dissolution or winding up of the Company, holders of Series A
Convertible Preferred Stock shall be entitled to share rateably, prior and in preference
to any distribution of any of the assets of the Company to the holders of Common Stock and
any other series of Preferred Stock ranking junior to the Series A Convertible Preferred
Stock, in all assets remaining after payment of liabilities. The holders of Series A
Convertible Preferred Stock shall be subject to, upon the successful increase of the total
authorized shares of Common Stock of the Company, the automatic conversion of such Series
A Convertible Preferred Stock into fully paid and nonassessable shares of Common Stock of
the Company at the approximate ratio of one for thirty-nine shares of the Common Stock of
the Company so that all 1,000,000 shares of Convertible Series A Preferred Stock shall
convert into 38,194,072 shares of Common Stock of the Company.
Series
B Preferred Stockholders of the Company are entitled to one vote for each share in the
election of directors and in all other matters to be voted on by the stockholders. There
is no cumulative voting in the election of directors. The one million shares of Series B
Preferred Stock shall have an aggregate voting power of 40% of the combined voting power
of the entire Companys shares, Common Stock and Preferred Stock as long as the
Company is in existence. Holders of Series B Preferred Stock are not entitled to receive
such dividends as may be declared from time to time by the Board of Directors with respect
to the Common Stock. In the event of liquidation, dissolution or winding up of the
Company, holders of Series B Preferred Stock shall be entitled to share ratably, prior and
in preference to any distribution of any of the assets of the Company to the holders of
Common Stock and any other series of Series B Preferred Stock ranking junior to the Series
B Preferred Stock, in all assets remaining after payment of liabilities. The holders of
Preferred B Stock have no pre-emptive or conversion rights and are not subject to further
calls or assessments.
Market Price and
Dividends on Common Equity and Other Shareholder Matters
Information
regarding the market price of the Companys common equity, payment of dividends, and
other shareholder matters is set forth in is set forth in Part III, Item 11 of the
Companys Annual Report on Form 10-K/A (Amendment No. 1), which was filed with the
Securities and Exchange Commission on December 17, 2008.
Legal Proceedings
Neither
the Company nor Favor Sea Limited, HK Engineering Plastics, or Xinda, is party to any
material legal proceedings.
48
Material Modification to
Rights of Security holders
Pursuant
to the Agreement and Plan of Merger and pursuant to Nevada Revised Statutes Section
78.209, the Company has set December 31, 2008 as the effective record date for a reverse
split of 124.1 for 1 to reduce the total number of issued and outstanding shares of common
stock. The total authorized shares of common stock will be reduced proportionately
accordingly as well. As a result, the total numbers of shares of common stock of the
Company held by its shareholders are all proportionately reduced together with the total
authorized share of the Companys common stock, leaving your proportionate holdings
substantially the same. Such a reverse split is necessary to allow the merger with Favor
Sea Limited to happen.
Pursuant
to the Agreement and Plan of Merger, the Company will issue 1,000,000 shares of
convertible Series A preferred stock of the Company to the shareholders of Favor Sea
Limited, and 1,000,000 shares of Series B preferred stock to XD in exchange for the
outstanding stock of Favor Sea Limited. The 1,000,000 shares of convertible Series A
preferred stock of the Company will convert approximately 1:38.2 into 38,194,072 shares of
the common stock of the Company after the completion of the Merger so that eventually the
shareholders of Favor Sea Limited own approximately 99% of the common stock of the
Company.
The
1,000,000 shares of Series B Preferred Stock will have an aggregate voting power of 40% of
the combined voting power of the entire Companys shares, common stock and preferred
stock as long as the Company is in existence. Without the vote or consent of the holders
of at least a majority of the shares of Series B Preferred Stock then outstanding, the
Company may not (i) authorize, create or issue, or increase the authorized number of
shares of, any class or series of capital stock ranking prior to or on a parity with the
Series B Preferred Stock, (ii) authorize, create or issue any class or series of common
stock of the Company other than the common stock, (iii) authorize any reclassification of
the Series B Preferred Stock, (iv) authorize, create or issue any securities convertible
into or exercisable for capital stock prohibited by (i) or (ii), (v) amend the designation
certificate of the Series B Preferred Stock, or (vi) enter into any merger or
reorganization, or disposal of assets involving 20% of the total capitalization of the
Company.
The
record holders of the Companys common stock on the date of December 31, 2008 will
have their fractional shares or shares numbering below one hundred shares post the reverse
split to be rounded up to one hundred shares, with the round-up shares to be deducted from
certain designated shareholders by the Company. Any holders of the Companys common
stock after the date of December 31, 2008 will not be eligible for the round-up shares.
49
Changes in and
Disagreements with Accountants
On
December 31, 2008, the Company changed its principal independent accountants. On such date,
Robison, Hill & Co. was dismissed from serving as the Companys principal
independent accountants and the Company retained Bagell Josephs Levine & Company, LLC
as its principal independent accountants. The decision to change accountants was approved
by the Companys Board of Directors on December 31, 2008.
The dismissal of Robison,
Hill & Co.
Robison,
Hill & Co. was the independent registered public accounting firm for the Company from
December 31, 2004 to December 31, 2008. None of Robinson, Hill & Co.'s reports on the Companys financial
statements from December 31, 2004 to December 31, 2008, (a) contained an adverse opinion or disclaimer
of opinion, (b) was modified as to uncertainty other than mentioned below, audit scope, or accounting principles, or
(c) contained any disagreements on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the satisfaction of Robison, Hill & Co., would have caused it to make
reference to the subject matter of the disagreements in connection with its reports. None
of the reportable events set forth in Item 304(a)(1)(ii) of Regulation S-K occurred during
the period in which Robison, Hill & Co. served as the Companys principal
independent accountants.
In
accordance with Item 304(a)(3), the Company has provided Robison, Hill & Co. with a
copy of this disclosure and has requested that Robison, Hill & Co. furnish it with a
letter addressed to the U.S. Securities and Exchange Commission stating whether it agrees
with the above statements, and if not, stating the respects in which it does not agree. A
copy of the letter from Robison, Hill & Co. addressed to the Securities and Exchange
Commission dated December 31, 2008 is filed as Exhibit 16.1 to this 8-K Report.
The Engagement of Bagell
Josephs Levine & Company, LLC
Prior to December 31, 2008, the date that
Bagell Josephs Levine & Company, LLC was retained as the principal independent
accountants of the Company:
(1)
The Company did not consult Bagell Josephs Levine & Company, LLC regarding either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
Companys financial statements;
(2)
Neither a written report nor oral advice was provided to the Company by
Bagell Josephs Levine & Company, LLC that they concluded was an important factor
considered by the Company in reaching a decision as to the accounting, auditing
or financial reporting issue; and
50
(3)
The Company did not consult Bagell Josephs Levine & Company, LLC regarding
any matter that was either the subject of a disagreement (as defined
in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or any of
the reportable events set forth in Item 304(a)(1)(iv) of Regulation S-K.
Item 9.01 Financial
Statements and Exhibits
Financial Statements
|
Page
|
|
|
|
|
Unaudited Financial Statements of Favor Sea Limited for the period from
|
|
|
|
|
|
May 2, 2008 (date of inception) to September 30, 2008
|
|
|
F-1
|
|
|
|
|
|
Audited Financial Statements of Harbin Xinda Macromolecule Material Co., Ltd.
|
|
|
for the years ended December 31, 2007 and 2006
|
|
|
F-19
|
|
|
|
|
|
NB Telecom Inc. Unaudited pro forma's
|
|
|
F-36
|
|
|
|
|
|
Exhibits
10.1
|
Agreement
and Plan of Merger dated December 24, 2008 among the Company and the shareholders of
Favor Sea Limited.
|
10.2
|
Designation
Certificate of Series A Preferred Stock
|
10.3
|
Designation
Certificate of Series B Preferred Stock
|
10.4
|
Asset
Purchase Agreement dated September 20, 2008 between Harbin Xinda Macromolecule
Material Co., Ltd. and Harbin Xinda High-Tech Co., Ltd.
|
16.1
|
Letter,
dated December 31, 2008, from Robison, Hill & Co. to the Securities and Exchange Commission.
|
51
FAVOR SEA LIMITED
CONSOLIDATED FINANCIAL
STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
FAVOR SEA LIMITED
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
|
Consolidated Balance Sheets at September 30, 2008 (Unaudited)
|
|
|
|
|
|
and December 31, 2007 (Audited)
|
|
|
|
F-1
|
|
|
|
|
Consolidated Statements of Income for the nine and three months
|
|
|
ended September 30, 2008 and 2007 (Unaudited)
|
|
|
|
F-2
|
|
|
|
|
Consolidated Statements of Changes in Shareholders' Equity for the nine months
|
|
|
ended September 30, 2008 and 2007 (Unaudited)
|
|
|
|
F-3
|
|
|
|
|
Consolidated Statements of Cash Flows for the nine months ended
|
|
|
September 30, 2008 and 2007 (Unaudited)
|
|
|
|
F-4
|
|
|
|
|
Notes to Consolidated Financial Statements (Unaudited)
|
|
|
|
F-5 - F-18
|
|
FAVOR SEA LIMITED
CONSOLIDATED BALANCE SHEETS
|
September 30,
2008
(Unaudited)
|
|
December 31,
2007
(Audited)
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
:
|
|
|
Cash and cash equivalents
|
|
|
$
|
2,167,016
|
|
$
|
87,455
|
|
Restricted Cash
|
|
|
|
4,388,872
|
|
|
5,428,673
|
|
Short Term Investment
|
|
|
|
|
|
|
|
|
Notes Receivable
|
|
|
|
831,522
|
|
|
|
|
Accounts receivable - net of allowance for bad debts of
|
|
|
$100,148 and $93,219, respectively
|
|
|
|
16,623,310
|
|
|
5,117,840
|
|
Other receivables
|
|
|
|
3,420,543
|
|
|
128,658
|
|
Inventory
|
|
|
|
10,786,227
|
|
|
5,587,862
|
|
Prepaid expenses
|
|
|
|
|
|
|
21,393
|
|
Due from related parties
|
|
|
|
|
|
|
105,537
|
|
Advances to suppliers
|
|
|
|
8,973,700
|
|
|
1,746,063
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
47,191,190
|
|
|
18,223,481
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
12,641,860
|
|
|
7,533,619
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
Intangible assets, net
|
|
|
|
250,271
|
|
|
236,867
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
|
250,271
|
|
|
236,867
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
$
|
60,083,321
|
|
$
|
25,993,967
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
Current liabilities
:
|
|
|
Short Term Loan
|
|
|
$
|
21,797,081
|
|
$
|
1,370,877
|
|
Notes Payable
|
|
|
|
9,867,597
|
|
|
12,886,245
|
|
Accounts payable
|
|
|
|
1,560,312
|
|
|
647,436
|
|
Other payable
|
|
|
|
3,175,438
|
|
|
31,861
|
|
Accrued expenses
|
|
|
|
709,652
|
|
|
43,940
|
|
Tax payable
|
|
|
|
145,320
|
|
|
1,454,745
|
|
Due to shareholders
|
|
|
|
620,000
|
|
|
|
|
Deferred revenue
|
|
|
|
273,115
|
|
|
93,040
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
38,148,515
|
|
|
16,528,144
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
Common Stock, $1 par value, 50,000 shares authorized, 40,000 shares issued
|
|
|
outstanding as of September 30, 2008 and December 31, 2007
|
|
|
|
40,000
|
|
|
40,000
|
|
Additional Paid-in-Capital
|
|
|
|
2,443,066
|
|
|
2,443,066
|
|
Retained earnings
|
|
|
|
17,801,554
|
|
|
6,363,651
|
|
Accumulated other comprehensive income
|
|
|
|
1,650,186
|
|
|
619,106
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
|
21,934,806
|
|
|
9,465,823
|
|
|
|
|
|
|
|
|
|
Total Liabilities And Shareholders' Equity
|
|
|
$
|
60,083,321
|
|
$
|
25,993,967
|
|
|
|
|
|
|
The accomanying notes
are an integral part of these financial statements
F-1
FAVOR SEA LIMITED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE
NINE AND THREE MONTHS ENDED SEPETEMBER 30, 2008 AND 2007
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
|
|
2008
(Unaudited)
|
|
2007
(Unaudited)
|
|
2008
(Unaudited)
|
|
2007
(Unaudited)
|
|
|
|
|
|
|
Sales
|
|
|
$
|
55,802,003
|
|
$
|
20,098,712
|
|
$
|
22,324,847
|
|
$
|
7,201,818
|
|
|
|
|
Cost of sales
|
|
|
|
(41,880,768
|
)
|
|
(15,925,484
|
)
|
|
(16,555,094
|
)
|
|
(6,203,812
|
)
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
13,921,235
|
|
|
4,173,228
|
|
|
5,769,753
|
|
|
998,006
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
Reaseach and development expenses
|
|
|
|
557,746
|
|
|
92,439
|
|
|
237,106
|
|
|
71,446
|
|
Selling expenses
|
|
|
|
241,823
|
|
|
29,040
|
|
|
194,029
|
|
|
6,874
|
|
General and Administrative expenses
|
|
|
|
1,102,261
|
|
|
199,831
|
|
|
656,322
|
|
|
15,788
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
|
1,901,830
|
|
|
321,310
|
|
|
1,087,457
|
|
|
94,108
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
12,019,405
|
|
|
3,851,918
|
|
|
4,682,296
|
|
|
903,898
|
|
|
|
|
|
|
|
|
|
|
Other Income (expenses)
|
|
|
Interest Income (expenses)
|
|
|
|
(481,875
|
)
|
|
(117,939
|
)
|
|
(318,608
|
)
|
|
(17,614
|
)
|
Other Income/Subsidy Income
|
|
|
|
25,665
|
|
|
6,598
|
|
|
485
|
|
|
120
|
|
Other expense
|
|
|
|
(100,881
|
)
|
|
(72,145
|
)
|
|
(100,881
|
)
|
|
(18,717
|
)
|
|
|
|
|
|
|
|
|
|
Total Other income(expense)
|
|
|
|
(557,091
|
)
|
|
(183,486
|
)
|
|
(419,004
|
)
|
|
(36,211
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
11,462,314
|
|
|
3,668,432
|
|
|
4,263,292
|
|
|
867,687
|
|
|
|
|
Provision for income taxes
|
|
|
|
24,411
|
|
|
|
|
|
18,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
$
|
11,437,903
|
|
$
|
3,668,432
|
|
$
|
4,245,110
|
|
$
|
867,687
|
|
|
|
|
Other Comprehensive Income
|
|
|
Foreign Currency Translation Adjustment
|
|
|
|
1,031,080
|
|
|
237,199
|
|
|
220,337
|
|
|
104,329
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
$
|
12,468,983
|
|
$
|
3,905,631
|
|
$
|
4,465,447
|
|
$
|
972,016
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Income per common share
|
|
|
Basic
|
|
|
$
|
285.95
|
|
$
|
91.71
|
|
$
|
106.13
|
|
$
|
21.69
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$
|
285.95
|
|
$
|
91.71
|
|
$
|
106.13
|
|
$
|
21.69
|
|
|
|
|
|
|
|
|
|
|
Weighted average common share outstanding
|
|
|
Basic
|
|
|
|
40,000
|
|
|
40,000
|
|
|
40,000
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
40,000
|
|
|
40,000
|
|
|
40,000
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
The accomanying notes
are an integral part of these financial statements
F-2
FAVOR SEA LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(UNAUDITED)
|
Commen Stock
|
|
Additional
Paid-in-Capital
|
|
Retained
Earnings
|
|
Accumulated Other
Comprehensive Income
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
40,000
|
|
|
2,443,066
|
|
|
1,091,081
|
|
|
136,174
|
|
|
3,710,322
|
|
|
|
|
Net income for the period
|
|
|
|
|
|
|
|
|
|
3,668,432
|
|
|
|
|
|
3,668,432
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
237,199
|
|
|
237,199
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
$
|
40,000
|
|
$
|
2,443,066
|
|
$
|
4,759,513
|
|
$
|
373,373
|
|
$
|
7,615,952
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
$
|
40,000
|
|
$
|
2,443,066
|
|
$
|
6,363,651
|
|
$
|
619,106
|
|
$
|
9,465,823
|
|
|
|
|
Net income for the period
|
|
|
|
|
|
|
|
|
|
11,437,903
|
|
|
|
|
|
11,437,903
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
1,031,080
|
|
|
1,031,080
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
$
|
40,000
|
|
$
|
2,443,066
|
|
$
|
17,801,554
|
|
$
|
1,650,186
|
|
$
|
21,934,806
|
|
|
|
|
|
|
|
|
|
|
|
|
The accomanying notes
are an integral part of these financial statements
F-3
FAVOR SEA LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
|
For the nine months ended
September 30,
|
|
|
2008
|
|
2007
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
11,437,903
|
|
$
|
3,668,432
|
|
Adjustments to reconcile net income to net cash provided by
|
|
|
(used in) operating activities:
|
|
|
Depreciation & amortization
|
|
|
|
685,860
|
|
|
243,750
|
|
Changes in assets and liabilities:
|
|
|
(Increase) decrease in -
|
|
|
Restricted cash
|
|
|
|
1,403,171
|
|
|
2,949,458
|
|
Accounts receivable and other receivables
|
|
|
|
(14,010,629
|
)
|
|
2,729,157
|
|
Tax Receivable
|
|
|
|
|
|
|
4,335
|
|
Inventory
|
|
|
|
(4,649,965
|
)
|
|
(3,573,750
|
)
|
Prepaid expenses
|
|
|
|
22,344
|
|
|
20,366
|
|
Notes receivables
|
|
|
|
(804,096
|
)
|
|
5,220
|
|
Advances to suppliers
|
|
|
|
(6,900,409
|
)
|
|
171,748
|
|
Increase (decrease) in -
|
|
|
Accounts payable and other payable
|
|
|
|
3,894,526
|
|
|
6,552,340
|
|
Accrued expenses
|
|
|
|
644,019
|
|
|
29,121
|
|
Tax payable
|
|
|
|
(1,378,125
|
)
|
|
260,050
|
|
Due to owners
|
|
|
|
|
|
|
(21,395
|
)
|
Deferred revenue
|
|
|
|
168,341
|
|
|
7,791,198
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
|
(9,487,060
|
)
|
|
20,830,030
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
Purchase of fixed assets
|
|
|
|
(5,103,516
|
)
|
|
(52,472
|
)
|
Loan to related party
|
|
|
|
110,228
|
|
|
(6,153,163
|
)
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
(4,993,288
|
)
|
|
(6,205,635
|
)
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
Proceeds from Short Term Loan
|
|
|
|
19,758,944
|
|
|
391,521
|
|
Proceeds from Shareholder Loan
|
|
|
|
620,000
|
|
|
|
|
Repayment of bank acceptance notes payable
|
|
|
|
(3,865,880
|
)
|
|
(7,373,645
|
)
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
|
16,513,064
|
|
|
(6,982,124
|
)
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
46,845
|
|
|
186,656
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
|
2,079,561
|
|
|
7,828,927
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
87,455
|
|
|
328,492
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
|
$
|
2,167,016
|
|
$
|
8,157,419
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Interest paid
|
|
|
$
|
457,982
|
|
$
|
157,240
|
|
|
|
|
|
|
Income taxes paid
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
The accomanying notes
are an integral part of these financial statements
F-4
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 1. ORGANIZATION AND
BASIS OF PRESENTATION
Favor Sea Limited (the
Company or Favor Sea) was incorporated under the laws of the
British Virgin Islands on May 2, 2008.
On August 11, 2008, Favor Sea
acquired 100% interest of Hong Kong Engineering Plastics Company Limited (HK
Engineering Plastics), a Limited Liability Company organized under the laws of the
Hong Kong Special Administration Region on May 27, 2008.
HK Engineering Plactics owns 100%
interest of Harbin Xinda Macromolecule Material Co., Ltd (Harbin Xinda), a
company incorporated in the Peoples Republic of China on September 23, 2004.
The transactions were accounted for
under purchase method. Since the Company and HK Engineering Plastics are all under common
control of a same majority shareholder, the consolidation of the Company has been
accounted for at historical cost and prepared on the basis as if the aforementioned
contractual arrangements with Favor See and HK Plastics Engineering had become effective
as of the beginning of the first period presented in the accompanying consolidated
financial statements.
The Company has not had any
transactions or operations of its own as of today. Instead, all of its operations were
carried out through its indirectly owned subsidiary, Harbin Xinda. Harbin Xinda is
primarily engaged in the business of research development, manufacture, distribution of
modified and engineering plastic pellets used in automotive parts through its
manufacturing facility and its wholly owned research laboratory, Harbin Xinda
Macromolecule Research Institute (the Research Institute), a separate entity
established in 2007.
The Companys consolidated
financial statements have been prepared in accordance with generally accepted accounting
principles in the United States of America (US GAAP).
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Principles of
consolidation
The consolidated financial statements
of the Company include the accounts of Favor Sea, HK Plastics Engineering, Harbin Xinda
and Research Institute. All significant inter-company balances and transactions are
eliminated in consolidation.
F-5
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of estimates
In preparing the financial statements
in conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the dates
of the financial statements, as well as the reported amounts of revenues and expenses
during the reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories. Actual results could
differ from those estimates.
Cash and cash equivalents
For purposes of the statement of cash
flow, the Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Accounts receivable
Accounts receivables consist
primarily of receivables resulting from sales of products, and are stated at net
realizable value. This value includes an appropriate allowance for estimated uncollectible
accounts. The allowance is calculated based upon the evaluation and the level of past due
accounts and the relationship with and the economic status of the customers. The allowance
for uncollectible amounts for the nine months ended September 30, 2008 was $100,148, and
$93,219 for the year ended December 31, 2007.
Inventory
Inventory is composed of raw
materials and packing materials for manufacturing, work in process, and finished goods.
Inventory is valued at the lower of cost or market with cost determined on the weighted
average method. Management compares the cost of inventory with the market value and an
allowance is made for writing down the inventory to its market value, if lower than cost.
No allowance for inventory is considered necessary for the nine months ended September 30,
2008 and 2007.
F-6
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment
Property and equipment are stated at
cost. The cost of an asset comprises its purchase price and any directly attributable
costs of bringing the asset to its present working condition and locations for its
intended use. Depreciation is calculated using the straight-line method over the following
useful lives:
|
|
|
|
|
|
Buildings and improvements
|
|
|
39 years
|
|
|
Machinery, equipment and automobiles
|
|
|
5-10 years
|
|
|
Expenditures for maintenance and
repairs are charged to expense as incurred. Additions, renewals and betterments are
capitalized.
Advance to suppliers
Advance to suppliers represent the
payments made and recorded in advance for goods and services received. The Company makes
advances to raw materials purchased from certain agents overseas, which account for 60% of
raw materials needed. In order to maintain a long-term relationship with the vendors, the
Company frequently needs to make advances from one and half month to
three months ahead. The advances to suppliers were $8,973,700 as of September 30,
2008 and $1,746,063 as of December 31, 2007.
Impairment of long-lived
assets
Long-lived assets, which include
property, plant and equipment and intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
Recoverability of long-lived assets
to be held and used is measured by a comparison of the carrying amount of an asset to the
estimated undiscounted future cash flows expected to be generated by the assets. If the
carrying amount of an asset exceeds its estimated undiscounted future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the assets. Fair value is generally determined using the
assets expected future discounted cash flows or market value, if readily
determinable. No impairment loss is recorded for the nine months ended September 30, 2008
and 2007.
F-7
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income taxes
The Company accounts for income tax under
the provisions of SFAS No.109 Accounting for Income Taxes, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of the events that have been included in the financial statements or tax
returns. Deferred income taxes are recognized for all significant temporary differences
between tax and financial statements bases of assets and liabilities. Valuation allowances
are established against net deferred tax assets when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. There are no deferred tax
amounts at the nine months ended September 30, 2008 and 2007.
Revenue recognition
The Companys 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 exists and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue recognition are
satisfied are recorded as deferred revenue.
Research and development
expenses
Research and development expenses are
costs associated with developing the Companys intellectual property. Research and
development costs are expensed as incurred. The costs of equipments that are acquired or
constructed for research and development activities and have alternative future uses are
classified as plant and equipment and depreciated over their estimated useful lives. The
research and development expense for the nine months ended September 30, 2008 and 2007 was
$557,746 and $92,439, respectively.
Earnings per share
Basic earnings per share are computed
by dividing income available to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive. There are
no such additional common shares available for dilution purposes for the nine months ended
September 30, 2008 and 2007.
F-8
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of credit
risk
Financial instruments that
potentially subject the Company to concentration of credit risk consist primarily of
accounts receivable and other receivables. The Company does not require collateral or
other security to support these receivables. The Company conducts periodic reviews of its
clients financial condition and customer payment practices to minimize collection
risk on accounts receivable.
Risks and uncertainties
The operations of the Company are
located in the PRC. Accordingly, the Companys business, financial condition, and
results of operations may be influenced by the political, economic, and legal environments
in the PRC, as well as by the general state of the PRC economy.
The Companys 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 Companys 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.
Fair value of financial
instruments
The carrying amounts of certain
financial instruments, including cash and cash equivalents, accounts receivable, other
receivables, accounts payable, accrued expenses, taxes payable, notes payable and other
loans payable approximate fair value due to the short-term nature of these items. The
carrying amounts of short-term loans from bank approximate the fair value based on the
Companys expected borrowing rate for debt with similar remaining maturities and
comparable risk.
F-9
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign currency
translation
The Companys functional
currency is the Renminbi (RMB). For financial reporting purposes, RMB has been
translated into United States dollars (USD) as the reporting currency. Assets
and liabilities are translated at the exchange rate in effect at the balance sheet date.
Revenues and expenses are translated at the average rate of exchange prevailing during the
reporting period. Translation adjustments arising from the use of different exchange rates
from period to period are included as a component of stockholders equity as
Accumulated other comprehensive income. Gains and losses resulting from
foreign currency translations are included in accumulated other comprehensive income.
There is no significant fluctuation in exchange rate for the conversion of RMB to USD
after the balance sheet date.
Recent accounting
pronouncements
In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilitiesincluding an amendment of FASB Statement No. 159 (FAS 159).
FAS 159 permits companies to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair value.
The objective of FAS 159 is to provide opportunities to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply hedge accounting provisions. FAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities. SFAS 159
will be effective in the first quarter of fiscal 2009. The Company is evaluating the
impact that this statement will have on its consolidated financial statements.
In June 2007, the FASB issued FASB
Staff Position No. EITF 07-3, Accounting for Nonrefundable Advance Payments for
Goods or Services Received for use in Future Research and Development Activities
(FSP EITF 07-3), which addresses whether nonrefundable advance payments for
goods or services that used or rendered for research and development activities should be
expensed when the advance payment is made or when the research and development activity
has been performed. The Company has adopted FSP EITF 07-3 and expensed the research and
development as it incurred.
F-10
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2007, the FASB issued
SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements an
amendment of Accounting Research Bulletin No. 51 (SFAS 160), which
establishes accounting and reporting standards for ownership interests in subsidiaries
held by parties other than the parent, the amount of consolidated net income attributable
to the parent and to the non-controlling interest, changes in a parents ownership
interest and the valuation of retained non-controlling equity investments when a
subsidiary is deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the interests
of the parent and the interests of the non-controlling owners. SFAS 160 is effective for
fiscal years beginning after December 15, 2007. The Company has not determined the effect
that the application of SFAS 160 will have on its consolidated financial statements.
In December 2007, Statement of
Financial Accounting Standards No. 141(R),
Business Combinations,
was issued. SFAS
No. 141R replaces SFAS No. 141,
Business Combinations.
SFAS 141R retains the
fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS
141 called the
purchase method)
be used for all business combinations and for an
acquirer to be identified for each business combination. SFAS 141R requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any non-controlling interest
in the acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. This replaces SFAS 141s cost-allocation process, which
required the cost of acquisition to be allocated to the individual assets acquired and
liabilities assumed based on their estimated fair values. SFAS 141R also requires the
acquirer in a business combination achieved in stages (sometimes referred to as a step
acquisition) to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair values (or
other amounts determined in accordance with SFAS 141R). SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2007 An entity may not
apply it before that date. The Company is currently evaluating the impact that adopting
SFAS No. 141R will have on its financial statements.
In March 2008, the FASB issued
Statement of Financial Accounting Standards (SFAS) No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133, which requires additional disclosures about the objectives of the derivative
instruments and hedging activities, the method of accounting for such instruments under
SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects
of such instruments and related hedged items on our financial position, financial
performance, and cash flows. SFAS No. 161 is effective beginning January 1,
2009. We are currently assessing the potential impact that adoption of SFAS No. 161
may have on our financial statements.
F-11
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
In June 2008, the FASB issued FASB
Staff Position on Emerging Issues Task Force Issue 03-6, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities
(FSP EITF 03-6-1). FSP EITF 03-6-1 states that unvested share-based payment
awards that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the computation of
earnings per share (EPS) pursuant to the two-class method. FSP EITF 03-6-1 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior-period EPS data
presented shall be adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data) to conform with the provisions of FSP
EITF 03-6-1. Early application is not permitted. Management is currently evaluating the
impact FSP EITF 03-6-1 will have on the Companys EPS calculations.
Note 3. RESTRICTED CASH
For the nine months ended September
30, 2008, the Company had restricted cash of $4,388,872. The Companys lenders
require the Company to maintain with the lending banks a cash balance of a minimum 40%
-50% of the balance of the notes payable (see Note 10) as collateral for the
companys obligations to the lenders
Note. 4 INVENTORY
The inventory consists of the
following:
|
As of
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Raw materials
|
|
|
$
|
1,120,582
|
|
$
|
665,270
|
|
Packing supplies
|
|
|
|
30,690
|
|
|
16,131
|
|
Work-in-process
|
|
|
|
71,130
|
|
|
53,428
|
|
Finished goods
|
|
|
|
9,563,825
|
|
|
4,853,033
|
|
|
|
|
|
|
Total
|
|
|
$
|
10,786,227
|
|
$
|
5,587,862
|
|
|
|
|
|
|
No allowance for inventory was made
for the nine months ended September 30, 2008.
F-12
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 5. PROPERTY, PLANT
AND EQUIPMENT, NET
The detail of property, plant and
equipment is as follows:
|
As of
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
Machinery & equipment
|
|
|
$
|
10,044,194
|
|
$
|
5,920,295
|
|
Automobiles
|
|
|
|
122,444
|
|
|
52,679
|
|
Plant & Buildings
|
|
|
|
2,385,015
|
|
|
2,220,000
|
|
|
|
|
|
|
Total
|
|
|
|
12,551,653
|
|
|
8,192,974
|
|
|
Less: accumulated depreciation
|
|
|
|
(1,409,648
|
)
|
|
(659,355
|
)
|
|
Construction in progress
|
|
|
|
1,499,855
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
$
|
12,641,860
|
|
$
|
7,533,619
|
|
|
|
|
|
|
Depreciation expense for nine months
ended September 30, 2008 and 2007 was $681,775 and $240,026, respectively.
Note 6. INTANGIBLE ASSET
Intangible asset consists of land use
right only. All land in the Peoples Republic of China is government owned and cannot
be sold to any individual or company. Instead, the government grants the user a Land
use right (the Right) to use the land. The Company has the right to use the land for
48 years and amortized the Right on a straight-line basis over 48 years. The land use
right was originally acquired in May 2005 for the amount of $226,281.
Net intangible assets at September
30, 2008 and December 31, 2007 were as follows:
|
As of
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
Land use right
|
|
|
$
|
268,948
|
|
$
|
250,340
|
|
Less: Accumulated amortization
|
|
|
|
(18,677
|
)
|
|
(13,473
|
)
|
|
|
|
|
|
Total
|
|
|
$
|
250,271
|
|
$
|
236,867
|
|
|
|
|
|
|
Amortization expense for nine months
ended September 30, 2008 and 2007 was $4,085 and $3,724, respectively.
F-13
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 7. OTHER RECEIVABLES
Other receivables represent cash
advances to employees, sales representatives and other outside parties for normal business
purposes. Other receivables for nine months ended September 30, 2008 amounted to $
3,420,543.
Note 8. RELATED PARTY
TRANSACTIONS
Amounts due to (from)
directors/affiliates are as follows:
|
As of
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
Piao Qiuyao
|
|
|
$
|
620,000
|
|
$
|
|
|
Ma Qingwei
|
|
|
|
|
|
|
(19,172
|
)
|
Han Jie
|
|
|
|
|
|
|
(86,365
|
)
|
|
|
|
|
|
Total
|
|
|
$
|
620,000
|
|
$
|
(105,537
|
)
|
|
|
|
|
|
The Company also has sales and
purchase with its affiliated companies. The detail is as follows:
|
For the nine months ended
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
|
|
|
Purchase from
|
|
|
|
|
|
|
|
|
Harbin Xinda Hi-tech Co, Ltd
|
|
|
$
|
1,063,008
|
|
$
|
19,423
|
|
Heilongjiang Xinda Hyundai Engineering Plastics Co, Ltd.
|
|
|
|
963,082
|
|
|
179,401
|
|
Sales to
|
|
|
Harbin Xinda Hi-tech Co., Ltd
|
|
|
|
69,842
|
|
|
131,091
|
|
Ms Piao, Qiuyao owns 100% of the
Company indirectly via XD Engineering Plastic Company Ltd, the solely shareholder of the
Company incorporated in British Virgin Island. Harbin Xinda Hi-Tech Co. Ltd and
Heilongjiang Xinda Hyundai Engineering Plastics Co. Ltd. are affiliate companies owned by
the relative of the Mr. Han Jie, who was the major shareholder of Harbin Xinda before the
ownership transferred to HK Engineering Plastics. Mr. Ma Qingwei is the Chief Operating
Officer of the Harbin Xinda and Mr. Han Jie is- the Chief Executive Officer of Harbin
Xinda.
On May 1, 2008, Harbin Xinda entered
into an operating lease for operating space expiring on April 30, 2011, with Harbin Xinda
High-Tech Co., Ltd. Harbin Xinda is subject to annual lease obligation of RMB 2,000,000
(appromixately $286,000 at date of signing). The annual payment should be made by the 15th
working day of December each year.
F-14
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 9. SHORT TERM LOANS
The short-term loans include the
following:
|
As of
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
a) Loan payable to Harbin Bank
|
|
|
|
|
|
|
|
|
one year term from 12/04/07 to 12/03/08,
|
|
|
a fixed interest rate of 0.79% per month,
|
|
|
$
|
1,472,776
|
|
$
|
1,370,877
|
|
|
|
|
b) Loan payable to Harbin Bank
|
|
|
one year term from 2/22/2008 to 2/21/2009
|
|
|
a fixed interest rate of 0.81% per month,
|
|
|
|
4,418,327
|
|
|
|
|
|
|
|
c) Loan payable to Harbin Bank
|
|
|
three-month term from 8/25/08 to 11/30/08,
|
|
|
a fixed interest rate of 0.71% per month,
|
|
|
|
4,418,327
|
|
|
|
|
|
|
|
d) Loan payable to Harbin Bank
|
|
|
one-month term from 9/12/2008 to 10/11/2008
|
|
|
a fixed interest rate of 0.71% per month,
|
|
|
|
441,833
|
|
|
|
|
|
|
|
e) Loan payable to Harbin Bank
|
|
|
one-month term from 9/26/2008 to 10/25/2008
|
|
|
a fixed interest rate of 0.67% per month,
|
|
|
|
736,388
|
|
|
|
|
|
|
|
f) Loan payable to Anhui Yiyang Metal Materials Co., Ltd.
|
|
|
six-month term from 5/27/2008 to 11/26/2008,
|
|
|
bears no interest
|
|
|
|
4,418,327
|
|
|
|
|
|
|
|
g) Loan payable to Anhui Yiyang Metal Materials Co., Ltd.
|
|
|
six-month term from 4/30/2008 to 10/29/2008,
|
|
|
bears no interest
|
|
|
|
5,891,103
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
21,797,081
|
|
$
|
1,370,877
|
|
|
|
|
|
|
Interest expense for the above short
term loans was $561,359 and $157,240 for nine months ended September 30, 2008 and 2007,
respectively.
Note 10. NOTES PAYABLE
As of September 30, 2008, the Company
has bank acceptance notes payable in the amount of $9,867,597. The notes are guaranteed to
be paid by the banks and usually for a short-term period of three to six months. The
Company is required to maintain cash deposits at a minimum 40%-50% of the total balance of
the notes payable with the banks, in order to ensure future credit availability.
F-15
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 11. INCOME TAXES
(a) Corporation income
tax (CIT)
The Company is governed by the Income
Tax Law of the Peoples Republic of China concerning the private-run enterprises,
which are generally subject to tax at a new statutory rate of 25% and were, until January
2008, subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income
tax) on income reported in the statutory financial statements after appropriate tax
adjustments.
On March 16,2007, the National
Peoples Congress of China approved the Corporate Income Tax Law of the Peoples
Republic of China (the New CIT Law), which is effective from January 1, 2008. Under the
new law, the corporate income tax rate applicable to all Companies, including both
domestic and foreign-invested companies, will be 25%, replacing the current applicable tax
rate of 33%. However, pending the detailed implementation rulings from the tax
authorities, we believe that some of the tax concession granted to eligible companies
prior to the new CIT laws will be grand fathered.
The Company is located in a special
economic development zone and is recognized as a high technology company by the Chinese
government. Therefore, it is entitled to a full exemption of special 15% CIT for two years
from January 1, 2006 through December 31, 2007 and 50% reduction in CIT for three years at
a favorable tax rate of 7.5% from January 1, 2008 to December 31, 2010. The income tax
expense of $24,411 for the nine months ended September 30, 2008 is attributed to the net
income of $285,105 derived from Harbin Xinda. The majority of the net income for the
period was from the Research Institute, which is a separate entity and whose income is
exempt from the income tax under the current law of China. The net effect on earnings per
share had the income tax been applied would decrease earnings per share from $285.95 to
$216.05 for the nine months ended September 30, 2008 and $106.13 to $81.18 for the three
months ended September 30, 2008.
F-16
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 11. INCOME TAXES
(Continued)
(a)
Corporation income tax (CIT) (Continued)
The following table reconciles the
statutory rates to the Companys effective tax rate for the nine months ended
September 30, 2008 and 2007.
|
For the Nine months
Ended September 30,
|
|
|
2008
|
|
2007
|
|
|
|
|
China Income tax
|
|
|
|
25.00
|
%
|
|
33.00
|
%
|
Tax exemption
|
|
|
|
(24.8
|
%)
|
|
(33
|
%)
|
|
|
|
|
|
Total provision for income tax
|
|
|
|
0.20
|
%
|
|
0.00
|
%
|
(b) Value added tax
(VAT)
Enterprises or individuals who sell
commodities, engage in repair and maintenance or import or export goods in the PRC are
subject to a value added tax in accordance with the PRC laws. The value added tax standard
rate is 17% of the gross sales price. A credit is available whereby VAT paid on the
purchases of semi-finished products or raw materials used in the production of the
Companys finished products can be used to offset the VAT due on the sales of the
finished products. The Company has a VAT tax payable of $15,656 as of September 30, 2008.
Note 12.
STOCKHOLDERS EQUITY
Favor Sea Limited (the
Company or Favor Sea) was incorporated under the laws of the
British Virgin Islands, with 50,000 shares of common stock authorized at par value of
US$1.00.
As of September 30, 2008, there were
40,000 shares of common stock issued and outstanding.
Note 13. MAJOR CUSTOMERS
AND SUPPLIERS
Two major customers accounted for
approximately 9.17% of the net revenue for the nine months ended September 30, 2008, with
each customer individually accounting for 4.78%, and 4.39%, respectively. At September 30,
2008, the total receivable balance due from these two customers was $1,414,828,
representing 8.46% of total accounts receivable.
Four major customers accounted for
20.37% of the net revenue for the nine months ended September 30, 2007, with each customer
individually accounted for 6.08%, 5.30%, 5.09%,
F-17
FAVOR SEA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
Note 13. MAJOR
CUSTOMERS AND SUPPLIERS (continued)
and 3.91%, respectively. At September
30, 2007, the total receivable balance due from these four customers was $1,842,777,
representing 23.35% of total accounts receivable.
Two major vendors provided
approximately 90.59% of the Companys purchases of raw materials for the period ended
September 30, 2008, with each vendor individually accounting for 70.48% and 20.11%,
respectively. The Company had total account payable balance due to the second largest
vendor of $223,809, representing 20.61% of total accounts payable, and advance to the
largest vendor of $8,540,730 at September 30, 2008.
One vendor provided 87.47% of the
Companys purchase of raw materials for the nine months ended September 30, 2007. The
Companys advance to this vendor was $7,013,788 at September 30, 2007, accounting for
98.68% of total advances to suppliers.
Note 14. COMMITMENTS AND
CONTINGENCY
a)
Renewal of short term loan with Anhui Yiyang Metal Materials Co., Ltd.
On October 31,2008, the Company
renewed the contract with Anhui Yiyang Metal Materials Co., Ltd., an unaffiliated partner
for the amount of RMB70,000,000 (approximately US$10.2 million). The term is from November
1, 2008 from October 31, 2009, at interest rate at 30% above variable interest of one year
term published by Bank of China. The Company is required to pay quarterly interest
expenses starting from January 1, 2009.
b) Asset Acquisition
Agreement with High-Tech
On September 20, 2008, Harbin Xinda
Macromolecule Material Co., Ltd ( Harbin Xinda, Buyer) signed an
agreement (Agreement) with Harbin Xinda High-Tech Co., Ltd. (Xinda
High-Tech, Seller), an affiliated company owned by the relative of Mr. Han Jie, the
Chairman and CEO of the Harbin Xinda to acquire all of the assets of Xinda High-Tech,
including plant buildings, land use rights, machinery and equipments for a total amount of
RMB240,000,000 (approximately US$35.1 million). Harbin Xinda was required to make two
installment payments of the full purchase price, a total of RMB50, 000,000 (approximately
$7.2 million) by the end of December 31, 2008 and remaining RMB190, 000,000 (approximately
$27.5 million) by the end of September 30, 2009. Through this purchase, Harbin Xinda is
expected to significantly increase its production and expand its operations.
F-18
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
F-19
|
|
|
|
|
|
|
|
Consolidated Balance Sheets at December 31, 2007 AND 2006
|
|
|
|
F-20
|
|
|
|
|
|
|
|
Consolidated Statements of Income for the years ended December 31, 2007 and 2006
|
|
|
|
F-21
|
|
|
|
|
|
|
|
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2007 and 2006
|
|
|
|
F-22
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006
|
|
|
|
F-23
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
|
F-24 - F-35
|
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
and Shareholders
Harbin Xinda Macromolecule Material Co., Ltd
We have audited the accompanying
consolidated balance sheets of Harbin Xinda Macromolecule Material Co., Ltd as of December
31, 2007 and 2006 and the related consolidated statements of operations, changes in
shareholders equity, and cash flows for the years ended December 31, 2007 and 2006.
These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance
with standards established by the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Harbin Xinda Macromolecule Material Co., Ltd as of December 31, 2007
and 2006 and the results of its operations, changes in shareholders equity, and cash
flows for the years ended December 31, 2007 and 2006 in conformity with accounting
principles generally accepted in the United States of America.
/S/ Bagell Josephs, Levine & Company,
LLC
Bagell Josephs, Levine & Company,
LLC
Marlton, New Jersey
April 15, 2008
F-19
HARBIN XINDA
MICROMOLECULE MATERIAL CO., LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
|
2007
|
|
2006
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
Cash and cash equivalents
|
|
|
$
|
87,455
|
|
$
|
328,492
|
|
Cash and cash equivalents - Restricted
|
|
|
|
5,428,673
|
|
|
4,869,235
|
|
Accounts receivable - net of allowance for bad debts of
|
|
|
$93,219 and $- 0 - respectively
|
|
|
|
5,117,840
|
|
|
1,095,790
|
|
Other receivable
|
|
|
|
128,658
|
|
|
4,358,699
|
|
Tax receivable
|
|
|
|
|
|
|
4,256
|
|
Inventory
|
|
|
|
5,587,862
|
|
|
4,600,451
|
|
Prepaid expenses
|
|
|
|
21,393
|
|
|
19,997
|
|
Due from related parties
|
|
|
|
105,537
|
|
|
1,956,398
|
|
Advances to suppliers
|
|
|
|
1,746,063
|
|
|
168,630
|
|
|
|
|
|
|
Total current assets
|
|
|
|
18,223,481
|
|
|
17,401,948
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
7,533,619
|
|
|
3,166,507
|
|
|
|
|
|
|
Other asset:
|
|
|
Intangible asset, net of amortization
|
|
|
|
236,867
|
|
|
226,278
|
|
|
|
|
|
|
Total other asset
|
|
|
|
236,867
|
|
|
226,278
|
|
|
|
|
|
|
Total Assets
|
|
|
$
|
25,993,967
|
|
$
|
20,794,733
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
Current liabilities:
|
|
|
Short Term Loans
|
|
|
$
|
1,370,877
|
|
$
|
2,562,755
|
|
Notes Payable
|
|
|
|
12,886,245
|
|
|
11,532,400
|
|
Accounts payable
|
|
|
|
647,436
|
|
|
1,566,033
|
|
Other payable
|
|
|
|
31,861
|
|
|
1,300,844
|
|
Accrued expenses
|
|
|
|
43,940
|
|
|
22,161
|
|
Tax payable
|
|
|
|
1,454,745
|
|
|
|
|
Deferred revenue
|
|
|
|
93,040
|
|
|
100,219
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
16,528,144
|
|
|
17,084,412
|
|
|
|
|
|
|
Shareholders equity
|
|
|
Capital Contribution
|
|
|
|
2,416,451
|
|
|
2,416,451
|
|
Additional Paid-in-Capital
|
|
|
|
66,615
|
|
|
66,615
|
|
Retained earnings
|
|
|
|
6,363,651
|
|
|
1,091,081
|
|
Accumulated other comprehensive income
|
|
|
|
619,106
|
|
|
136,174
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
9,465,823
|
|
|
3,710,321
|
|
|
|
|
|
|
Total Liabilities And Shareholders Equity
|
|
|
$
|
25,993,967
|
|
$
|
20,794,733
|
|
|
|
|
|
|
The accompanying notes
are an intergral part of these financial statements
F-20
HARBIN XINDA
MICROMOLECULE MATERIAL CO., LTD.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Sales
|
|
|
$
|
34,177,415
|
|
$
|
13,415,434
|
|
|
|
|
Cost of sales
|
|
|
|
27,829,973
|
|
|
10,604,429
|
|
|
|
|
|
|
Gross profit
|
|
|
|
6,347,442
|
|
|
2,811,005
|
|
|
|
|
|
|
Operating Expenses
|
|
|
Reseach and development expenses
|
|
|
|
189,329
|
|
|
94,797
|
|
Selling expenses
|
|
|
|
131,772
|
|
|
121,403
|
|
General and administrative expenses
|
|
|
|
403,834
|
|
|
341,645
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
|
724,935
|
|
|
557,845
|
|
|
|
|
|
|
Operating Income
|
|
|
|
5,622,507
|
|
|
2,253,160
|
|
|
|
|
|
|
Other Income (expenses)
|
|
|
Investment Income
|
|
|
|
|
|
|
70
|
|
Interest Income (expenses)
|
|
|
|
(152,684
|
)
|
|
(95,854
|
)
|
Other Income/Subsidy Income
|
|
|
|
10,434
|
|
|
65,224
|
|
Other expenses
|
|
|
|
(207,687
|
)
|
|
(39,225
|
)
|
|
|
|
|
|
Total Other income(expense)
|
|
|
|
(349,937
|
)
|
|
(69,785
|
)
|
|
|
|
|
|
Income before income taxes
|
|
|
|
5,272,570
|
|
|
2,183,375
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
$
|
5,272,570
|
|
$
|
2,183,375
|
|
|
|
|
Other Comprehensive Income
|
|
|
Foreign Currency Translation Adjustment
|
|
|
$
|
482,932
|
|
|
95,909
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
$
|
5,755,502
|
|
$
|
2,279,284
|
|
|
|
|
|
|
Basic and Diluted Income per common share
|
|
|
Basic
|
|
|
$
|
0.26
|
|
$
|
0.11
|
|
|
|
|
|
|
Diluted
|
|
|
$
|
0.26
|
|
$
|
0.11
|
|
|
|
|
|
|
Weighted average common share outstanding
|
|
|
Basic
|
|
|
|
20,000,000
|
|
|
20,000,000
|
|
|
|
|
|
|
Diluted
|
|
|
|
20,000,000
|
|
|
20,000,000
|
|
|
|
|
|
|
The accompanying notes
are an intergral part of these financial statements
F-21
HARBIN XINDA
MICROMOLECULE MATERIAL CO., LTD.
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS EQUITY F
OR THE YEARS ENDED DECEMBER
31, 2007 AND 2006
|
Capital
|
|
Additional
Paid-in-Capital
|
|
Retained
Earnings
|
|
Accumulated Other
Comprehensive Income
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
$
|
2,416,451
|
|
$
|
66,615
|
|
$
|
(1,092,294
|
)
|
$
|
40,265
|
|
$
|
1,431,037
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
2,183,375
|
|
|
|
|
|
2,183,375
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
95,909
|
|
|
95,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
2,416,451
|
|
|
66,615
|
|
|
1,091,081
|
|
|
136,174
|
|
|
3,710,321
|
|
|
|
|
Net income for the year
|
|
|
|
|
|
|
|
|
|
5,272,570
|
|
|
|
|
|
5,272,570
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
482,932
|
|
|
482,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
$
|
2,416,451
|
|
$
|
66,615
|
|
$
|
6,363,651
|
|
$
|
619,106
|
|
$
|
9,465,823
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an intergral part of these financial statements
F-22
HARBIN XINDA
MICROMOLECULE MATERIAL CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
|
$
|
5,272,570
|
|
$
|
2,183,375
|
|
Adjustments to reconcile net income to net cash provided by
|
|
|
(used in) operating activities:
|
|
|
Depreciation & amortization
|
|
|
|
280,925
|
|
|
254,854
|
|
Bad Debts
|
|
|
|
89,424
|
|
|
|
|
Gain on disposal of fixed assets
|
|
|
|
(3,774
|
)
|
|
|
|
Changes in assets and liabilities:
|
|
|
(Increase) decrease in -
|
|
|
Restricted cash
|
|
|
|
(559,438
|
)
|
|
(3,630,109
|
)
|
Accounts receivable and other receivables
|
|
|
|
113,759
|
|
|
(4,530,458
|
)
|
Tax Receivable
|
|
|
|
4,255
|
|
|
11,482
|
|
Inventories
|
|
|
|
(987,411
|
)
|
|
(4,107,551
|
)
|
Prepaid expenses
|
|
|
|
|
|
|
(2,696
|
)
|
Advances to suppliers
|
|
|
|
(1,577,433
|
)
|
|
2,839,569
|
|
Increase (decrease) in -
|
|
|
Accounts payable and other payable
|
|
|
|
(2,187,580
|
)
|
|
723,141
|
|
Accrued expenses
|
|
|
|
21,778
|
|
|
19,345
|
|
Tax payable
|
|
|
|
1,454,745
|
|
|
(554
|
)
|
Deferred revenue
|
|
|
|
(7,176
|
)
|
|
21,680
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
|
1,914,644
|
|
|
(6,217,922
|
)
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
Purchase of fixed assets
|
|
|
|
(4,393,949
|
)
|
|
(867,819
|
)
|
Proceeds from sale of fixed assets
|
|
|
|
144,657
|
|
|
|
|
Decrease in Short Term Investment
|
|
|
|
|
|
|
6,196
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
(4,249,292
|
)
|
|
(861,623
|
)
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
Proceeds (payments) from (to) Short Term Loans
|
|
|
|
(1,315,063
|
)
|
|
250,862
|
|
Proceeds from bank acceptance notes payable
|
|
|
|
1,354,858
|
|
|
9,049,021
|
|
Collections (payments) on due to related parties
|
|
|
|
1,850,861
|
|
|
(2,005,788
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
1,890,656
|
|
|
7,294,095
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
202,955
|
|
|
72,923
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
|
(241,037
|
)
|
|
287,473
|
|
|
|
|
Cash and cash equivalents, beginning of year
|
|
|
|
328,492
|
|
|
41,019
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
$
|
87,455
|
|
$
|
328,492
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Interest paid
|
|
|
$
|
212,926
|
|
$
|
123,922
|
|
|
|
|
|
|
Income taxes paid
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
The accompanying notes
are an intergral part of these financial statements
F-23
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 1. ORGANIZATION AND
DESCRIPTION OF BUSINESS
Harbin Xinda Macromolecule
Material Co., Ltd (the "Company" or "Harbin Xinda") was incorporated in Harbin,
Heilongjiang Province, China on September 23, 2004.
The Company is primarily engaged in
the business of research development, manufacture, distribution of modified and
engineering plastic pellets used in automotive parts through its manufacturing facility
and its wholly owned research laboratory, Harbin Xinda Macromolecule Research Institute
(the Research Institute), a separate entity established in 2007.
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The Companys consolidated
financial statements have been prepared in accordance with generally accepted accounting
principles in the United States of America (US GAAP). The accompanying
consolidated financial statements reflect necessary adjustments not recorded in the books
of account of the Company to present them in conformity with US GAAP.
Principles of
consolidation
The consolidated financial statements
of the Company include the accounts of Harbin Xinda and its wholly owned subsidiary,
Harbin Xinda Macromolecule Research Institute All significant inter-company balances and
transactions are eliminated in consolidation.
Use of estimates
In preparing the financial statements
in conformity with accounting principles generally accepted in the United States of
America, management makes estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the dates
of the financial statements, as well as the reported amounts of revenues and expenses
during the reporting year. Significant estimates, required by management, include the
recoverability of long-lived assets and the valuation of inventories. Actual results could
differ from those estimates.
F-24
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and cash equivalents
For purposes of the statement of cash
flow, the Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Accounts receivable
Accounts receivables consist
primarily of receivables resulting from sales of products, and are stated at net
realizable value. This value includes an appropriate allowance for estimated uncollectible
accounts. The allowance is calculated based upon the evaluation and the level of past due
accounts and the relationship with and the economic status of the customers. The allowance
for uncollectible amounts for the years ended December 31, 2007 and 2006 was $93,219 and $
0 -, respectively.
Inventory
Inventory is composed of raw
materials and packing materials for manufacturing, work in process, and finished goods.
Inventory is valued at the lower of cost or market with cost determined on the weighted
average method. Management compares the cost of inventory with the market value and an
allowance is made for writing down the inventory to its market value, if lower than cost.
No allowance for inventory is considered necessary for the years ended December 31, 2007
and 2006.
Property and equipment
Property and equipment are stated at
cost. The cost of an asset comprises its purchase price and any directly attributable
costs of bringing the asset to its present working condition and locations for its
intended use. Depreciation is calculated using the straight-like method over the following
useful lives:
|
|
|
|
|
|
Buildings and improvements
|
|
|
39 years
|
|
|
Machinery, equipment and automobiles
|
|
|
5-10 years
|
|
|
Expenditures for maintenance and
repairs are charged to expense as incurred. Additions, renewals and betterments are
capitalized.
F-25
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advance to suppliers
Advance to suppliers represent the
payments made and recorded in advance for goods and services received. The Company makes
advances to raw materials purchased from certain vendors overseas, which account for 60%
of raw materials needed. In order to maintain a long-term relationship with the vendors,
the Company frequently needs to make advances from one and half month to
three months ahead. The advances to suppliers were $1,746,063 and $168,630 as of
December 31, 2007 and 2006, respectively.
Deferred revenue
Revenue from the sale of goods or
services is recognized at the time that goods are delivered or services are rendered.
Receipts in advance for goods to be delivered or services to be rendered in a subsequent
period are carried forward as deferred revenue.
Impairment of long-lived
assets
Long-lived assets, which include
property, plant and equipment and intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of long-lived assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds
its estimated undiscounted future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair value of the assets.
Fair value is generally determined using the assets expected future discounted cash
flows or market value, if readily determinable. No impairment loss is recorded for the
years ended December 31, 2007 and 2006.
Income taxes
The Company accounts for income tax
under the provisions of SFAS No.109 Accounting for Income Taxes, which
requires recognition of deferred tax assets and liabilities for the expected future tax
consequences of the events that have been included in the financial statements or tax
returns. Deferred income taxes are recognized for all significant temporary differences
between tax and financial statements bases of assets and liabilities. Valuation allowances
are established against net deferred tax assets when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. There are no deferred tax
amounts at December 31, 2007 and 2006.
F-26
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue recognition
The Company utilizes the accrual
method of accounting. In accordance with the provisions of Staff Accounting
Bulletin (SAB) 104, sales revenue is recognized when products are shipped and
payments of the customers and collection are reasonably assured. Payments
received before all of the relevant criteria for revenue recognition are satisfied are
recorded as deferred revenue.
Research and development
expenses
Research and development expenses are
costs associated with developing the Companys intellectual property. Research and
development costs are expensed as incurred. The costs of equipments that are acquired or
constructed for research and development activities and have alternative future uses are
classified as plant and equipment and depreciated over their estimated useful lives. The
research and development expense for the years ended December 31, 2007 and 2006 was
$189,329 and $94,797, respectively.
Earnings per share
Basic earnings per share are computed
by dividing income available to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive. There are
no such additional common shares available for dilution purposes as of December 31, 2007
and 2006.
Concentration of credit
risk
Financial instruments that
potentially subject the Company to concentration of credit risk consist primarily of
accounts receivable and other receivables. The Company does not require collateral or
other security to support these receivables. The Company conducts periodic reviews of its
clients financial condition and customer payment practices to minimize collection
risk on accounts receivable.
F-27
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risks and uncertainties
The operations of the Company are
located in the PRC. Accordingly, the Companys business, financial condition, and
results of operations may be influenced by the political, economic, and legal environments
in the PRC, as well as by the general state of the PRC economy.
The Companys 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 Companys 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.
Fair value of financial
instruments
The carrying amounts of certain
financial instruments, including cash and cash equivalents, accounts receivable, other
receivables, accounts payable, accrued expenses, taxes payable, notes payable and other
loans payable approximate fair value due to the short-term nature of these items. The
carrying amounts of short-term loans from bank approximate the fair value based on the
Companys expected borrowing rate for debt with similar remaining maturities and
comparable risk.
Foreign currency
translation
The Companys functional
currency is the Renminbi (RMB). For financial reporting purposes, RMB has been
translated into United States dollars (USD) as the reporting currency. Assets
and liabilities are translated at the exchange rate in effect at the balance sheet date.
Revenues and expenses are translated at the average rate of exchange prevailing during the
reporting period. Translation adjustments arising from the use of different exchange rates
from period to period are included as a component of stockholders equity as
Accumulated other comprehensive income. Gains and losses resulting from
foreign currency translations are included in accumulated other comprehensive income.
There is no significant fluctuation in exchange rate for the conversion of RMB to USD
after the balance sheet date.
F-28
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent accounting
pronouncements
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. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. The
management of the Company is currently evaluating the impact of adopting SFAS 157 on its
consolidated financial statements.
In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FASB Statement No. 115 (FAS 159).
FAS 159 permits companies to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. The objective of FAS 159 is to provide opportunities to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply hedge accounting provisions. FAS 159 also establishes presentation
and disclosure requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and liabilities. SFAS
159 will be effective in the first quarter of fiscal 2009. The Company is evaluating the
impact that this statement will have on its consolidated financial statements.
In June 2007, the FASB issued FASB
Staff Position No. EITF 07-3, Accounting for Nonrefundable Advance Payments for
Goods or Services Received for use in Future Research and Development Activities
(FSP EITF 07-3), which addresses whether nonrefundable advance payments for
goods or services that used or rendered for research and development activities should be
expensed when the advance payment is made or when the research and development activity
has been performed. The Company has adopted FSP EITF 07-3 and expensed the research and
development as it incurred.
In December 2007, the FASB issued
SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements an
amendment of Accounting Research Bulletin No. 51 (SFAS 160), which
establishes accounting and reporting standards for ownership interests in subsidiaries
held by parties other than the parent, the amount of consolidated net income attributable
to the parent and to the non-controlling interest, changes in a parents ownership
interest and the valuation of retained non-controlling equity investments when a
subsidiary is deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the interests
of the parent and the interests of the non-controlling owners. SFAS 160 is effective for
fiscal years beginning after December 15, 2007.
F-29
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company has not determined the
effect that the application of SFAS 160 will have on its consolidated financial
statements.
In December 2007, Statement of
Financial Accounting Standards No. 141(R),
Business Combinations,
was issued. SFAS
No. 141R replaces SFAS No. 141,
Business Combinations.
SFAS 141R retains the
fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS
141 called the
purchase method)
be used for all business combinations and for an
acquirer to be identified for each business combination. SFAS 141R requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any non-controlling interest
in the acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. This replaces SFAS 141s cost-allocation process, which
required the cost of acquisition to be allocated to the individual assets acquired and
liabilities assumed based on their estimated fair values. SFAS 141R also requires the
acquirer in a business combination achieved in stages (sometimes referred to as a step
acquisition) to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair values (or
other amounts determined in accordance with SFAS 141R). SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2007 An entity may not
apply it before that date. The Company is currently evaluating the impact that adopting
SFAS No. 141R will have on its financial statements.
Note 3. RESTRICTED CASH
As of December 31, 2007 and 2006, the
Company has restricted cash of $5,428,673 and $4,869,235 respectively. The Companys
lenders require the Company to maintain with the lending banks a cash balance of a minimum
40% -50% of the balance of the notes payable (see Note 10) as collateral for the
Companys obligations to the lenders. The Company earns interest at a variable rate
per month on these restricted cash. The interest income earned was $ 60,240 and $ 28,067
for the years ended December 31, 2007 and 2006, respectively.
F-30
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 4. INVENTORY
The inventory consists of the
following:
|
As of December 31,
|
|
|
2007
|
|
2006
|
|
|
|
|
Raw materials
|
|
|
$
|
665,270
|
|
$
|
241,459
|
|
Packing supplies
|
|
|
|
16,131
|
|
|
|
|
Work-in-process
|
|
|
|
53,428
|
|
|
|
|
Finished goods
|
|
|
|
4,853,033
|
|
|
4,358,992
|
|
|
|
|
|
|
Total
|
|
|
$
|
5,587,862
|
|
$
|
4,600,451
|
|
|
|
|
|
|
No allowance for inventory was made
for the years ended December 31, 2007 and 2006.
Note 5. PROPERTY, PLANT
AND EQUIPMENT, NET
The detail of property, plant and
equipment is as follows:
|
As of December 31,
|
|
|
2007
|
|
2006
|
|
|
|
|
Machinery & equipment
|
|
|
$
|
5,920,295
|
|
$
|
1,459,544
|
|
Automobiles
|
|
|
|
52,679
|
|
|
84,746
|
|
Plant & Buildings
|
|
|
|
2,220,000
|
|
|
2,075,066
|
|
|
|
|
|
|
Total
|
|
|
|
8,192,974
|
|
|
3,619,356
|
|
Less: accumulated depreciation
|
|
|
|
(659,355
|
)
|
|
(452,849
|
)
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
$
|
7,533,619
|
|
$
|
3,166,507
|
|
|
|
|
|
|
Depreciation expense for the years
ended December 31, 2007 and 2006 was $ 275,922 and $250,082, respectively.
F-31
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 6. INTANGIBLE ASSET
Intangible asset consists of land use
right only. All land in the Peoples Republic of China is government owned and cannot
be sold to any individual or company. Instead, the government grants the user a Land
use right (the Right) to use the land. The Company has the right to use the land for
48 years and amortized the Right on a straight-line basis over 48 years. The land use
right was originally acquired in May 2005 for the amount of $226,281.
Net intangible assets at December 31,
2007 and 2006 were as follows:
|
As of December 31,
|
|
|
2007
|
|
2006
|
|
|
|
|
Land use right
|
|
|
$
|
250,340
|
|
$
|
233,997
|
|
Less: Accumulated amortization
|
|
|
|
(13,473
|
)
|
|
(7,719
|
)
|
|
|
|
|
|
Total
|
|
|
$
|
236,867
|
|
$
|
226,278
|
|
|
|
|
|
|
Amortization expense for the years
ended December 31, 2007 and 2006 amounted to $5,003 and $4,772, respectively.
Note 7. OTHER RECEIVABLES
Other receivables represent cash
advances to employees or sales representatives for normal business purposes. Other
receivables for the years ended December 31, 2007 and 2006 were $ 128,658 and $4,358,699
respectively. The decrease in 2007 was due to collection on cash advance.
F-32
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 8. RELATED PARTY
TRANSACTIONS
Amounts due to (from)
directors/affiliates are as follows:
|
As of December 31,
|
|
|
2007
|
|
2006
|
|
|
|
|
Harbin Xinda Hi-tech Co.Ltd
|
|
|
$
|
|
|
$
|
1,613,763
|
|
Ma Qingwei
|
|
|
|
19,172
|
|
|
317,383
|
|
Sun Limei
|
|
|
|
|
|
|
46,258
|
|
Han Jie
|
|
|
|
86,365
|
|
|
|
|
Zhang Dawei
|
|
|
|
|
|
|
(769
|
)
|
Sun Libin
|
|
|
|
|
|
|
(20,237
|
)
|
|
|
|
|
|
Total
|
|
|
$
|
105,537
|
|
$
|
1,956,398
|
|
|
|
|
|
|
Amounts due are unsecured,
non-interest bearing and due upon demand.
Harbin Xinda Hi-Tech Co. Ltd and
Heilongjiang Xinda Hyundai Engineering Plastics Co. are affiliate companies owned by the
relative of the majority shareholder. Mr. Ma Qingwei is the Chief Operating Officer of the
Company and owns 25% of the Company. Mr. Han Jie is the Chief Executive Officer of the
Company and he owns 75% of the Company.
The Company also has sales and
purchase with its affiliated companies. The detail is as follows:
|
As of December 31,
|
|
|
2007
|
|
2006
|
|
Purchase from Xinda Hi-tech Co, Ltd
|
|
|
$
|
|
|
$
|
5,999
|
|
Purchase from Hyundai Engineering Plastics Co, Ltd.
|
|
|
|
440,554
|
|
|
408,517
|
|
Sales to Xinda Hi-tech Co., Ltd
|
|
|
|
163,072
|
|
|
|
|
F-33
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 9. SHORT TERM LOANS
The short-term loans include the
following:
|
Balance at December 31,
|
|
|
2007
|
|
2006
|
|
|
|
|
a) Loan payable to Harbin Commerical Bank
|
|
|
|
|
|
|
|
|
one year term from 12/04/07 to 12/03/08,
|
|
|
a fixed interest rate of 0.79% per month,
|
|
|
$
|
1,370,877
|
|
$
|
|
|
|
|
|
b) Loan payable to Harbin Commerical Bank
|
|
|
one year term from 11/22/2006 to 11/21/2007,
|
|
|
a fixed interest rate of 0.66% per month,
|
|
|
|
|
|
|
1,281,378
|
|
|
|
|
b) Loan payable to Harbin Commerical Bank
|
|
|
one year term from 12/26/2006 to 11/30/2007,
|
|
|
a fixed interest rate of 0.66% per month,
|
|
|
|
|
|
|
1,281,377
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,370,877
|
|
$
|
2,562,755
|
|
|
|
|
|
|
Interest expense paid for the above
short term loans totaled $ 212,926 and $ 123,922 for the years ended December 31, 2007 and
2006, respectively.
Note 10. NOTES PAYABLE
As of December 31, 2007 and 2006, the
Company has bank acceptance notes payable in the amount of $12,886,245 and $11,532,400,
respectively. The notes are guaranteed to be paid by the banks and usually for a
short-term period of 3 to 6 months. The Company is required to maintain cash deposits at a
minimum 40%-50% of the total balance of the notes payable with the banks, in order to
ensure future credit availability.
Note 11. INCOME TAXES
(a) Corporation income
tax (CIT)
The Company is governed by the Income
Tax Law of the Peoples Republic of China concerning the private-run enterprises,
which are generally subject to tax at a new statutory rate of 25% and were, until January
2008, subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income
tax) on income reported in the statutory financial statements after appropriate tax
adjustments.
F-34
HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
DECEMER 31, 2007 AND 2006
Note 11. INCOME TAXES
(Continued)
(a)
Corporation income tax (CIT) (Continued)
The Company is located in a special
economic development zone and is recognized as a high technology company by the Chinese
government. Therefore, it is entitled to a full exemption of special 15% CIT for two years
from January 1, 2006 through December 31, 2007 and 50% reduction in CIT for three years at
a favorable tax rate of 7.5% from 2007 to 2010.
On March 16,2007, the National
Peoples Congress of China approved the Corporate Income Tax Law of the Peoples
Republic of China (the New CIT Law), which is effective from January 1, 2008. Under the
new law, the corporate income tax rate applicable to all Companies, including both
domestic and foreign-invested companies, will be 25%, replacing the current applicable tax
rate of 33%. However, pending the detailed implementation rulings from the tax
authorities, we believe that some of the tax concession granted to eligible companies
prior to the new CIT laws will be grand fathered.
The estimated tax savings for the
years ended December 31, 2007 and 2006 would have the net effect on earnings per share had
the income tax been applied , leading to earnings per share reduced from $0.26 to $0.22 in
2007 and $0.11 to $0.09 in 2006.
(b) Value added tax
(VAT)
Enterprises or individuals who sell
commodities, engage in repair and maintenance or import or export goods in the PRC are
subject to a value added tax in accordance with the PRC laws. The value added tax standard
rate is 17% of the gross sales price. A credit is available whereby VAT paid on the
purchases of semi-finished products or raw materials used in the production of the
Companys finished products can be used to offset the VAT due on the sales of the
finished products. The Company has a VAT tax payable of $1,391,331 as of December 31, 2007
and a VAT tax receivable of $6,087 as of December 31, 2006.
Note 12.
STOCKHOLDERS EQUITY
The Companys registered capital
is RMB 20,000,000, equivalent of $2,416,451, contributed by the two main stockholders of
the Company. The industry practice in PRC does not require the issuance of stock
certificates to the shareholders, nor a third party transfer agent to maintain the
records. For the purpose of financial reporting, the Company elected to designate one (1)
common share for each RMB contributed. Accordingly, there were total 20,000,000 shares
issued and outstanding for the years ended December 31, 2007 and 2006.
F-35
NB TELECOM, INC
UNAUDITED PRO FORMA
CONDENSED CONSOLODATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
NB TELECOM, INC
INDEX TO UNAUDITED PRO
FORMA CONDENSED CONSOLODATED
FINANCIAL STATEMENTS
|
PAGE (S)
|
|
|
|
|
|
Introduction to Unaudited Pro Forma Condensed Consolidated
|
|
|
|
|
|
Financial statements
|
|
|
|
F-36 - F-37
|
|
|
|
|
|
|
|
Pro Forma Balance Sheet- September 30, 2008 (Unaudited)
|
|
|
|
F-38
|
|
|
|
|
|
|
|
Pro Forma Statement of Income for the nine months ended September 30 2008 (Unaudited)
|
|
|
|
F-39
|
|
|
|
|
|
|
|
Pro Forma Statement of Income for the year ended December 31, 2007 (Unaudited)
|
|
|
|
F-40
|
|
|
|
|
|
|
|
Notes to Pro Forma Financial Statements (Unaudited)
|
|
|
|
F-41
|
|
NB TELECOM, INC
INTRODUCTION TO
UNAUDITIED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
On
December 24, 2008, NB Telecom, Inc (the Parent), China XD Plastics Company
Limited, a Nevada Corporation wholly-owned by the Parent (the Merger Sub),
signed a Share Exchange Agreement with Favor Sea Limited (Favor Sea) and
shareholders of Favor Sea, whereby, the Merger Sub agrees to acquire all of the issued and
outstanding capital stock of Favor Sea and then merge with and into the Parent at the same
date. Favor Sea became a wholly-owned subsidiary of the Parent upon which the Merger Sub
shall no longer exist, and Parents name will change to the Merger Subs name,
pursuant to section 92A.180 of the Nevada Statutes.
In
exchange, the Merger Sub issued to the shareholders of Favor Sea: (i)10 shares of its
common stock, which shall be converted into approximately 50,367,778 shares of the Parent
common stock prior to and approximately 405,928 post reserve-split at a ratio of 124.1 to
1; (ii)1,000,000 shares of convertible Series A preferred stock which shall convert
approximately at a ratio of 1 to 38.2 into 38,194,072 shares of Parent common stock so
that eventually the shareholders of Favor Sea shall own approximately 99% of Parent common
stock outstanding upon the completion of the Merger; (iii) 1,000,000 shares of Series B
preferred stock. Immediately after the Merger and the reserve stock split, the Parent
shall conduct an amendment to its charter to increase the authorized shares of Parent
common stock to 500,000,000 to allow such conversion of preferred stock into Parent common
stock. The Parent will also amend its charter to increase the authorized shares of its
preferred stock to 50,000,000.
Immediately
before and in conjunction with the consummation of the Merger, the Parent will spin off
all of assets and liabilities to Sotech, Inc., a Georgia corporation so the only material
assets of the Parent following the Spin-off will be the ownership of the Merger Sub.
Favor
Sea owns 100% of its subsidiaries, Favor Sea (US) Limited, a New York corporation, Hong
Kong Engineering Plastics Company Limited, a corporation established and existing in
China, which in turn owns 100% ownership interest in Harbin Xinda Macromolecule Material
Co., Ltd., a limited liability company established and existing in China.
The
acquisition will be accounted for as a reverse merger under the purchase method of
accounting since there was a change of control. Accordingly, Favor Sea will be treated as
the continuing entity for accounting purposes.
F-36
NB TELECOM, INC
INTRODUCTION TO
UNAUDITIED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The
accompanying unaudited pro forma condensed consolidated balance sheet has been presented
with consolidated subsidiaries at September 30, 2008. The unaudited pro forma condensed
consolidated statement of income for the nine months ended September 30, 2008 and for the
year ended December 31, 2007 has been presented as if the acquisition had occurred January
1, 2007.
The
unaudited pro forma condensed consolidated statements do not necessarily represent the
actual results that would have been achieved had the companies been combined at the
beginning of the year, nor may they be indicative of future operations. These unaudited
pro forma condensed financial statements should be read in conjunction with the
companies respective historical financial statements and notes included thereto.
F-37
NB TELECOM, INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER
30, 2008
|
NB TELECOM, INC
|
|
FAVOR SEA LIMITED
|
|
Adjustments
|
|
Notes
|
|
(1)
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
Cash and cash equivalents
|
|
|
$
|
|
|
$
|
2,167,016
|
|
|
|
|
|
|
|
$
|
2,167,016
|
|
Restricted Cash
|
|
|
|
|
|
|
4,388,872
|
|
|
|
|
|
|
|
|
4,388,872
|
|
Comissions and sales receivable, net
|
|
|
|
5,553
|
)
|
|
|
|
(5,553
|
)
|
|
a
|
|
|
|
|
|
Notes Receivable
|
|
|
|
|
|
|
831,522
|
|
|
|
|
|
|
|
|
831,522
|
|
Accounts receivable - net of allowance
|
|
|
for bad debts of $100,148 and $93,219,
|
|
|
respectively
|
|
|
|
|
|
|
16,623,310
|
|
|
|
|
|
|
|
|
16,623,310
|
|
Other receivables
|
|
|
|
|
|
|
3,420,543
|
|
|
|
|
|
|
|
|
3,420,543
|
|
Inventories
|
|
|
|
324
|
|
|
10,786,227
|
|
(324
|
)
|
|
a
|
|
|
|
10,786,227
|
|
Advances to suppliers
|
|
|
|
|
|
|
8,973,700
|
|
|
|
|
|
|
|
|
8,973,700
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
5,877
|
|
|
47,191,190
|
|
|
|
|
|
|
|
|
47,191,190
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
|
|
|
|
12,641,860
|
|
|
|
|
|
|
|
|
12,641,860
|
|
|
|
|
Other assets:
|
|
|
Intangible asset, net
|
|
|
|
|
|
|
250,271
|
|
|
|
|
|
|
|
|
250,271
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
|
|
|
|
250,27
|
|
|
|
|
|
|
|
|
250,271
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
$
|
5,877
|
|
$
|
60,083,321
|
|
|
|
|
|
|
|
$
|
60,083,321
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
Current Liabilites
|
|
|
Short Term Loan
|
|
|
$
|
|
|
$
|
21,797,081
|
|
|
|
|
|
|
|
$
|
21,797,081
|
|
Notes Payable
|
|
|
|
119,214
|
|
|
9,867,597
|
|
(119,214
|
)
|
|
a
|
|
|
|
9,867,597
|
|
Accounts payable
|
|
|
|
190,588
|
|
|
1,560,312
|
|
(190,588
|
)
|
|
a
|
|
|
|
1,560,312
|
|
Other payable
|
|
|
|
2,166
|
|
|
3,175,438
|
|
(2,166
|
)
|
|
a
|
|
|
|
3,175,438
|
|
Accrued expenses
|
|
|
|
|
|
|
709,652
|
|
|
|
|
|
|
|
|
709,652
|
|
Tax payable
|
|
|
|
|
|
|
145,320
|
|
|
|
|
|
|
|
|
145,320
|
|
Due to shareholders
|
|
|
|
|
|
|
620,000
|
|
|
|
|
|
|
|
|
620,000
|
|
Deferred revenue
|
|
|
|
|
|
|
273,115
|
|
|
|
|
|
|
|
|
273,115
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
311,968
|
|
|
38,148,515
|
|
|
|
|
|
|
|
|
38,148,515
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
Common Stock, .0001 par value 100,000,000
|
|
|
shares authorized, 49,632,222 shares issued
|
|
|
and outstanding at September 30, 2008
|
|
|
|
4,963
|
|
|
|
|
|
|
|
|
|
|
|
4,963
|
|
|
|
|
Common Stock, $1 par value, 50,000 shares
|
|
|
authorized, 40,000 shares issued and
|
|
|
outstanding as of September 30, 2008
|
|
|
|
|
|
|
40,000
|
|
(40,000
|
)
|
|
b
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
501,474
|
|
|
2,443,066
|
|
(466,437
|
)
|
|
a,b
|
|
|
|
2,478,103
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
1,650,186
|
|
|
|
|
|
|
|
|
1,650,186
|
|
|
|
|
Retained earnings
|
|
|
|
(812,528
|
)
|
|
17,801,554
|
|
812,528
|
|
|
a,b
|
|
|
|
17,801,554
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity (deficit)
|
|
|
|
(306,091
|
)
|
|
21,934,806
|
|
|
|
|
|
|
|
|
21,934,806
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
$
|
5,877
|
|
$
|
60,083,321
|
|
|
|
|
|
|
|
$
|
60,083,321
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents reverse acquisition
showing the assets and liabilities of Favor Sea Only
See Notes to
unaudited Pro forma condensed consolidated financial statements
F-38
NB TELECOM, INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR NINE
MONTHS ENDED SEPTEMBER 30, 2008
|
NB TELECOM, INC
|
|
FAVOR SEA LIMITED
|
|
Adjustments
|
|
Notes
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
|
|
|
$
|
9,522
|
|
$
|
55,802,003
|
|
$
|
(9,522
|
)
|
a
|
|
|
$
|
55,802,003
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
|
10,329
|
|
|
41,880,768
|
|
|
(10,329
|
)
|
a
|
|
|
|
41,880,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
|
(807
|
)
|
|
13,921,235
|
|
|
|
|
|
|
|
|
13,921,235
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
Research and development expense
|
|
|
|
|
|
|
557,746
|
|
|
|
|
|
|
|
|
557,746
|
|
Selling expense
|
|
|
|
|
|
|
241,823
|
|
|
|
|
|
|
|
|
241,823
|
|
General and adminstrative expenses
|
|
|
|
7,506
|
|
|
1,102,261
|
|
|
(7,506
|
)
|
a
|
|
|
|
1,102,261
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
|
7,506
|
|
|
1,901,830
|
|
|
|
|
|
|
|
|
1,901,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FROM OPERATIONS
|
|
|
|
(8,313
|
)
|
|
12,019,405
|
|
|
|
|
|
|
|
|
12,019,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
Interest income (expense)
|
|
|
|
(13,805
|
)
|
|
(481,875
|
)
|
|
13,805
|
|
a
|
|
|
|
(481,875
|
)
|
Other income
|
|
|
|
|
|
|
25,665
|
|
|
|
|
|
|
|
|
25,665
|
|
Other expense
|
|
|
|
|
|
|
(100,881
|
)
|
|
|
|
|
|
|
|
(100,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense)
|
|
|
|
(13,805
|
)
|
|
(557,091
|
)
|
|
|
|
|
|
|
|
(557,091
|
)
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
AND MINORITY INTEREST
|
|
|
|
(22,118
|
)
|
|
11,462,314
|
|
|
|
|
|
|
|
|
11,462,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAX
|
|
|
|
|
|
|
24,411
|
|
|
|
|
|
|
|
|
24,411
|
|
|
|
|
|
|
|
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES
|
|
|
$
|
(22,118
|
)
|
$
|
11,437,903
|
|
|
|
|
|
|
|
$
|
11,437,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
1,031,080
|
|
|
|
|
|
|
|
|
1,031,080
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
|
$
|
(22,118
|
)
|
$
|
12,468,983
|
|
|
|
|
|
|
|
$
|
12,468,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED INCOME (LOSS) PER SHARE
|
|
|
$
|
(0.00
|
)
|
$
|
285.95
|
|
$
|
(285.70
|
)
|
b
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER
|
|
|
OF COMMON SHARES
|
|
|
|
49,632,222
|
|
|
40,000
|
|
|
|
|
|
|
|
|
49,632,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to
unaudited Pro forma condensed consolidated financial statements
F-39
NB TELECOM, INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2007
|
NB TELECOM, INC
|
|
FAVOR SEA LIMITED
|
|
Adjustments
|
|
Notes
|
|
Pro
Forma
|
|
|
REVENUES
|
|
|
$
|
71,291
|
|
$
|
34,177,415
|
|
$
|
(71,291
|
)
|
a
|
|
|
$
|
34,177,415
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
|
63,570
|
|
|
27,829,973
|
|
|
(63,570
|
)
|
a
|
|
|
|
27,829,973
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
|
7,721
|
|
|
6,347,442
|
|
|
|
|
|
|
|
|
6,347,442
|
|
|
|
|
OPERATING EXPENSES
|
|
|
Research and development expense
|
|
|
|
|
|
|
189,329
|
|
|
|
|
|
|
|
|
189,329
|
|
Selling expense
|
|
|
|
|
|
|
131,772
|
|
|
|
|
|
|
|
|
131,772
|
|
General and adminstrative expenses
|
|
|
|
97,884
|
|
|
403,834
|
|
|
(97,884
|
)
|
a
|
|
|
|
403,834
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
|
97,884
|
|
|
724,935
|
|
|
|
|
|
|
|
|
724,935
|
|
|
|
|
NET INCOME (LOSS) FROM OPERATIONS
|
|
|
|
(90,163
|
)
|
|
5,622,507
|
|
|
|
|
|
|
|
|
5,622,507
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
Interest income (expense)
|
|
|
|
(23,185
|
)
|
|
(152,684
|
)
|
|
23,185
|
|
a
|
|
|
|
(152,684
|
)
|
Other income
|
|
|
|
6,160
|
)
|
|
10,434
|
|
|
(6,160
|
)
|
a
|
|
|
|
10,434
|
|
Other expense
|
|
|
|
(2,398
|
)
|
|
(207,687
|
)
|
|
2,398
|
|
a
|
|
|
|
(207,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense)
|
|
|
|
(19,423
|
)
|
|
(349,937
|
)
|
|
|
|
|
|
|
|
(349,937
|
)
|
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
AND MINORITY INTEREST
|
|
|
|
(109,586
|
)
|
|
5,272,570
|
|
|
|
|
|
|
|
|
5,272,570
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAX
|
|
|
|
735
|
|
|
|
|
|
(735
|
)
|
a
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES
|
|
|
$
|
(110,321
|
)
|
$
|
5,272,570
|
|
|
|
|
|
|
|
$
|
5,272,570
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
|
|
|
|
|
|
|
482,932
|
|
|
|
|
|
|
|
|
482,932
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
|
$
|
(110,321
|
)
|
$
|
5,755,502
|
|
|
|
|
|
|
|
$
|
5,755,502
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED INCOME (LOSS) PER SHARE
|
|
|
$
|
(0.00
|
)
|
$
|
131.81
|
|
|
(131.70
|
)
|
b
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER
|
|
|
OF COMMON SHARES
|
|
|
|
49,632,222
|
|
|
40,000
|
|
|
|
|
|
|
|
|
49,632,222
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to
unaudited Pro forma condensed consolidated financial statements
F-40
NB TELECOM, INC
NOTES TO THE UNAUDITED
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma
adjustments are included in the accompanying unaudited pro forma condensed consolidated
balance sheet as of September 30, 2008 and the unaudited pro forma condensed consolidated
statement of income for the nine months ended September 30, 2008 and for the year ended
December 31, 2007 to reflect the acquisition of Favor Sea by the Merger Sub and the
Parent:
|
a.
|
To
record the spin-off of the Parents assets and liabilities prior to the
reverse acquisition;
|
|
b.
|
These
adjustments reflect the recapitalization as a result of the transactions
related to the share exchange.
|
F-41
Exhibit 10.1
AGREEMENT AND PLAN OF
MERGER
AGREEMENT
AND PLAN OF MERGER (Agreement) made this 24th day of December 2008 by and
among NB Telecom, Inc., a Nevada corporation (the Parent), China XD Plastics
Company Limited, a Nevada corporation (the Merger Sub) wholly owned by the
Parent, and Favor Sea Limited (Company) a British Virgin Islands corporation,
and XD. Engineering Plastics Company Limited, a British Virgin Islands corporation, the
principal shareholder of the Company (the Principal Shareholder and together
with the minority shareholders in the Company, the Sellers).
R E C I T A L S:
A. The
respective Boards of Directors of the Parent and the Company have determined
that an acquisition of the Company by the Merger Sub and then the merger of the
Merger Sub with and into the Parent (the Merger), upon the terms
and subject to the conditions set forth in this Agreement, would be fair and in
the best interests of their respective shareholders, and such Boards of
Directors have approved such Merger, pursuant to which shares of Common Stock
of the Company (Company Common Stock) issued and outstanding
immediately prior to the Effective Time of the Merger (as defined in Section
1.03) and all securities convertible or exchangeable into Company Common Stock
will be exchanged (including by reservation for future issuances) will be
exchanged for the right to receive 99% of Common Stock of the Parent (Parent
Common Stock) other than Dissenting Shares (as defined in Section
2.01(d)).
B. The
Parent, the Merger Sub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
C. For
federal income tax purposes, the parties intend that the Merger shall qualify
as reorganization under the provisions of Section 368 of the Internal Revenue
Code of 1986, as amended (the Code).
NOW,
THEREFORE, in consideration of the representations, warranties, covenants and agreements
contained in this Agreement, the parties agree as follows:
ARTICLE I:
THE MERGER
AND MERGER CONSIDERATION
1.01 The Merger and
Consideration.
Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the Nevada Corporations Code (the Nevada
Statutes), the Merger Sub shall acquire the Company and then shall be merged with
and into the Parent at the Effective Time of the Merger. The Company will become a wholly
owned subsidiary of the Parent upon which the Merger Sub shall no long exist, and
Parents name will change to the Merger Subs name, pursuant to section 92A.180
of the Nevada Statutes. The Merger Sub shall issue (i) to the Sellers and their designees,
10 shares or such number of shares of the common stock of the Merger Sub which shall
constitute no more than 10% ownership interest in the Merger Sub and which shall be
converted into approximately 50,367,778 shares of the Parent Common Stock prior to and
approximately 405,928 post a reverse stock split in accordance with Section 1.08 to be
done in conjunction of the Merger, and 1,000,000 shares of convertible Series A preferred
stock which shall convert approximately 1:38.2 into 38,194,072 shares of Parent Common
Stock after the completion of the Merger so that eventually the Sellers and their
designees shall own approximately 99% of Parent Common Stock outstanding post the
completion of the Merger; and (ii) to the Principal Shareholder and their designees,
1,000,000 shares of Series B preferred stock. Immediately after the Merger and the reverse
stock split in accordance with Section 1.08, the Parent shall conduct an amendment to its
charter to increase the authorized shares of Parent Common Stock to 500,000,000 to allow
such conversion of preferred stock into Parent Common Stock. At that time, the Parent will
also amend its charter to increase the authorized shares of its preferred stock to
50,000,000. Forms of the certificates of designation of the Series A convertible preferred
stock and Series B preferred stock are attached hereto as
Exhibit A
and
Exhibit
B,
respectively.
1.02 Closing.
Unless this
Agreement shall have been terminated and the transactions herein contemplated shall have
been abandoned pursuant to Section 7.01 and subject to the satisfaction or waiver of the
conditions set forth in Article VI, the closing of the Merger (the Closing)
will take place at 10:00 a.m. on the business day upon satisfaction of the conditions set
forth in Article VI (or as soon as practicable thereafter following satisfaction or waiver
of the conditions set forth in Article VI) (the Closing Date), at the offices
of Troutman Sanders LLP in New York, unless another date, time or place is agreed to in
writing by the parties hereto.
1.03 Effective Time of Merger.
As soon as practicable following the satisfaction or waiver of the conditions set forth in
Article VI, the parties shall file articles of merger (the Articles of Merger)
executed in accordance with the relevant provisions of the Nevada Statutes and shall make
all other filings or recordings required under Nevada Statutes. The Merger shall become
effective at such time as the Articles of Merger are duly filed with the Secretary of
State of Nevada or at such other time as is permissible in accordance with Nevada Statutes
and as the Parent and the Company shall agree should be specified in the Articles of
Merger (the time the Merger becomes effective being the Effective Time of the
Merger). The Parent shall use reasonable efforts to have the Closing Date and the
Effective Time of the Merger to be the same day.
1.04 Effects of the Merger.
The Merger shall have the effects set forth in the applicable provisions of the Nevada
Statutes.
1.05 Articles of
Incorporation; Bylaws; Purposes.
(a) The
Certificate of Incorporation of the Parent in effect immediately prior to the
Effective Time of the Merger shall be the Certificate of Incorporation of the
Parent until thereafter changed or amended as provided therein or by applicable
law.
2
(b) The
Bylaws of the Parent in effect at the Effective Time of the Merger shall be the
Bylaws of the Parent until thereafter changed or amended as provided therein or
by applicable law.
(c) The
purposes of the Parent and the total number of its authorized capital stock
shall be as set forth in the Certificate of Incorporation of the Parent in
effect immediately prior to the Effective Time of the Merger until such time as
such purposes and such number may be amended as provided in the Certificate of
Incorporation of the Parent and by applicable law.
1.06 Directors.
The directors
of the Company at the Effective Time of the Merger shall be the directors of the Parent,
and its subsidiary, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
1.07 Officers.
The officers of
the Company at the Effective Time of the Merger shall be the officers of the Parent and
its subsidiary, until the earlier of their resignation or removal or until their
respective successors are duly elected and qualified, as the case may be.
1.08 Stock Split.
Immediately
following the execution of this Agreement, the Parent shall take all actions required to
affect an approximate one hundred and twenty-four and one tenth for one reverse split
(124.1:1) of the authorized and issued and outstanding Parent Common Stock, so that after
such split and redemption there will be approximately authorized, issued and outstanding
805,928 shares of the Parent Common Stock. The record and effective date of the reverse
split shall be December 31, 2008.
1.09 Round-Up
.
Immediately following the execution of this Agreement and upon the effectiveness of the
reverse split, the surviving entity of the Merger will issue an appropriate number of
shares to round-up any fractional shares and shares below 100 post the reverse split held
by each shareholder of record on the record date of December 31, 2008 to 100 shares of
Parent Common Stock. Such newly issued shares for the round-up shall be referred to
hereinafter as the Round-Up Shares. Such Round-Up Shares shall be deducted
from the account(s) of certain shareholders of the Parent existing prior to the date of
this Agreement designated by the Parent per the Parents written instruction to the
transfer agent of the Parent.
ARTICLE II:
EFFECT OF
THE MERGER
ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS
2.01 Effect on Capital Stock.
As of the Effective Time of the Merger, by virtue of the Merger and without any action on
the part of the holders of shares of Company Common Stock or any shares of capital stock
of the Merger Sub:
3
(a) Common
Stock of the Merger Sub. Each share of common stock of the Merger Sub issued
and outstanding immediately prior to the Effective Time of the Merger shall be
converted into shares of Parent Common Stock according to Section 2.02 and
shall be the issued and outstanding capital stock of the Parent.
(b) Cancellation
of Parent-Owned Merger Sub Common Stock. Each share of Common Stock of the
Merger Sub that is owned by the Parent shall automatically be cancelled and
retired and shall cease to exist, and no Parent Common Stock or other
consideration shall be delivered or deliverable in exchange therefor.
(c) Conversion
of Company Common Stock. Except as otherwise provided herein, each issued and
outstanding share of Company Common Stock shall be converted into fully paid
and nonassessable shares of Parent Common Stock in accordance with the Exchange
Ratio described in Section 2.02.
(d) Dissenting
Shares. Notwithstanding anything in this Agreement to the contrary, shares of
Company Common Stock issued and outstanding immediately prior to the Effective
Time of the Merger held by a holder (if any) who has the right to demand
payment for and an appraisal of such shares as provided under British Virgin
Islands law, if applicable, (Dissenting Shares) shall not be
converted into a right to receive Merger Consideration unless such holder fails
to perfect or otherwise loses such holders right to such payment or
appraisal, if any. If, after the Effective Time of the Merger, such holder
fails to perfect or loses any such right to appraisal, each such share of such
holder shall be treated as a share that had been converted as of the Effective
Time of the Merger into the right to receive Merger Consideration in accordance
with this Section 2.01. The Company shall give prompt notice to the Parent of
any demands received by the Company for appraisal of shares of Company Common
Stock, and the Parent shall have the right to participate in all negotiations
and proceedings with respect to such demands. The Company shall not, except
with the prior written consent of the Parent, make any payment with respect to,
or settle or offer to settle, any such demands.
2.02 Exchange Ratio.
The
Exchange Ratio is as follows: Each share of Company Stock shall be converted
into shares of Parent Common Stock in the Merger, an Exchange Ratio of 1: 5,036,778
Parent.
2.03 Stock Warrants.
At the
Effective Time of the Merger, there will be no outstanding warrants to purchase Parent
Common Stock.
2.04 Exchange of
Certificates.
(a) Exchange
of Certificates. As soon as reasonably practicable as of or after the Effective
Time of the Merger, the Parent shall issue the Parent Shares, for the benefit
of the holders of shares of Company Common Stock, for exchange in accordance
with this Article II.
4
(b) Settlement
Date. The settlement date as set forth herein shall be such date which is six
months from the Effective Time of the Merger and the date of the resolution of
any Contests further to Section 8.03 herein.
(c) Exchange
Procedures. At the Effective Time of the Merger, each holder of an outstanding
certificate or certificates which prior thereto represented shares of Company
Common Stock shall, upon surrender of such certificate or certificates and
acceptance be entitled to a certificate or certificates representing the number
of shares of Parent Common Stock into which the aggregate number of shares of
Company Common Stock previously represented by such certificate or certificates
surrendered shall have been converted pursuant to this Agreement. The Company
shareholders shall accept such certificates upon compliance with such
reasonable terms and conditions to affect an orderly exchange thereof in
accordance with normal exchange practices. All shares of Company Common Stock
shall be surrendered at the Effective Time of the Merger. After the Effective
Time of the Merger, there shall be no further transfer on the records of the
Company or its transfer agent of certificates representing shares of Company
Common Stock. If any certificate for such Parent Common Stock is to be issued
in a name other than that in which the certificate for Company Common Stock
surrendered for exchange is registered, it shall be a condition of such
exchange that the certificate so surrendered shall be properly endorsed, with
signature guaranteed, or otherwise in proper form for transfer and that the
person requesting such exchange shall pay to the Parent or its transfer agent
any transfer or other taxes or other costs required by reason of the issuance
of certificates for such Parent Common Stock in a name other than that of the
registered holder of the certificate surrendered, or establish to the
satisfaction of the Parent or its transfer agent that all taxes have been paid.
(d) No
Further Ownership Rights in Company Common Stock. All shares of Parent Common
Stock issued upon the surrender for exchange of certificates representing
shares of Company Common Stock in accordance with the terms of this Article II
shall be deemed to have been issued (and paid) in full satisfaction of all
rights pertaining to the shares of Company Common Stock theretofore represented
by such certificates.
(e) No
Liability. None of the Parent, the Merger Sub, or the Company shall be liable
to any person in respect of any shares of Parent Common Stock (or dividends or
distributions with respect thereto) delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law. All certificates
representing shares of Company Common Stock shall have been surrendered at the
Effective Time of the Merger.
5
ARTICLE III:
REPRESENTATIONS
AND WARRANTIES
3.01 Representations and
Warranties of the Company.
Except as set forth in the Company Disclosure Schedule
delivered by the Company to the Parent at the time of execution of this Agreement, the
Company represents and warrants to the Parent and the Merger Sub as follows:
(a) Organization,
Standing and Corporate Power. The Company is duly organized, validly existing
and in good standing under the laws of the British Virgin Islands and has the
requisite corporate power and authority to carry on its business as now being
conducted. The Company is duly qualified or licensed to do business and is in
good standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so
qualified or licensed (individually or in the aggregate) would not have a
material adverse effect (as defined in Section 10.02) with respect to the
Company.
(b) Subsidiaries.
The Company owns 100% of its subsidiaries, Favor Sea (US) Limited, a New York
corporation, Hong Kong Engineering Plastics Company Limited, a corporation
established and existing in China, which in turn owns 100% ownership interest
in Harbin Xinda Macromolecule Material Co., Ltd., a limited liability company
established and existing in China (collectively, Company Subs). The
Company has no interest in any other company, corporation, partnership, joint
venture or otherwise other than the Company Subs.
(c) Capital
Structure. The authorized capital stock of the Company consists of 50,000 of
Company Common Stock. There are 40,000 shares of Common Stock outstanding, all
of which are owned by Sellers. Except as set forth above, no shares of capital
stock or other equity securities of the Company are issued, reserved for
issuance or outstanding. All outstanding shares of capital stock of the Company
are duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights. There are no outstanding bonds, debentures, notes
or other indebtedness or other securities of the Company having the right to
vote (or convertible into, or exchangeable for, securities having the right to
vote) on any matters on which shareholders of the Company may vote. The Company
Disclosure Schedule sets forth the outstanding Capitalization of the Company.
Except as set forth above, there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or undertakings
of any kind to which the Company is a party or by which it is bound obligating
the Company to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock or other equity or voting securities
of the Company or obligating the Company to issue, grant, extend or enter into
any such security, option, warrant, call, right, commitment, agreement,
arrangement or undertaking. There are no outstanding contractual obligations,
commitments, understandings or arrangements of the Company to repurchase,
redeem or otherwise acquire or make any payment in respect of any shares of
capital stock of the Company. There are no agreements or arrangements pursuant
to which the Company is or could be required to register shares of Company
Common Stock or other securities under the Securities Act of 1933, as amended
(the Securities Act) or other agreements or arrangements with or
among any security holders of the Company with respect to securities of the
Company.
6
(d) Authority;
Noncontravention. The Company has the requisite corporate and other power and
authority to enter into this Agreement and to consummate the Merger. The
execution and delivery of this Agreement by the Company and the consummation by
the Company of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company. This Agreement
has been duly executed and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms. The execution and delivery of this Agreement do not,
and the consummation of the transactions contemplated by this Agreement and
compliance with the provisions hereof will not, conflict with, or result in any
breach or 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 or put right with respect to 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 under, (i) the Articles of
Incorporation or Bylaws of the Company, (ii) any loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license applicable to the Company, its properties or
assets, or (iii) subject to the governmental filings and other matters referred
to in the following sentence, any judgment, order, decree, statute, law,
ordinance, rule, regulation or arbitration award applicable to the Company, its
properties or assets. No consent, approval, order or authorization of, or
registration, declaration or filing with, or notice to, any federal, state or
local government or any court, administrative agency or commission or other
governmental authority, agency, domestic or foreign (a Governmental Entity),
is required by or with respect to the Company in connection with the execution
and delivery of this Agreement by the Company or the consummation by the
Company of the transactions contemplated hereby, except, with respect to this
Agreement, for the filing of the Articles of Merger with the Secretary of State
of Nevada.
(e) Financial
Statements. (i) The Parent has received a copy of the audited consolidated
financial statements of the Company and Company Subs for the fiscal year ended
December 31, 2007 and 2006 and unaudited financial statements for the
nine-months ended September 30, 2008 and 2007 (collectively, the Financial
Statements). The Financial Statements fairly present the financial
condition of the Company at the dates indicated and its results of their
operations and cash flows for the periods then ended and, except as indicated
therein, reflect all claims against, debts and liabilities of the Company,
fixed or contingent, and of whatever nature. (ii) Since September 30, 2008 (the
Balance Sheet Date), there has been no material adverse change in
the assets or liabilities, or in the business or condition, financial or
otherwise, or in the results of operations or prospects, of the Company,
whether as a result of any legislative or regulatory change, revocation of any
license or rights to do business, fire, explosion, accident, casualty, labor
trouble, flood, drought, riot, storm, condemnation, act of God, public force or
otherwise and no material adverse change in the assets or liabilities, or in
the business or condition, financial or otherwise, or in the results of
operation or prospects, of the Company except in the ordinary course of
business. (iii) Since the Balance Sheet Date, the Company has not suffered any
damage, destruction or loss of physical property (whether or not covered by
insurance) affecting its condition (financial or otherwise) or operations
(present or prospective), nor has the Company issued, sold or otherwise
disposed of, or agreed to issue, sell or otherwise dispose of, any capital
stock or any other security of the Company and has not granted or agreed to
grant any option, warrant or other right to subscribe for or to purchase any
capital stock or any other security of the Company or has incurred or agreed to
incur any indebtedness for borrowed money.
7
(f) Absence
of Certain Changes or Events. Since the Balance Sheet Date, the Company has
conducted its business only in the ordinary course consistent with past
practice, and there is not and has not been: (i) any material adverse change
with respect to the Company; (ii) any condition, event or occurrence which
individually or in the aggregate could reasonably be expected to have a
material adverse effect or give rise to a material adverse change with respect
to the Company; (iii) any event which, if it had taken place following the
execution of this Agreement, would not have been permitted by Section 4.01
without prior consent of the Parent; or (iv) any condition, event or occurrence
which could reasonably be expected to prevent, hinder or materially delay the
ability of the Company to consummate the transactions contemplated by this
Agreement.
(g) Litigation;
Labor Matters; Compliance with Laws.
(i) There
is no suit, action or proceeding or investigation pending or, to the knowledge
of the Company, threatened against or affecting the Company or any basis for
any such suit, action, proceeding or investigation that, individually or in the
aggregate, could reasonably be expected to have a material adverse effect with
respect to the Company or prevent, hinder or materially delay the ability of
the Company to consummate the transactions contemplated by this Agreement, nor
is there any judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against the Company having, or which, insofar
as reasonably could be foreseen by the Company, in the future could have, any
such effect.
(ii) The
Company is not a party to, or bound by, any collective bargaining agreement,
contract or other agreement or understanding with a labor union or labor
organization, nor is it the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it to bargain with any
labor organization as to wages or conditions of employment nor is there any
strike, work stoppage or other labor dispute involving it pending or, to its
knowledge, threatened, any of which could have a material adverse effect with
respect to the Company.
(iii) The
conduct of the business of the Company complies with all statutes, laws,
regulations, ordinances, rules, judgments, orders, decrees or arbitration
awards applicable thereto.
8
(h) Benefit
Plans. The Company is not a party to any collective bargaining agreement or any
bonus, pension, profit sharing, deferred compensation, incentive compensation,
stock ownership, stock purchase, phantom stock, retirement, vacation,
severance, disability, death benefit, hospitalization, medical or other plan,
arrangement or understanding (whether or not legally binding) under which the
Company currently has an obligation to provide benefits to any current or
former employee, officer or director of the Company (collectively, Benefit
Plans).
(i) Certain
Employee Payments. The Company is not a party to any employment agreement which
could result in the payment to any current, former or future director or
employee of the Company of any money or other property or rights or accelerate
or provide any other rights or benefits to any such employee or director as a
result of the transactions contemplated by this Agreement, whether or not (i)
such payment, acceleration or provision would constitute a parachute
payment (within the meaning of Section 280G of the Code), or (ii) some
other subsequent action or event would be required to cause such payment,
acceleration or provision to be triggered.
(j) Tax
Returns and Tax Payments. The Company has timely filed all Tax Returns required
to be filed by it, has paid all Taxes shown thereon to be due and has provided
adequate reserves in its financial statements for any Taxes that have not been
paid, whether or not shown as being due on any returns. No material claim for
unpaid Taxes has been made or become a lien against the property of the Company
or is being asserted against the Company, no audit of any Tax Return of the
Company is being conducted by a tax authority, and no extension of the statute
of limitations on the assessment of any Taxes has been granted by the Company
and is currently in effect. As used herein, taxes shall mean all
taxes of any kind, including, without limitation, those on or measured by or
referred to as income, gross receipts, sales, use, ad valorem, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium value added, property or windfall profits taxes, customs,
duties or similar fees,, assessments or charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any governmental authority, domestic or foreign. As used
herein, Tax Return shall mean any return, report or statement
required to be filed with any governmental authority with respect to Taxes.
(k) Environmental
Matters. The Company is in compliance with all applicable Environmental Laws.
Environmental Laws means all applicable federal, state and local
statutes, rules, regulations, ordinances, orders, decrees and common law
relating in any manner to contamination, pollution or protection of human
health or the environment, and similar state laws.
(l) Material
Contract Defaults. The Company is not, or has not received any notice or has
any knowledge that any other party is, in default in any respect under any
Material Contract; and there has not occurred any event that with the lapse of
time or the giving of notice or both would constitute such a material default.
For purposes of this Agreement, a Material Contract means any contract,
agreement or commitment that is effective as of the Closing Date to which the
Company is a party (i) with expected receipts or expenditures in excess of
$100,000, (ii) requiring the Company to indemnify any person, (iii) granting
exclusive rights to any party, (iv) evidencing indebtedness for borrowed or
loaned money in excess of $100,000 or more, including guarantees of such
indebtedness, or (v) which, if breached by the Company in such a manner would
(A) permit any other party to cancel or terminate the same (with or without
notice of passage of time) or (B) provide a basis for any other party to claim
money damages (either individually or in the aggregate with all other such
claims under that contract) from the Company or (C) give rise to a right of
acceleration of any material obligation or loss of any material benefit under
any such contract, agreement or commitment.
9
(m) Properties.
The Company has good, clear and marketable title to all the tangible properties
and tangible assets reflected in the latest balance sheet as being owned by the
Company or acquired after the date thereof which are, individually or in the
aggregate, material to the Companys business (except properties sold or
otherwise disposed of since the date thereof in the ordinary course of
business), free and clear of all material liens.
(n) Trademarks
and Related Contracts. To the knowledge of the Company:
(i) As
used in this Agreement, the term Trademarks means trademarks,
service marks, trade names, Internet domain names, designs, slogans, and
general intangibles of like nature; the term Trade Secrets means
technology; trade secrets and other confidential information, know-how,
proprietary processes, formulae, algorithms, models, and methodologies; the
term Intellectual Property means patents, copyrights, Trademarks,
applications for any of the foregoing, and Trade Secrets; the term Company
License Agreements means any license agreements granting any right to use
or practice any rights under any Intellectual Property (except for such
agreements for off-the-shelf products that are generally available or less than
$25,000), and any written settlements relating to any Intellectual Property, to
which the Company is a party or otherwise bound; and the term Software means
any and all computer programs, including any and all software implementations
of algorithms, models and methodologies, whether in source code or object code.
(ii) To
the knowledge of the Company, none of the Companys Intellectual Property
or Company License Agreements infringe upon the rights of any third party that
may give rise to a cause of action or claim against the Company or its
successors.
(o) Board
Recommendation. The Board of Directors of the Company has unanimously
determined that the terms of the Merger are fair to and in the best interests
of the shareholders of the Company and recommended that the holders of the
shares of Company Common Stock approve the Merger.
10
(p) Required
Company Vote. The affirmative vote of a majority of the shares of each of the
Company Common Stock is the only vote of the holders of any class or series of
the Companys securities necessary to approve the Merger (the Company
Shareholder Approval).
3.02 Representations and
Warranties of Company Subs.
Except as set forth in the Company Disclosure Schedule
delivered by the Company to the Parent at the time of execution of this Agreement, the
Company and the Shareholders, jointly and severally, each represents and warrants to the
Parent and the Merger Sub as follows:
(a) Organization,
Standing and Corporate Power. Company Subs are duly organized, validly existing
and in good standing under the laws of the Peoples Republic of China and
Hong Kong and has the requisite corporate power and authority to carry on its
business as now being conducted. Company Subs are duly qualified or licensed to
do business and are in good standing in each jurisdiction in which the nature
of their business or the ownership or leasing of their properties makes such
qualification or licensing necessary, other than in such jurisdictions where
the failure to be so qualified or licensed (individually or in the aggregate)
would not have a material adverse effect (as defined in Section 10.02) with
respect to Company Subs.
(b) Subsidiaries:
The Company Subs are 100% owned by the Company and shall remain wholly owned
subsidiaries of the Company following the Sale.
(c) Capital
Structure. Except as set forth in the Financial Statements, no shares of
capital stock or other equity securities of Company Subs are issued, reserved
for issuance or outstanding. All outstanding equity ownership interest in
Company Subs are duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive rights. There are no outstanding bonds,
debentures, notes or other indebtedness or other securities of Company Subs
having the right to vote (or convertible into, or exchangeable for, securities
having the right to vote) on any matters on which shareholders of Company Subs
may vote. The Company Disclosure Schedule sets forth the outstanding
Capitalization of Company Subs. Except as set forth above, there are no
outstanding securities, options, warrants, calls, rights, commitments,
agreements, arrangements or undertakings of any kind to which Company Subs are
a party or by which they are bound obligating Company Subs to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other equity or voting securities of Company Subs or obligating
Company Subs to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement, arrangement or undertaking. There
are no outstanding contractual obligations, commitments, understandings or
arrangements of Company Subs to repurchase, redeem or otherwise acquire or make
any payment in respect of any shares of capital stock of Company Subs. There
are no agreements or arrangements pursuant to which Company Subs are or could
be required to register shares of Company Common Stock or other securities
under the Securities Act of 1933, as amended (the Securities Act)
or other agreements or arrangements with or among any security holders of
Company Subs with respect to securities of Company Subs.
11
(d) Authority;
Noncontravention. Each of the Company Subs has the requisite corporate and
other power and authority to enter into this Agreement and to make the
representations contained herein. This Agreement has been duly executed and
delivered by Company Subs and constitutes a valid and binding obligation of
Company Subs, enforceable against Company Subs in accordance with its terms.
The execution and delivery of this Agreement do not, and the consummation of
the transactions contemplated by this Agreement and compliance with the
provisions hereof will not, conflict with, or result in any breach or 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 or put right
with respect to 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
Company Subs under, (i) the Articles of Incorporation or Bylaws of Company
Subs, (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease
or other agreement, instrument, permit, concession, franchise or license
applicable to Company Subs, its properties or assets, or (iii) subject to the
governmental filings and other matters referred to in the following sentence,
any judgment, order, decree, statute, law, ordinance, rule, regulation or
arbitration award applicable to Company Subs, their properties or assets. No
consent, approval, order or authorization of, or registration, declaration or
filing with, or notice to, any federal, state or local government or any court,
administrative agency or commission or other governmental authority, agency,
domestic or foreign (a Governmental Entity), is required by or with
respect to Company Subs in connection with the execution and delivery of this
Agreement by Company Subs or the consummation by Company Subs of the
transactions contemplated hereby, except, as set forth in the Company
Disclosure Schedule.
(e) Absence
of Certain Changes or Events. Since the Balance Sheet Date, other than the
ownership interest transfer to the Company, if applicable, each of the Company
Subs has conducted its business only in the ordinary course consistent with
past practice, and there is not and has not been: (i) any material adverse
change with respect to Company Subs; (ii) any condition, event or occurrence
which individually or in the aggregate could reasonably be expected to have a
material adverse effect or give rise to a material adverse change with respect
to Company Subs; (iii) any event which, if it had taken place following the
execution of this Agreement, would not have been permitted by Section 4.01
without prior consent of the Parent; or (iv) any condition, event or occurrence
which could reasonably be expected to prevent, hinder or materially delay the
ability of Company Subs to consummate the transactions contemplated by this
Agreement.
(f) Litigation;
Labor Matters; Compliance with Laws.
(i) There
is no suit, action or proceeding or investigation pending or, to the knowledge
of Company Subs, threatened against or affecting Company Subs or any basis for
any such suit, action, proceeding or investigation that, individually or in the
aggregate, could reasonably be expected to have a material adverse effect with
respect to Company Subs or prevent, hinder or materially delay the ability of
Company Subs to consummate the transactions contemplated by this Agreement, nor
is there any judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against Company Subs having, or which, insofar
as reasonably could be foreseen by Company Subs, in the future could have, any
such effect.
12
(ii) None
of the Company Subs is a party to, or bound by, any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization, nor is any the subject of any proceeding asserting that it
has committed an unfair labor practice or seeking to compel it to bargain with
any labor organization as to wages or conditions of employment nor is there any
strike, work stoppage or other labor dispute involving it pending or, to its
knowledge, threatened, any of which could have a material adverse effect with
respect to Company Subs.
(iii) The
conduct of the business of Company Subs complies with all statutes, laws,
regulations, ordinances, rules, judgments, orders, decrees or arbitration
awards applicable thereto.
(g) Benefit
Plans. None of the Company Subs is a party to any collective bargaining
agreement or any bonus, pension, profit sharing, deferred compensation,
incentive compensation, stock ownership, stock purchase, phantom stock,
retirement, vacation, severance, disability, death benefit, hospitalization,
medical or other plan, arrangement or understanding (whether or not legally
binding) under which it currently has an obligation to provide benefits to any
current or former employee, officer or director of Company Subs (collectively,
Benefit Plans).
(h) Certain
Employee Payments. None of the Company Subs is a party to any employment
agreement which could result in the payment to any current, former or future
director or employee of Company Subs of any money or other property or rights
or accelerate or provide any other rights or benefits to any such employee or
director as a result of the transactions contemplated by this Agreement,
whether or not (i) such payment, acceleration or provision would constitute a
parachute payment (within the meaning of Section 280G of the Code),
or (ii) some other subsequent action or event would be required to cause such
payment, acceleration or provision to be triggered.
(i) Tax
Returns and Tax Payments. Each of the Company Subs has timely filed all Tax
Returns required to be filed by it, has paid all Taxes shown thereon to be due
and has provided adequate reserves in its financial statements for any Taxes
that have not been paid, whether or not shown as being due on any returns. No
material claim for unpaid Taxes has been made or become a lien against the
property of Company Subs or is being asserted against Company Subs, no audit of
any Tax Return of Company Subs is being conducted by a tax authority, and no
extension of the statute of limitations on the assessment of any Taxes has been
granted by Company Subs and is currently in effect. As used herein,
taxes shall mean all taxes of any kind, including, without
limitation, those on or measured by or referred to as income, gross receipts,
sales, use, ad valorem, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium value added, property
or windfall profits taxes, customs, duties or similar fees,, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any governmental authority,
domestic or foreign. As used herein, Tax Return shall mean any
return, report or statement required to be filed with any governmental
authority with respect to Taxes.
13
(j) Environmental
Matters. Each of the Company Subs is in material compliance with all applicable
Environmental Laws. Environmental Laws means all applicable
federal, state and local statutes, rules, regulations, ordinances, orders,
decrees and common law relating in any manner to contamination, pollution or
protection of human health or the environment, and similar state laws.
(k) Material
Contract Defaults. None of the Company Subs is, nor have they received any
notice or has any knowledge that any other party is, in default in any respect
under any Material Contract; and there has not occurred any event that with the
lapse of time or the giving of notice or both would constitute such a material
default. For purposes of this Agreement, a Material Contract means any
contract, agreement or commitment that is effective as of the Closing Date to
which Company Subs is a party (i) with expected receipts or expenditures in
excess of $100,000, (ii) requiring Company Subs to indemnify any person, (iii)
granting exclusive rights to any party, (iv) evidencing indebtedness for
borrowed or loaned money in excess of $100,000 or more, including guarantees of
such indebtedness, or (v) which, if breached by Company Subs in such a manner
would (A) permit any other party to cancel or terminate the same (with or
without notice of passage of time) or (B) provide a basis for any other party
to claim money damages (either individually or in the aggregate with all other
such claims under that contract) from Company Subs or (C) give rise to a right
of acceleration of any material obligation or loss of any material benefit
under any such contract, agreement or commitment.
(l) Properties.
Each of the Company Subs has good, clear and marketable title to all the
tangible properties and tangible assets reflected in the latest balance sheet
as being owned by Company Subs or acquired after the date thereof which are,
individually or in the aggregate, material to Company Subss business
(except properties sold or otherwise disposed of since the date thereof in the
ordinary course of business), free and clear of all material liens.
(m) Trademarks
and Related Contracts. To the knowledge of Company Subs:
(i) As
used in this Agreement, the term Trademarks means trademarks,
service marks, trade names, Internet domain names, designs, slogans, and
general intangibles of like nature; the term Trade Secrets means
technology; trade secrets and other confidential information, know- how,
proprietary processes, formulae, algorithms, models, and methodologies; the
term Intellectual Property means patents, copyrights, Trademarks,
applications for any of the foregoing, and Trade Secrets; the term Company
License Agreements means any license agreements granting any right to use
or practice any rights under any Intellectual Property (except for such
agreements for off-the-shelf products that are generally available or less than
$25,000), and any written settlements relating to any Intellectual Property, to
which Company Subs is a party or otherwise bound; and the term Software means
any and all computer programs, including any and all software implementations
of algorithms, models and methodologies, whether in source code or object code.
14
(ii) To
the knowledge of Company Subs, none of Company Subss Intellectual
Property or Company License Agreements infringe materially upon the rights of
any third party that may give rise to a cause of action or claim against
Company Subs or their successors.
3.03 Representations and
Warranties of the Parent and the Merger Sub.
Except as set forth in the disclosure
schedule delivered by the Parent to the Company at the time of execution of this Agreement
(the Parent Disclosure Schedule), the Parent and the Merger Sub represent and
warrant to the Company as follows:
(a) Organization,
Standing and Corporate Power. Each of the Parent, the Merger Sub and the other
Parent Subsidiaries (as defined in Section 3.03(b)) is (or at Closing will be)
duly organized, validly existing and in good standing under the laws of the
State of Nevada, as is applicable, and has the requisite corporate power and
authority to carry on its business as now being conducted. Each of the Parent,
the Merger Sub and the other Parent Subsidiaries is duly qualified or licensed
to do business and is in good standing in each jurisdiction in which the nature
of its business or the ownership or leasing of its properties makes such
qualification or licensing necessary, other than in such jurisdictions where
the failure to be so qualified or licensed (individually or in the aggregate)
would not have a material adverse effect with respect to the Parent.
(b) Subsidiaries.
The Parent has one subsidiary:
Merger Sub,
which is a Nevada corporation
incorporated in December 2008. All the outstanding shares of capital stock of
each such entity which is a corporation have been validly issued and are fully
paid and nonassessable and, except as set forth in the Parent Disclosure
Schedule, are owned (of record and beneficially) by the Parent, free and clear
of all Liens. Except for the capital stock of its subsidiaries, which are
corporations, the Parent does not own, directly or indirectly, any capital
stock or other ownership interest in any corporation, partnership, business
association, joint venture or other entity.
15
(c) Capital
Structure. As of the date of this Agreement, the authorized capital stock of
the Parent consists of 100,000,000 shares of Parent Common Stock, $0.0001 par
value, and 10,000,000 shares of preferred stock at $0.0001 par value, of which
approximately 49,632,222 shares of Parent Common Stock will be issued and
outstanding as of the date of this Agreement and no shares of Parent Common
Stock are issuable upon the exercise of outstanding warrants, convertible
notes, and options and otherwise. As of the date hereof, there are
approximately 330 shareholders of the Parent Common Stock issued and
outstanding. Immediately prior to the Closing, pursuant to Section 1.08 of the
Agreement, there shall be an approximate 124.1:1 reverse split of shares of
Parent Common Stock issue and outstanding. Except as set forth above, no shares
of capital stock or other equity securities of the Parent are issued, reserved
for issuance or outstanding. All outstanding shares of capital stock of the
Parent are, and all shares which may be issued pursuant to this Agreement will
be, when issued, duly authorized, validly issued, fully paid and nonassessable,
not subject to preemptive rights, and issued in compliance with all applicable
state and federal laws concerning the issuance of securities. There are no
outstanding bonds, debentures, notes or other indebtedness or other securities
of the Parent having the right to vote (or convertible into, or exchangeable
for, securities having the right to vote) on any matters on which shareholders
of the Parent may vote. Except as set forth above, there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which the Parent or any of its
subsidiaries is a party or by which any of them is bound obligating the Parent
or any its subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other equity
securities of the Parent or any of its subsidiaries or obligating the Parent or
any of its subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other equity
securities of the Parent or any of its subsidiaries or obligating the Parent or
any of its subsidiaries to issue, grant, extend or enter into any such
security, option, warrant, call, right, commitment, agreement, arrangement or
undertaking. There are no outstanding contractual obligations, commitments,
understandings or arrangements of the Parent or any of its subsidiaries to
repurchase, redeem or otherwise acquire or make any payment in respect of any
shares of capital stock of the Parent or any of its subsidiaries.
(d) Authority;
Noncontravention. The Parent and subsidiaries have all requisite corporate
authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement by
the Parent and the Merger Sub and the consummation by the Parent and the Merger
Sub of the transactions contemplated by this Agreement have been (or at Closing
will have been) duly authorized by all necessary corporate action on the part
of the Parent and the Merger Sub. This Agreement has been duly executed and
delivered by and constitutes a valid and binding obligation of each of the
Parent and the Merger Sub, enforceable against each such party in accordance
with its terms. The execution and delivery of this agreement do not, and the
consummation of the transactions contemplated by this Agreement and compliance
with the provisions of this Agreement will not, conflict with, or result in any
breach or 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 or put right with respect to 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 Parent or any of its subsidiaries under,
(i) the articles of incorporation or bylaws of the Parent or the Merger Sub or
the comparable charter or organizational documents of any other subsidiary of
the Parent, (ii) any loan or credit agreement, note, bond, mortgage, indenture,
lease or other agreement, instrument, permit, concession, franchise or license
applicable to the Parent, the Merger Sub or any other subsidiary of the Parent
or their respective properties or assets, or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any judgment,
order, decree, statute, law, ordinance, rule, regulation or arbitration award
applicable to the Parent, the Merger Sub or any other subsidiary of the Parent
or their respective properties or assets, other than, in the case of clauses
(ii) and (iii), any such conflicts, breaches, violations, defaults, rights,
losses or liens that individually or in the aggregate could not have a material
adverse effect with respect to the Parent or could not prevent, hinder or
materially delay the ability of the Parent to consummate the transactions
contemplated by this Agreement. No consent, approval, order or authorization
of, or registration, declaration or filing with, or notice to, any Governmental
Entity is required by or with respect to the Parent, the Merger Sub or any
other subsidiary of the Parent in connection with the execution and delivery of
this Agreement by the Parent or the Merger Sub or the consummation by the
Parent or the Merger Sub, as the case may be, of any of the transactions
contemplated by this Agreement, except for the filing of the Articles of Merger
with the Secretaries of State of Nevada, as required, and such other consents,
approvals, orders, authorizations, registrations, declarations, states.
16
(e) SEC
Documents; Undisclosed Liabilities. The Parent has filed all reports,
schedules, forms, statements and other documents as required by the Securities
and Exchange Commission (the SEC) and the Parent has delivered or
made available to the Company all reports, schedules, forms, statements and
other documents filed with the SEC (collectively, and in each case including
all exhibits and schedules thereto and documents incorporated by reference
therein, the Parent SEC Documents). As of their respective dates,
the Parent SEC Documents complied in all material respects with the
requirements of the Securities Act or the Securities Exchange Act of 1934, as
the case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to such Parent SEC documents, and none of the Parent SEC
Documents (including any and all consolidated financial statements included
therein) as of such date 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. Except to the extent revised or superseded by a
subsequent filing with the SEC (a copy of which has been provided to the
Company prior to the date of this Agreement), none of the Parent SEC Documents,
to the knowledge of the Parents management, contains any untrue statement
of a material fact or omits to state any 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 consolidated financial statements of the Parent included in
such 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 generally
accepted accounting principles (except, in the case of unaudited consolidated
quarterly statements, as permitted by Form 10-Q 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 the
Parent and its consolidated subsidiaries as of the dates thereof and the
consolidated results of operations and changes in cash flows for the periods
then ended (subject, in the case of unaudited quarterly statements, to normal
year-end audit adjustments as determined by Parents independent
accountants). Except as set forth in the Parent SEC Documents, at the date of
the most recent audited financial statements of the Parent included in the
Parent SEC Documents, neither the Parent nor any of its subsidiaries had, and
since such date neither the Parent nor any of such subsidiaries has incurred,
any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) which, individually or in the aggregate, could
reasonably be expected to have a material adverse effect with respect to the
Parent.
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(f) Absence
of Certain Changes or Events. Except as disclosed in the Parent SEC Documents,
since the date of the most recent financial statements included in the Parent
SEC Documents, the Parent has conducted its business only in the ordinary
course consistent with past practice in light of its current business
circumstances, and there is not and has not been: (i) any material adverse
change with respect to the Parent; (ii) any condition, event or occurrence
which, individually or in the aggregate, could reasonably be expected to have a
material adverse effect or give rise to a material adverse change with respect
to the Parent; (iii) any event which, if it had taken place following the
execution of this Agreement, would not have been permitted by Section 4.02
without the prior consent of the Company; or (iv) any condition, event or
occurrence which could reasonably be expected to prevent, hinder or materially
delay the ability of the Parent to consummate the transactions contemplated by
this Agreement.
(g) Interim
Operations of the Merger Sub. The Merger Sub was formed solely for the purpose
of engaging in the transactions contemplated hereby, has (or will have) engaged
in no other business activities and has (or will have) conducted its operations
only as contemplated hereby.
(h) Litigation;
Labor Matters; Compliance with Laws.
(i) There
is no suit, action or proceeding or investigation pending or, to the knowledge
of the Parent, threatened against or affecting the Parent or any basis for any
such suit, action, proceeding or investigation that, individually or in the
aggregate, could reasonably be expected to have a material adverse effect with
respect to the Parent or prevent, hinder or materially delay the ability of the
Parent to consummate the transactions contemplated by this Agreement, nor is
there any judgment, decree, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against the Parent having, or which, insofar
as reasonably could be foreseen by the Parent, in the future could have, any
such effect.
(ii) The
Parent is not a party to, or bound by, any collective bargaining agreement,
contract or other agreement or understanding with a labor union or labor
organization, nor is it the subject of any proceeding asserting that it has
committed an unfair labor practice or seeking to compel it to bargain with any
labor organization as to wages or conditions of employment nor is there any
strike, work stoppage or other labor dispute involving it pending or, to its
knowledge, threatened, any of which could have a material adverse effect with
respect to the Parent.
(iii) The
conduct of the business of the Parent complies with all statutes, laws,
regulations, ordinances, rules, judgments, orders, decrees or arbitration
awards applicable thereto.
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(i) Benefit
Plans. The Parent is not a party to any Benefit Plan under which the Parent
currently has an obligation to provide benefits to any current or former
employee, officer or director of the Parent.
(j) Certain
Employee Payments. The Parent is not a party to any employment agreement which
could result in the payment to any current, former or future director or
employee of the Parent of any money or other property or rights or accelerate
or provide any other rights or benefits to any such employee or director as a
result of the transactions contemplated by this Agreement, whether or not (i)
such payment, acceleration or provision would constitute a parachute
payment (within the meaning of Section 280G of the Code), or (ii) some
other subsequent action or event would be required to cause such payment,
acceleration or provision to be triggered.
(k) Tax
Returns and Tax Payments. The Parent has timely filed all Tax Returns required
to be filed by it, has paid all Taxes shown thereon to be due and has provided
adequate reserves in its financial statements for any Taxes that have not been
paid, whether or not shown as being due on any returns. No material claim for
unpaid Taxes has been made or become a lien against the property of the Parent
or is being asserted against the Parent, no audit of any Tax Return of the
Parent is being conducted by a tax authority, and no extension of the statute
of limitations on the assessment of any Taxes has been granted by the Parent
and is currently in effect.
(l) Environmental
Matters. The Parent is in material compliance with all applicable Environmental
Laws.
(m) Material
Contract Defaults. The Parent is not, or has not, received any notice or has
any knowledge that any other party is, in default in any respect under any
Material Contract; and there has not occurred any event that with the lapse of
time or the giving of notice or both would constitute such a material default.
For purposes of this Agreement, a Material Contract means any contract,
agreement or commitment that is effective as of the Closing Date to which the
Parent is a party (i) with expected receipts or expenditures in excess of
$10,000, (ii) requiring the Parent to indemnify any person, (iii) granting
exclusive rights to any party, (iv) evidencing indebtedness for borrowed or
loaned money in excess of $10,000 or more, including guarantees of such
indebtedness, or (v) which, if breached by the Parent in such a manner would
(A) permit any other party to cancel or terminate the same (with or without
notice of passage of time) or (B) provide a basis for any other party to claim
money damages (either individually or in the aggregate with all other such
claims under that contract) from the Parent or (C) give rise to a right of
acceleration of any material obligation or loss of any material benefit under
any such contract, agreement or commitment.
(n) Properties.
The Parent has good, clear and marketable title to all the tangible properties
and tangible assets reflected in the latest balance sheet as being owned by the
Parent or acquired after the date thereof which are, individually or in the
aggregate, material to the Parents business (except properties sold or
otherwise disposed of since the date thereof in the ordinary course of
business), free and clear of all material liens.
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(o) Trademarks
and Related Contracts. The Parent does not hold any Trademarks, Trade Secrets,
or Intellectual Property, and is not party to any license agreements regarding
such.
(p) Board
Recommendation. The Board of Directors of the Parent has unanimously determined
that the terms of the Merger are fair to and in the best interests of the
shareholders of the Parent.
(q) Spin-Off.
Immediately after and in conjunction with the consummation of the Merger, the
Parent will spin off all of assets and liabilities of the Parents
existing operation to Sotech, Inc., a Georgia corporation (Sotech),
in a distribution (the Spin-Off) so that the only material assets
of the Parent following the Spin-Off will be the ownership of the Merger Sub.
Sotech shall assume all existing and future liabilities arising from or
associated with or related to the existing operation of the Parent so that the
Parent and the newly merged entity shall not be liable for any such
liabilities.
(r) Liabilities.
The Parent and the Merger Sub guarantee that the Company and the Sellers are
free from any and all claims, liabilities or obligations of any nature
(absolute, accrued, contingent or otherwise) from the operations of the Parent
and any of its subsidiaries on and prior to the date hereof. The foregoing
representation and warranty of the Parent and the Merger Sub under this Section
3.03(r) shall survive and remain in full force and effect for the two years
following the Effective Time of the Merger.
(s) (s)
_____. The Parent and the Merger Sub guarantee that prior to the consummation
of the Merger all outstanding Parent Common Stock purchase rights, options, and
warrants shall be cancelled (the Cancellation). The Parent will
file a Form 8-K with the SEC regarding such Cancellation.
ARTICLE IV:
COVENANTS
RELATING TO
CONDUCT OF BUSINESS PRIOR TO MERGER
4.01 Conduct of the Company and the
Parent.
From the date of this Agreement and until the Effective Time of the Merger, or
until the prior termination of this Agreement, the Company and the Parent, shall not,
unless mutually agreed to in writing:
(a) engage
in any transaction, except in the normal and ordinary course of business, or
create or suffer to exist any Lien or other encumbrance upon any of their
respective assets or which will not be discharged in full prior to the
Effective Time of the Merger;
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(b) sell,
assign or otherwise transfer any of their assets, or cancel or compromise any
debts or claims relating to their assets, other than for fair value, in the
ordinary course of business, and consistent with past practice;
(c) fail
to use reasonable efforts to preserve intact their present business
organizations, keep available the services of their employees and preserve its
material relationships with customers, suppliers, licensors, licensees,
distributors and others, to the end that its good will and ongoing business not
be impaired prior to the Effective Time of the Merger;
(d) except
for matters related to complaints by former employees related to wages, suffer
or permit any material adverse change to occur with respect to the Company and
the Parent or their business or assets; or
(e) Make
any material change with respect to their business in accounting or bookkeeping
methods, principles or practices, except as required by GAAP.
ARTICLE V:
ADDITIONAL
AGREEMENTS
5.01 Access to Information;
Confidentiality.
(a) The
Company shall, and shall cause its officers, employees, counsel, financial
advisors and other representatives to, afford to the Parent and its
representatives reasonable access during normal business hours during the
period prior to the Effective Time of the Merger to its and to Company Subs properties,
books, contracts, commitments, personnel and records and, during such period,
the Company shall, and shall cause its and Company Subs officers,
employees and representatives to, furnish promptly to the Parent all
information concerning their respective business, properties, financial
condition, operations and personnel as such other party may from time to time
reasonably request. For the purposes of determining the accuracy of the
representations and warranties of the Parent and the Merger Sub set forth
herein and compliance by the Parent and the Merger Sub of their respective
obligations hereunder, during the period prior to the Effective Time of the
Merger, the Parent shall provide the Company and its representatives with
reasonable access during normal business hours to its and Merger Subs
properties, books, contracts, commitments, personnel and records as may be
necessary to enable the Company to confirm the accuracy of the representations
and warranties of the Parent and the Merger Sub set forth herein and compliance
by the Parent and the Merger Sub of their obligations hereunder, and, during
such period, the Parent shall, and shall cause its subsidiaries, officers,
employees and representatives to, furnish promptly to the Company upon its
request (i) a copy of each report, schedule, registration statement and other
document filed by it during such period pursuant to the requirements of federal
or state securities laws and (ii) all other information concerning its
business, properties, financial condition, operations and personnel as such
other party may from time to time reasonably request. Except as required by
law, each of the Company, the Merger Sub, and the Parent will hold, and will
cause its respective directors, officers, employees, accountants, counsel,
financial advisors and other representatives and affiliates to hold, any
nonpublic information in confidence.
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(b) No
investigation pursuant to this Section 5.01 shall affect any representations or
warranties of the parties herein or the conditions to the obligations of the
parties hereto.
5.02 Best Efforts.
Upon the
terms and subject to the conditions set forth in this Agreement, each of the parties
agrees to use its best efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most expeditious
manner practicable, the Merger and the other transactions contemplated by this Agreement.
The Parent, the Merger Sub and the Company will use their best efforts and cooperate with
one another (i) in promptly determining whether any filings are required to be made or
consents, approvals, waivers, permits or authorizations are required to be obtained (or,
which if not obtained, would result in an event of default, termination or acceleration of
any agreement or any put right under any agreement) under any applicable law or regulation
or from any governmental authorities or third parties, including parties to loan
agreements or other debt instruments and including such consents, approvals, waivers,
permits or authorizations as may be required to transfer the assets and related
liabilities of the Company to the Merger Sub in promptly making any such filings, in
furnishing information required in connection therewith and in timely seeking to obtain
any such consents, approvals, permits or authorizations and (ii) in facilitating each
others due diligence investigations. The Parent and the Company shall mutually
cooperate in order to facilitate the achievement of the benefits reasonably anticipated
from the Merger.
5.03 Public Announcements.
The
Parent and the Merger Sub, on the one hand, and the Company, on the other hand, 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
transactions contemplated by this Agreement 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 or court process. The parties agree that the initial press release or
releases to be issued with respect to the transactions contemplated by this Agreement
shall be mutually agreed upon prior to the issuance thereof. Notwithstanding the
foregoing, Company may disclose the contemplated Merger in letters to the Companys
optionees for purposes of fulfilling the Companys obligations under the Company
Option Plan to the said optionees.
5.04 Expenses.
All costs and
expenses incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses.
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5.05 Directorships.
Upon the
Effective Time of the Merger, all officers of the Parent shall have resigned and the
Parent shall have taken all action to cause HAN Jie, MA Qingwei, MA Junjie to be elected
to its Board of Directors and its officers to consist of the following: Mr. HAN Jie as the
Chairman of the Board, the CEO and acting CFO.
5.06 No Solicitation.
Except
as previously agreed to in writing by the other party, neither the Company or the Parent
shall authorize or permit any of its officers, directors, agents, representatives, or
advisors to (a) solicit, initiate or encourage or take any action to facilitate the
submission of inquiries, proposals or offers from any person relating to any matter
concerning any merger, consolidation, business combination, recapitalization or similar
transaction involving the Company or the Parent, respectively, other than the transaction
contemplated by this Agreement or any other transaction the consummation of which would or
could reasonably be expected to impede, interfere with, prevent or delay the Merger or
which would or could be expected to dilute the benefits to the Company of the transactions
contemplated hereby. The Company or the Parent will immediately cease and cause to be
terminated any existing activities, discussions and negotiations with any parties
conducted heretofore with respect to any of the foregoing.
ARTICLE VI:
CONDITIONS
PRECEDENT
6.01 Conditions to Each
Partys Obligation to Effect the Merger.
The respective obligation of each party
to effect the Merger is subject to the satisfaction or waiver on or prior to the Closing
Date of the following conditions:
(a) Opinions
of Counsel. Execution and delivery of the following: to the Company, an opinion
of counsel from the Parents legal counsel that the terms, conditions and
structure of this Merger satisfy Nevada law.
(b) No
Injunctions or Restraints. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect.
(c) No
Dissent. Holders of no more than five percent (5%) of the Merger Subs
Common Stock shall have dissented to the Merger.
(d) Auditor
Letter. Auditors bring down letter confirming the cancellation of all
liabilities of the Parent and its subsidiaries.
(e) Deliverables
of Parent. Parent shall deliver to the Sellers the following:
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(i) the
minute books of the Parent and any of its subsidiaries, including its corporate
seals, unissued stock certificates, stock registers, Certificate of
Incorporation, bylaws and corporate minutes;
(ii) information
on any bank accounts of the Parent and any of its subsidiaries and confirmation
of the cancellation of such bank accounts;
(iii) copies
of any material contracts of the Parent and any of its subsidiaries; and
(iv) a
certificate respecting the good standing of the Parent from the Secretary of
State of Nevada.
6.02 Conditions to Obligations of
the Parent and the Merger Sub.
The obligations of the Parent and the Merger Sub to
effect the Merger are further subject to the following conditions:
(a) Representations
and Warranties. The representations and warranties of the Company and Company
Subs set forth in this Agreement shall be true and correct in all material
respects, in each case as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date. The Parent shall have
received a certificate signed on behalf of the Company by the president of the
Company to such effect.
(b) Performance
of Obligations of the Company. The Company and Company Subs shall have
performed the obligations required to be performed by them under this Agreement
at or prior to the Closing Date (except for such failures to perform as have
not had or could not reasonably be expected, either individually or in the
aggregate, to have a material adverse effect with respect to the Company or
adversely affect the ability of the Company to consummate the transactions
herein contemplated or perform its obligations hereunder), and the Parent shall
have received a certificate signed on behalf of the Company by the president of
the Company to such effect.
(c) Consents,
etc. The Parent shall have received evidence, in form and substance reasonably
satisfactory to it, that such licenses, permits, consents, approvals,
authorizations, qualifications and orders of governmental authorities and other
third parties as necessary in connection with the transactions contemplated
hereby have been obtained.
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(d) No
Litigation. There shall not be pending or threatened by any Governmental Entity
any suit, action or proceeding (or by any other person any suit, action or
proceeding which has a reasonable likelihood of success), (i) challenging or
seeking to restrain or prohibit the consummation of the Merger or any of the
other transactions contemplated by this Agreement or seeking to obtain from the
Parent or any of its subsidiaries any damages that are material in relation to
the Parent and its subsidiaries taken as a whole, (ii) seeking to prohibit or
limit the ownership or operation by the Company, the Parent or any of its
subsidiaries of any material portion of the business or assets of the Company,
the Parent or any of its subsidiaries, or to dispose of or hold separate any
material portion of the business or assets of the Company, the Parent or any of
its subsidiaries, as a result of the Merger or any of the other transactions
contemplated by this Agreement, (iii) seeking to impose limitations on the
ability of the Parent or Merger Sub to acquire or hold, or exercise full rights
of ownership of, any shares of Company Common Stock or Common Stock of the
Surviving Corporation, including, without limitation, the right to vote the
Company Common Stock or Common Stock of the Surviving Corporation on all
matters properly presented to the shareholders of the Company or the Surviving
Corporation, respectively, or (iv) seeking to prohibit the Parent or any of its
subsidiaries from effectively controlling in any material respect the business
or operations of the Company.
(e) Due
Diligence Investigation. The Parent shall be satisfied with the results of its
due diligence investigation of the Company and Company Subs in its sole and
absolute discretion.
(f) The
Company shall file a Form 8-K with the SEC within four business days of the
Closing Date of the Merger containing information about the Merger and Pro
Forma financial statements of the Parent and the Company and audited financial
statements of the Company as required by Regulation S-K. Such Form 8-K shall be
in form and substance acceptable to Parent and its counsel prior to Closing.
6.03 Conditions to Obligation of
the Company.
The obligation of the Company to effect the Merger is further subject to
the following conditions:
(a) Representations
and Warranties. The representations and warranties of the Parent and the Merger
Sub set forth in this Agreement shall be true and correct in all material
respects, in each case as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date. The Company shall have
received a certificate signed on behalf of the Parent by the president of the
Parent to such effect.
(b) Performance
of Obligations of the Parent and the Merger Sub. The Parent and the Merger Sub
shall have performed the obligations required to be performed by them under
this Agreement at or prior to the Closing Date (except for such failures to
perform as have not had or could not reasonably be expected, either
individually or in the aggregate, to have a material adverse effect with
respect to the Parent or adversely affect the ability of the Parent to
consummate the transactions herein contemplated or perform its obligations
hereunder), and the Company shall have received a certificate signed on behalf
of the Parent by the president of the Parent to such effect.
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(c) No
Litigation. There shall not be pending or threatened any suit, action or
proceeding before any court, Governmental Entity or authority (i) pertaining to
the transactions contemplated by this Agreement or (ii) seeking to prohibit or
limit the ownership or operation by the Company, the Parent or any of its
subsidiaries, or to dispose of or hold separate any material portion of the
business or assets of the Company, the Parent or of its any subsidiaries.
(d) Consents,
etc. The Company shall have received evidence, in form and substance reasonably
satisfactory to it, that such licenses, permits, consents, approvals,
authorizations, qualifications and orders of governmental authorities and other
third parties as necessary in connection with the transactions contemplated
hereby have been obtained.
(e) Filing
of Merger Agreement. The Parent shall have filed or will promptly file after
the Closing Date in the office of the Secretary of State or other office of
each jurisdiction in which such filings are required for the Merger to become
effective.
(f) Resignations.
The Parent shall deliver to the Company written resignations of all of the
officers of the Parent and evidence of election of those new directors and
officers as further escribed in Section 5.06 herein.
(g) 8-K.
The Post Merger Company shall file a Form 8-K with the SEC within four days of
the closing of the Merger containing audited financial statements of the
Company as required by Regulation S-K.
ARTICLE VII:
TERMINATION, AMENDMENT AND WAIVER
7.01 Termination.
This Agreement
may be terminated and abandoned at any time prior to the Effective Time of
the Merger:
(a) by
mutual written consent of the Parent and the Company;
(b) by
either the Parent or the Company if any Governmental Entity shall have issued
an order, decree or ruling or taken any other action permanently enjoining,
restraining or otherwise prohibiting the Merger and such order, decree, ruling
or other action shall have become final and nonappealable;
(c) by
either the Parent or the Company if the Merger shall not have been consummated
on or before December 31, 2008 (other than as a result of the failure of the
party seeking to terminate this Agreement to perform its obligations under this
Agreement required to be performed at or prior to the Effective Time of the
Merger);
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(d) by
the Parent, if a material adverse change shall have occurred relative to the
Company;
(e) by
the Parent, if the Company willfully fails to perform in any material respect
any of its material obligations under this Agreement; or
(f) by
the Company, if the Parent or the Merger Sub willfully fails to perform in any
material respect any of their respective obligations under this Agreement.
7.02 Effect of Termination.
In
the event of termination of this Agreement by either the Company or the Parent as provided
in Section 7.01, this Agreement shall forthwith become void and have no effect, without
any liability or obligation on the part of the Parent, the Merger Sub or the Company,
other than the provisions of the last sentence of Section 5.01(a) and this Section 7.02.
Nothing contained in this Section shall relieve any party for any breach of the
representations, warranties, covenants or agreements set forth in this Agreement.
7.03 Amendment.
This Agreement
may not be amended except by an instrument in writing signed on behalf of each of the
parties.
7.04 Extension; Waiver.
Subject to Section 7.0 1(c), at any time prior to the Effective Time of the Merger, the
parties may (a) extend the time for the performance of any of the obligations or other
acts of the other parties, (b) waive any inaccuracies in the representations and
warranties contained in this Agreement or in any document delivered pursuant to this
Agreement, or (c) waive compliance with any of the agreements or conditions contained in
this Agreement. Any agreement on the part of a party to any such extension or waiver shall
be valid only if set forth in an instrument in writing signed on behalf of such party. The
failure of any party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
7.05 Procedure for Termination,
Amendment, Extension or Waiver.
A termination of this Agreement pursuant to Section
7.01, an amendment of this Agreement pursuant to Section 7.03 or an extension or waiver of
this Agreement pursuant to Section 7.04 shall, in order to be effective, require in the
case of the Parent, the Merger Sub or the Company, action by its Board of Directors.
7.06 Return of Documents.
In
the event of termination of this Agreement for any reason, the Parent and the Company will
return to the other party all of the other partys documents, work papers, and other
materials (including copies) relating to the transactions contemplated in this Agreement,
whether obtained before or after execution of this Agreement. The Parent and Company will
not use any information so obtained from the other party for any purpose and will take all
reasonable steps to have such other partys information kept confidential.
27
ARTICLE VIII:
INDEMNIFICATION AND RELATED MATTERS
8.01 Survival of Representations
and Warranties.
The representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective Time of the
Merger until the Settlement Date.
8.02 Indemnification.
(a) Irrespective
of any due diligence investigation conducted by the Company with regard to the
transactions contemplated hereby, the Parent shall indemnify and hold the
Company and each of its officers and directors (the Company
Representatives) harmless from and against any and all liabilities,
obligations, damages, losses, deficiencies, costs, penalties, interest and
expenses (collectively, Losses) arising out of, based upon,
attributable to or resulting from any and all Losses incurred or suffered by
the Company or any of the Company Representatives resulting from or arising out
of any breach of a representation, warranty or covenant made by the Parent as
set forth herein.
(b) The
Company shall indemnify and hold the Parent and each of its officers and
directors (the Parent Representatives) harmless from and against
any and all liabilities, obligations, damages, losses, deficiencies, costs,
penalties, interest and expenses (collectively, Losses) arising out
of, based upon, attributable to or resulting from any and all Losses incurred
or suffered by the Parent or any of the Parent Representatives resulting from
or arising out of any breach of a representation, warranty or covenant made by
Company as set forth herein.
28
8.03 Notice of
Indemnification.
In the event any proceeding shall be threatened or instituted or any
claim or demand shall be asserted in respect of which payment may be sought by the Parent
or any Parent Representative or by the Company or any Company Representative, against the
other, as the case may be (each an Indemnitee), under the provisions of this
Article VIII (an Indemnity Claim), the Indemnitee shall promptly cause written
notice of the assertion of any such Claim of which it has knowledge which is covered by
this indemnity to be forwarded to the Parent Representative, who shall be Paul Kelly, or
the Company. Any notice of an Indemnity Claim by reason of any of the representations,
warranties or covenants contained in this Agreement shall state specifically the
representation, warranty or covenant with respect to which the Indemnity Claim is made,
the facts giving rise to an alleged basis for the Claim, and the amount of the liability
asserted against the Indemnitor by reason of the Indemnity Claim. Within ten (10) days of
the receipt of such written notice, the Parent Representative or the Company, as the case
may be, shall notify the Indemnitee in writing of its intent to contest the
indemnification obligation (a Contest) or to accept liability hereunder. If
the Parent Representative or the Company, as the case may be, does not respond within ten
(10) days of the request of such written notice to such written notice, the Parent
Representative or the Company, as the case may be, will be deemed to accept liability as
it relates to the Merger Consideration. In such event, the Indemnitee will deliver a
Notice to the Parent that there is a determination of liability to this Section 8.03 and
the Parent shall be instructed to adjust the Merger Consideration. In the event of a
Contest, within ten (10) days of the receipt of the written notice thereof, the parties
will select arbitrators and submit the dispute to binding arbitration before the American
Arbitration Association at a venue to be located in New York City. The arbitrators shall
be selected by the mutual agreement of the parties. If the parties can not agree on the
arbitrator, each may select one arbitrator and the two designated arbitrators shall select
the third arbitrator. If the third arbitrator can not be agreed upon, the American
Arbitration Association in New York shall select the third arbitrator. A decision by the
individual arbitrator or a majority decision by the three arbitrators shall be final and
binding upon the parties. Such arbitration shall follow the rules of the American
Arbitration Association and must be resolved by the arbitrators within thirty (30) days
after the matter is submitted to arbitration. If the arbitration is ruled favorably for
Parent so that there is a determination of a Loss, the Indemnitee will deliver a Notice to
the Parent that there is a determination of liability pursuant to this Section 8.03 and
the Parent shall adjust the Merger Consideration Deposit accordingly.
ARTICLE IX:
Intentionally left blank and reserved.
29
ARTICLE X:
GENERAL
PROVISIONS
10.01 Notices.
All notices,
requests, claims, demands and other communications under this Agreement shall be in
writing and shall be deemed given if delivered personally or sent by facsimile, electronic
mail, or overnight courier (providing proof of delivery) to the parties at the following
addresses (or at such other address for a party as shall be specified by like notice):
(a)
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if
to the Parent or Parent Representative, to:
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NB Telecom, Inc.
106 May Drive
Saxonburg, Pennsylvania 16056
Attn: Paul Kelly
(724) 352-7606
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Jones, Haley & Mottern, P.C.
115 Perimeter Center Place, Suite 170
Atlanta,
Georgia 30346
Attn: Richard W. Jones
(770) 804-0500
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(b)
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if
to the Company, to:
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Favor Sea Limited
P.O. Box 957
Offshore Incorporations Centre
Road Town,
Tortola, British Virgin Islands
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Allbright Law Offices
Citigroup Tower
4/F No. 33
Hua Yuan Shi Qiao Road
Pudong
New Area Shanghai, 200120
Attn: Steve Zhu, Esq.
(021)-61059116
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Troutman Sanders LLP
The Chrysler Building
405 Lexington Avenue
New York, New
York 10174
Attention: Howard H. Jiang, Esq.
(212) 704-6063
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30
10.02 Definitions. For purposes
of this Agreement:
(a) an
affiliate of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such first person;
(b) material
adverse change or material adverse effect means, when used in
connection with the Company or the Parent, any change or effect that either
individually or in the aggregate with all other such changes or effects is
materially adverse to the business, assets, properties, condition (financial or
otherwise) or results of operations of such party and its subsidiaries taken as
a whole (after giving effect in the case of the Parent to the consummation of
the Merger);
(c) person means
an individual, corporation, partnership, joint venture, association, trust,
unincorporated organization or other entity; and
(d) a
subsidiary of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its board of Directors or
other governing body (or, if there are no such voting interests, fifty percent
(50%) or more of the equity interests of which) is owned directly or indirectly
by such first person.
10.03 Interpretation.
When a
reference is made in this Agreement to a Section, Exhibit or Schedule, such reference
shall be to a Section of, or an Exhibit or Schedule to, this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement. Whenever the
words include, includes or including are used in this
Agreement, they shall be deemed to be followed by the words without
limitation.
10.04 Entire Agreement; No
Third-Party Beneficiaries.
This Agreement and the other agreements referred to herein
constitute the entire agreement, and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter of this
Agreement. This Agreement is not intended to confer upon any person other than the parties
any rights or remedies.
10.05 Governing Law.
This
Agreement shall be governed by, and construed in accordance with, the laws of the State of
Nevada, regardless of the laws that might otherwise govern under applicable principles of
conflicts of laws thereof.
10.06 Assignment.
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. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
10.07 Enforcement.
The parties
agree that irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically the terms
and provisions of this Agreement in any court of the United States located in the State of
Nevada, this being in addition to any other remedy to which they are entitled at law or in
equity. In addition, each of the parties hereto (a) agrees that it will not attempt to
deny or defeat such personal jurisdiction or venue by motion or other request for leave
from any such court, and (b) agrees that it will not bring any action relating to this
Agreement or any of the transactions contemplated by this Agreement in any state court
other than such court.
31
10.08 Severability.
Whenever
possible, each provision or portion of any provision of this Agreement will be interpreted
in such manner as to be effective and valid under applicable law but if any provision or
portion of any provision of this Agreement is held to be invalid, illegal or unenforceable
in any respect under any applicable law or rule in any jurisdiction, such invalidity,
illegality or unenforceability will not affect any other provision or portion of any
provision in such jurisdiction, and this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or
portion of any provision had never been contained herein.
10.09 Counterparts.
This
Agreement may be executed in one or more identical counterparts, all of which shall be
considered one and the same instrument and shall become effective when one or more such
counterparts shall have been executed by each of the parties and delivered to the other
parties.
[Signature Page
Follows]
32
IN
WITNESS WHEREOF, the undersigned have caused their duly authorized officers to execute
this Agreement as of the date first above written.
PARENT:
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By:
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/s/ Paul Kelly
Name: Paul Kelly
Title: President
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MERGER SUB:
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CHINA
XD PLASTICS COMPANY LIMITED
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By:
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/s/ Paul Kelly
Name: Paul Kelly
Title: President
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SELLERS:
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/s/ PIAO Qiuyao
On behalf of XD. Engineering Plastics Company Limited and the Minority
Shareholders.
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COMPANY:
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By:
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_____________________
Name:
Title:
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33
Exhibit 10.2
NB TELECOM, INC.
CERTIFICATE OF
DESIGNATION
OF SERIES A CONVERTIBLE
PREFERRED STOCK
NB
Telecom, Inc. (the "Company"), a corporation organized and existing under Nevada
Revised Statutes of the State of Nevada, does hereby certify:
FIRST:
Pursuant to authority conferred upon the Board of Directors by its Certificate of
Incorporation, and pursuant to the provisions of Nevada Revised Statutes has adopted a
resolution on December 24, 2008, which is set forth below, to issue the number of shares
of the Series A Convertible Preferred Stock pursuant to a resolution dated December 24,
2008, a copy of which was filed with the State of Nevada.
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RESOLVED,
that pursuant to the authority expressly granted to and vested in the Board of Directors
of the Company by the provisions of the Certificate of Incorporation of the Company, as
amended, out of the authorized but unissued shares of Preferred Stock of the Company this
Board of Directors hereby creates a series of the Preferred Stock, par value $0.0001 per
share (the Preferred Stock), of the Company, and this Board of Directors
hereby fixes the powers, designations, preferences and relative, participating, optional
or other special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof (in addition to the powers, designations, preferences and
relative, participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, set forth in the Certificate of Incorporation of the
Company which are applicable to Preferred Stock of all series) as follows:
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|
1.
Designation
.
The designation of the series shall be Series A Convertible Preferred
Stock (the Series A Convertible Preferred Stock).
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|
2.
Number
.
The number of shares constituting the Series A Convertible Preferred Stock
shall be 1,000,000.
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|
3.
Liquidation
Preference
. (a) With respect to liquidation and any other class or series
of capital stock of the Company ranking senior to or on a parity with the
Series A Convertible Preferred Stock with respect to liquidation, in the event
of any liquidation, dissolution or winding up of the affairs of the Company,
whether voluntary or involuntary, the holders of record of the issued and
outstanding shares of Series A Convertible Preferred Stock (Holder)
shall be entitled to receive, out of the assets of the Company available for
distribution to the Holders of shares of Series A Convertible Preferred Stock,
prior and in preference to any distribution of any of the assets of the Company
to the holders of Common Stock and any other series of Preferred Stock ranking
junior to the Series A Convertible Preferred Stock with respect to liquidation
and any other class or series of capital stock of the Company ranking junior to
the Series A Convertible Preferred Stock with respect to liquidation, an amount
in cash equal to $22,000,000. If, upon such liquidation, dissolution or winding
up of the affairs of the Company, the assets of the Company distributable among
the Holders of Series A Convertible Preferred Stock and any other series of
Preferred Stock ranking on a parity therewith in respect thereto or any class
or series of capital stock of the Company ranking on a parity therewith in
respect thereto shall be insufficient to permit the payment in full to all such
Holders of shares of the preferential amounts payable to them, then the entire
assets of the Company available for distribution to such Holders of shares
shall be distributed ratably among such Holders in proportion to the respective
amounts that would be payable per share if such assets were sufficient to
permit payment in full. After payment of the full amount to which they are
entitled upon liquidation pursuant to this Section 3(a), the Holders of shares
of Series A Convertible Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Company. Neither a
consolidation or merger of the Company with another corporation or other entity
nor a sale, transfer, lease or exchange of all or part of the Companys
assets will be considered a liquidation, dissolution or winding up of the
affairs of the Company for purposes of this Section 3(a).
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(b) No
Preference on Common Stock. The preference in liquidation provided in the above
Section 3(a) shall not apply if the Holder of the Series A Convertible
Preferred Stock has converted the Series A Convertible Preferred Stock into
Common Stock of the Company, which shall be ranked junior to Preferred Stock.
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4.
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Mandatory Conversion:
Convertible Preferred Stock shall be mandatorily
converted as follows:
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|
(a) Upon
the successful increase of the total authorized shares of common stock of the
Company, the Company shall automatically convert such Series A Convertible
Preferred Stock into fully paid and nonassessable shares of Common Stock of the
Company at the approximate ratio of one for thirty-nine shares of the Common
Stock of the Company (Conversion Ratio) so that all 1,000,000
shares of Convertible Series A Preferred Stock shall convert into 38,194,072
shares of Common Stock of the Company.
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|
(b) Costs.
The Company shall pay all documentary fee attributable to the issuance or
delivery of shares of Common Stock upon conversion of any shares of Series A
Convertible Preferred Stock; provided that the Company shall not be required to
pay any taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificate for such shares in a name other than
that of the Holder of the shares of Series A Preferred Stock in respect of
which such shares are being issued.
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(c)
No
dividend
. Series A Preferred Stock shall carry no interest nor dividend
during its existence
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FURTHER
RESOLVED, that any and all actions heretofore taken by the Company within the terms of
any of the foregoing resolutions are hereby ratified and confirmed.
SECOND:
That said determination of the powers, designation, preferences and the relative,
participating, optional or other rights, and the qualifications, limitations or
restrictions thereof, relating to said series of Preferred Stock, was duly made by the
Board of Directors of the Company pursuant to the provisions of the Certificate of
Incorporation of the Company, as amended, and in accordance with the provisions of Nevada
Revised Statutes of the State of Nevada.
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By:
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/s/ Paul Kelly
Paul Kelly, Director
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By:
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/s/ Craig Burton
Craig
Burton, Director
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By:
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/s/ Leonard J. Battaglia
Leonard J. Battaglia,
Director
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Exhibit 10.3
NB TELECOM, INC.
CERTIFICATE OF
DESIGNATION
OF SERIES B PREFERRED STOCK
NB
Telecom, Inc. (the Company), a corporation organized and existing under Nevada
Revised Statutes of the State of Nevada, does hereby certify:
FIRST:
Pursuant to authority conferred upon the Board of Directors by its Certificate of
Incorporation, and pursuant to the provisions of Nevada Revised Statutes has adopted a
resolution on December 24, 2008, which is set forth below, to issue the number of shares
of the Series B Preferred Stock pursuant to a resolution dated December 24, 2008, a copy
of which was filed with the State of Nevada.
RESOLVED,
that pursuant to the authority expressly granted to and vested in the Board of Directors
of the Corporation by the provisions of the Certificate of Incorporation of the
Corporation, as amended, out of the authorized but unissued shares of Preferred Stock of
the Corporation this Board of Directors hereby creates a series of the Preferred Stock,
par value $.0001 per share (the Preferred Stock), of the Corporation, and this
Board of Directors hereby fixes the powers, designations, preferences and relative,
participating, optional or other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof (in addition to the powers,
designations, preferences and relative, participating, optional or other special rights,
and the qualifications, limitations or restrictions thereof, set forth in the Certificate
of Incorporation of the Corporation which are applicable to Preferred Stock of all series)
as follows:
1.
Designation
.
The designation of the series shall be Series B Preferred Stock (the
Series B Preferred Stock).
2.
Number
.
The number of shares constituting the Series B Preferred Stock shall be one
million (1,000,000).
3.
Voting
Rights
.
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a.
General
Voting Rights
. The one million (1,000,000) Series B Preferred Stock shall
have an aggregate voting power of 40% of the combined voting power of the
entire Companys shares, Common Stock and Preferred Stock as long as the
Company is in existence. Each holder of the Series B Preferred Stock shall have
full voting rights and powers equal to the voting rights and powers of the
holders of Common Stock, and shall be entitled, notwithstanding any provision
hereof, to notice of any stockholders meeting in accordance with the
by-laws of the Corporation, and shall be entitled to vote, together with
holders of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote.
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b.
Consent
Needed for Authorization
. Without the vote or consent of the holders of at
least a majority of the shares of Series B Preferred Stock then outstanding,
the Corporation may not (i) authorize, create or issue, or increase the
authorized number of shares of, any class or series of capital stock ranking
prior to or on a parity with the Series B Preferred Stock, (ii) authorize,
create or issue any class or series of common stock of the Corporation other
than the Common Stock, (iii) authorize any reclassification of the Series B
Preferred Stock, (iv) authorize, create or issue any securities convertible
into or exercisable for capital stock prohibited by Section 3(b)(i) or (ii),
(v) amend this Certificate or (vi) enter into any merger or reorganization, or
disposal of assets involving 20% of the total capitalization of the
Corporation.
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4.
Liquidation
.
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a.
Preference
.
Subject to the rights of the holders of any other series of Preferred Stock
ranking senior to or on a parity with the Series B Preferred Stock with respect
to liquidation and any other class or series of capital stock of the
Corporation ranking senior to or on a parity with the Series B Preferred Stock
with respect to liquidation, in the event of any liquidation, dissolution or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
the holders of record of the issued and outstanding shares of Series B
Preferred Stock shall be entitled to receive, out of the assets of the
Corporation available for distribution to the holders of shares of Series B
Preferred Stock, prior and in preference to any distribution of any of the
assets of the Corporation to the holders of Common Stock and any other series
of Preferred Stock ranking junior to the Series B Preferred Stock with respect
to liquidation and any other class or series of capital stock of the
Corporation ranking junior to the Series B Preferred Stock with respect to
liquidation, an amount in cash per share equal to $1.00, plus an amount equal
to all dividends accrued and unpaid on each such share (whether or not
declared) up to the date fixed for distribution. If, upon such liquidation,
dissolution or winding up of the affairs of the Corporation, the assets of the
Corporation distributable among the holders of Series B Preferred Stock and any
other series of Preferred Stock ranking on a parity therewith in respect
thereto or any class or series of capital stock of the Corporation ranking on a
parity therewith in respect thereto shall be insufficient to permit the payment
in full to all such holders of shares of the preferential amounts payable to
them, then the entire assets of the Corporation available for distribution to
such holders of shares shall be distributed ratably among such holders in
proportion to the respective amounts that would be payable per share if such
assets were sufficient to permit payment in full. After payment of the full
amount to which they are entitled upon liquidation pursuant to this Section
4(a), the holders of shares of Series B Preferred Stock will not be entitled to
any further participation in any distribution of assets by the Corporation.
Neither a consolidation or merger of the Corporation with another corporation
or other entity nor a sale, transfer, lease or exchange of all or part of the
Corporations assets will be considered a liquidation, dissolution or
winding up of the affairs of the Corporation for purposes of this Section 4(a).
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b.
Adjustments
.
The liquidation preference provided for herein with respect to the Series B
Preferred Stock shall be equitably adjusted to reflect any stock dividend,
stock distribution, stock split or reverse stock split, combination of shares,
subdivision of shares or reclassification of shares with respect to the Series
B Preferred Stock.
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5.
Dividends.
The holders of the Series B Preferred Stock shall not be entitled to receive
dividends per share of Series B Preferred Stock.
6.
Redemption
.
The Corporation shall have no rights to redeem Series B Preferred Stock.
SECOND:
That said determination of the powers, designation, preferences and the relative,
participating, optional or other rights, and the qualifications, limitations or
restrictions thereof, relating to said series of Preferred Stock, was duly made by the
Board of Directors of the Company pursuant to the provisions of the Certificate of
Incorporation of the Company, as amended, and in accordance with the provisions of Nevada
Revised Statutes of the State of Nevada.
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By:
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/s/ Paul Kelly
Paul Kelly, Director
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|
By:
|
/s/ Craig Burton
Craig Burton, Director
|
|
By:
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/s/ Leonard Battaglia
Leonard Battaglia,
Director
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Exhibit 10.4
Contract NO. HXD20080901
Asset Purchase Contract
Between
Harbin Xinda
Macromolecule Material Co., Ltd.
And
Harbin Xinda High-tech
Co., Ltd.
September
20
th
, 2008
Table of Contents
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ARTICLE 1
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SALE OF ASSETS
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1
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ARTICLE 2
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TRANSFER AND REGISTRATION OF TITLE CHANGE
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1
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ARTICLE 3
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ARTICLE 3 PURCHASE PRICE AND PAYMENT
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2
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ARTICLE 4
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TAXES AND OTHER EXPENSES
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3
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ARTICLE 5
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ARTICLE 5 REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS OF SELLER
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3
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ARTICLE6
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REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS OF PURCHASER
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4
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ARTICLE 7
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BREACH OF PURCHASER
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5
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ARTICLE 8
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BREACH OF SELLER
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5
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ARTICLE 9
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INDEMNITIES
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6
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ARTICLE 10
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NOTICE
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6
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ARTICLE 11
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TERMINATION
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7
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ARTICLE 12
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GOVERNING LAW AND DISPUTE RESOLUTION
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7
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ARTICLE 13
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FORCE MAJEURE
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8
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ARTICLE 14
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MISCELLANEOUS
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9
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Appendix A ASSETS LIST (See
Attachment)
Appendix B REPORT OF ASSETS APPRAISAL (See Attachment)
Appendix C COMMITMENT
LETTER
The
Asset Purchase Contract (this Contract) is entered into as of September 20th,
2008 by the following parties in Harbin, Heilongjiang Province, China.
(1) Harbin
Xinda Macromolecule Material Co., Ltd.(hereinafter called Purchaser), a
business entity incorporated under the laws of the Peoples Republic of China(China),
was registered in No.9, QinLing Road, Yingbin Road Centralized District, Harbin
Development Zone, Heilongjiang Province, China; and
(2) Harbin
Xinda High-tech Co., Ltd.(hereinafter called Seller), a business
entity incorporated under the laws of the Peoples Republic of China(China),
was registered in No.9, Dalian North Road, Haping Road Centralized District ,
Harbin Development Zone, Heilongjiang Province, China
Purchaser
and Seller here are called party respectively and, collectively the
parties in the Contract. Both parties agree to the following agreements under
negotiation.
ARTICLE 1
SALE OF ASSETS
1.1
The parties agree to: the purchaser purchases plants, lands, equipments and subsidiary
construction and facilities listed in Appendix A (hereinafter called assets)
from the seller. Appendix A should be the acceptance basis of sellers transferring
assets to purchaser.
1.2
The assets appraisal prices are detailed in Appendix B. Appendix B is the basis of
determining the price by parties.
ARTICLE 2
TRANSFER AND
REGISTRATION OF TITLE CHANGE
1
2.1
The Seller should start transferring assets to purchaser on the date of this contract.
All equipments and subsidiary construction and facilities in the plant listed in Appendix
A should be checked, inspected and transferred; the transfer of plant listed in Appendix
A should be based on transferring of the keys.
2.2
Any custodial responsibilities and losses of the transferred assets shall be transferred
to purchaser as of the date of transferring; meanwhile, any right of managing, using,
disposal and earning of the transferred assets shall be transferred to purchaser as of
the date of transferring.
2.3
The parties agree to:
2.3.1
For the part of assets that are required not to be registered in title change, the
transferring date of ownership should be the actual date of transferring.
2.3.2
For the part of assets that are required to be registered in title change, the change
date of ownership should be assured under relevant laws. Any party has obligations to
assist the other to conduct the registration formalities of changing the title, include,
but not limited to, signing the individual transaction file in connect with this contract
and conducting relevant formalities(hereinafter called obligations of mutual
assistance )
ARTICLE 3
ARTICLE 3 PURCHASE
PRICE AND PAYMENT
3.1
Based on the reference of Report of Assets Appraisal (detailed in Appendix B), the
parties agree to confirm the assets price under this contract which is 240 million RMB.
Purchaser should pay the assets price to seller according to this contract.
3.2
The date and amount of purchaser's payment to seller are as follows:
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1 50 million RMB to be paid before Dec.31st, 2008
2 190 million RMB to be paid before
Sep.30th, 2009
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2
ARTICLE 4
TAXES AND OTHER
EXPENSES
Purchaser
and seller should bear any expenses with respect to the negotiation, drafting, signing and
fulfilling of this contract. The taxes generated by this contract should be paid by
taxpayer set forth in laws.
ARTICLE 5
ARTICLE 5
REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS OF SELLER
The
seller acknowledges that, the purchaser shall sign this contract based on the truth of
following representations and warranties by seller. The sellers representations,
warranties and undertakings to purchaser are as follows:
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(a) The
seller has all rights and authorization of signing, conducting and
delivering of this contract and carrying out the proposed transactions in
this contract, and the seller is incorporated or formed formally in
accordance to applicable local laws.
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(b) After
singed and delivered this contract, the seller must fulfill all proposed
transactions in this contract, and takes all necessary corporate or other
actions to get the formal approval and authorization.
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(c) If
the purchaser authorizes, signs and delivers this contract formally, it
constitutes legal, effective and binding obligations to seller and can be
conducted forcibly according to the rules of this contract unless this
clauses are limited by the laws of bankruptcy, insolvency, restructuring,
deferred payment and similar laws that affect the right of creditor; and
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(d) The
sellers signing, delivery and fulfillment of this contract and the
completion of proposed transaction in this contract will not violate the
rules of the sellers organization and the corporate governing; or
violate any laws, regulations, contracts and judgments that have binding
obligations to the seller.
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(e) The
seller promises that it will not engage in the business that will compete
with purchaser as of the date of signing this contract.
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(f) The
seller will bear all interests, repayments of credit, equipment debts and
project payments raised during the period of this contract.
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ARTICLE 6
REPRESENTATIONS,
WARRANTIES AND UNDERTAKINGS OF PURCHASER
The
purchaser acknowledges that, the seller shall sign this contract prior to the truth of the
following representations and warranties by purchaser. The purchasers
representations, warranties and undertakings to purchaser are as follows:
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(a) The
purchaser has all rights and authorization of signing, conducting and
delivering of this contract and carrying out the proposed transactions in
this contract, and the purchaser is incorporated or formed formally in
accordance to applicable local laws.
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(b) After
signed and delivered this contract, the purchaser must conduct all
proposed transactions stated in this contract, and take all necessary
corporate or other behaviors to get the formal approval and authorization.
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(c) If
the seller authorizes, signs and delivers this contract formally, it
constitutes legal, effective and binding obligations to purchaser and can
be conducted forcibly according to the rules of this contract unless this
clauses are limited by the laws of bankruptcy, insolvency, restructuring,
deferred payment and similar laws that affect the right of creditor; and
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(d) The
purchasers signing, delivery and fulfillment of this contract and the
completion of proposed transaction in this contract will not violate the
rules of the partys organization and the corporate governing; or
violate any laws, regulations, contracts and judgments that have binding
obligations to the party.
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(e) If
the purchaser can not make the payment under the term of payment, the
purchaser will bear all interests, repayments of credit, equipment debts
and project payments of seller.
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ARTICLE 7
BREACH OF PURCHASER
If
purchaser has the following actions without prior writing consent of seller, the purchaser
should make compensations to seller in order to indemnify the seller from damages.
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(a) If
the purchaser defaults in payment exceeding 30 days, the purchaser should
bear all interest costs occurred after the maturity date of payment.
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(b) Failing
to discharge or fulfill proper mutual assistance obligation.
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ARTICLE 8
BREACH OF SELLER
If
the seller has following actions, the seller should make compensations to purchaser in
order to indemnify the purchaser from damages:
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(a) Failing
to transfer assets to purchaser in time exceeding 30 days, and failing to
transfer in time after the purchasers reasonable demanding.
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(b) Failing
to discharge or fulfill proper mutual assistance obligation.
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ARTICLE 9
INDEMNITIES
If
any representations, warranties or undertakings of any party in this contract or relevant
document delivered according to this contract are inaccurate, or any violation of the
representation, warranties and undertakings bring about any claim of right, damages,
indemnity, expense and cost (including reasonable legal fee, attorney fee and expense),
the party (the indemnifying Party) should make compensation to the other party
in order to indemnify it from damages.
ARTICLE 10
NOTICE
All
notices, requests, demands, permission and other communications (Notices)
shall be delivered to the other party by hand delivery, or mail, or facsimile
transmission, addressed as set forth on the first page of this agreement as well as the
other address or facsimile which have been given by each party. Such notices shall be in
compliance with this provision.
Any
notices shall be deemed to have been delivered under the following circumstance:
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(a) Such
notices shall be deemed upon delivered by hand delivery or express shipping
company
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(b) Or,
upon the third day following receipt of registered mail or certified mail with
postage prepaid.
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(c) Or,
upon the date when delivered by facsimile (the sender shall hold the
transmission confirmation report which shows the content, recipients
number, transmission page and date.)
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ARTICLE 11
TERMINATION
11.1
Termination
This
Agreement shall be terminated upon the date when fully executed except additional
information under this Agreement.
11.2
Contingent
If
terminated under this provision, this Agreement shall be no effective. However, both
parties shall be under the binding of provision 10.1, 10.2, 12.1, 12.2 and this provision.
No provisions shall be deemed to release any liabilities against any party of breach of
this Agreement prior to the date of termination.
ARTICLE 12
GOVERNING LAW AND
DISPUTE RESOLUTION
12.1
Governing Law
The
signing, effectiveness, explanation, execution and dispute resolution of this Agreement
shall be governed by and construed in accordance with Chinese Law.
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12.2
Dispute Resolution
Any
dispute, disagreement or claim caused by this Agreement or relevance to this Agreement, or
execution, explanation, breach or effectiveness, or relevant to all above, shall be
resolved by friendly negotiation. Negotiation shall start when delivery the requirement of
such negotiation in writing, which requires to note the nature of dispute. If the dispute
will not be resolved within 30 days after the said date of notice, the dispute shall bring
to litigation following by the notice from one party to another party.
12.3
Litigation
Litigation
shall be raised and be accepted by the Intermediate Peoples Court of Harbin City.
12.4
Property Preservation
In
order to protect the right of both parities and provide solution, any party has the right
to ask for property preservation before the final award by the court in accordance with
law. During the period of dispute resolution, both parties shall continue performing other
provision of this Agreement except dispute matter.
ARTICLE 13
FORCE MAJEURE
As
the incidents that the blocked side cant forecast and prevent or avoid it from
occurring, such as earthquakes, typhoons, floods (but except for the negligence or
intentional fires caused by either party of this agreement , employees or guests), fire
emergency (but except for the negligence or intentional fires caused by either party of
this agreement , employees or guests) and other natural disasters, wars, riots and similar
military actions, civil commotion, as well as strikes, sabotage, epidemic and the embargo
, expropriation, injunction or other restrictions and actions of the government (
force majeure), are directly to cause that either party can not fulfill the
obligations in whole or in part under the agreement (blocked party), as long
as meeting all the following situations, the blocked side should be regarded as not in
breach of the contract.
8
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(a)
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If the blocked side encounters the work stoppage, obstacles or delays due to the
force majeure as a direct result of the incident when it carries out the
obligations of the contract ; and:
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(b)
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When force majeure takes place, the blocked side has noticed the other side, and
provided the written materials concerning it within 30 days after the force
majeure takes place, which includes specifications of stating delays in
performances or the parts about the reason to fulfill this agreement.
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ARTICLE 14
MISCELLANEOUS
14.1
Abstention
As
any of the parties waives the right of this agreement, it must sign up a written document
as the proof. The right, power or remedy of any party under delay or failure to exercise
this agreement should not be regarded as abstention. Exercising the right, power or remedy
under the part of this agreement should not rule out further exercise of such rights,
powers or remedies or the exercise of other rights, powers or remedies. Without limiting
the provisions above, if one party waives to investigate the other partys breach to
the provisions of this agreement, it should not be viewed as its giving up investigating
the breach of this provision or any other provision in the further.
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14.2
No transferring or subletting
This
contrast shall be binding upon and inure to the benefit of the parties hereto, their
successors and assigns. Without the prior written agreement of the other side, either
party may not transfer its present rights and obligations under the agreement.
14.3
Entire Agreement
The
entire undertakings and agreements that have reached by both sides about the main issues
are used to replace the agreements and understandings that were reached by both sides
about the main issues of this agreement before.
14.4
Remedy
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(a)
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Both parties confirm that the damages may not be sufficient to compensate for
the breach of agreement loss. Each party has the right to prohibit the violation
of this agreement, the enforcement of agreement terms and provisions of the
injunction or other relief.
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(b)
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The rights of each party under the agreement belong to the accumulative rights;
any party can own all other rights or the rights after remedies according to the
law.
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14.5
Not constituting an employment or partnership
Without
any regulation under this agreement should be constituted or be deemed as constitute
Employer-employee relationship or partnership.
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14.6
Divisibility
Any
or each of the obligations should be treated as the independent obligation under this
agreement and any or more obligation in whole or in part will be enforced separately when
it cant be enforced. If any or more terms of this agreement cant be enforced,
it should be deleted from the agreement, but any of the deletions will not affect other
enforcement without deletion under this agreement.
14.7
Leasing Agreement
The
same month as the agreement being signed is the termination month of leasing agreement,
the purchaser will never pay the rent since October, 2008. The original leasing agreement
is abolished.
14.8
Undertaking
In
order to avoid the horizontal competition that may arise between Harbin Xinda
Macromolecule Material Co., Ltd. and maintain the benefits of all shareholders in the
company to keep long-term and stable development of the enterprise, the seller makes
commitment in the form of a commitment letter which is detailed in Appendix C.
14.9
Amendment
The
contract can be amended, modified and supplemented only if the both parties sign the
written agreement upon the contract.
[The
remainder of this page intentionally left blank]
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IN WITNESS WHEREOF, the parties
hereto have executed this contract as of the date and year first above written.
SELLER: HARBIN XINDA HIGH- TECH CO.,
LTD.
By: _______________
Date:________________
PURCHASER: HARBIN XINDA
MACROMOLECULE MATERIAL CO., LTD.
By: __________________
Date:___________________
Appendix A ASSETS LIST (See
Attachment)
Appendix B REPORT OF ASSETS APPRAISAL (See Attachment)
Appendix C COMMITMENT
LETTER
Commitment Letter
In order to avoid the horizontal
competition that may arise between Harbin Xinda Macromolecule Material Co., Ltd., Our
Company swears in the form of Commitment Letter, as follows:
Our company guarantees that we will
never engage in competitive business activities or pose a competitive threat to the
primary business of HARBIN XINDA MACROMOLECULE MATERIAL CO., LTD. directly, indirectly or
any other way inside or outside China.
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HARBIN
XINDA HIGH-TECH CO., LTD.
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EXHIBIT 16.1
December 31, 2008
Securities and Exchange
Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: NB Telecom, Inc.
Commission
File No. 333-134073
We have read the statements that we
understand NB Telecom, Inc. will include in Item 4.01 of the Form 8-K report it will file
regarding the recent change of auditors. We agree with such statements made regarding our
firm.
We have no basis to agree or disagree
with any other statements made in the Form 8-K.
Respectfully submitted,
Certified Public Accountants
Appendix I
AMENDMENT TO ARTICLES
OF INCORPORATION
OF
CHINA XD PLASTICS COMPANY LIMITED
China Xd Plastics Company
Limited, a corporation organized and existing under the laws of the State of
Nevada, hereby certifies asfollows:
1.
The name of the corporation is China Xd Plastics Company Limited
The date of filing of its
original Articles of Incorporation with the Secretary of State was December 1,
2005.
2.
This Amended Articles of Incorporation amends the provisions of the Articles of
Incorporation of this corporation in full.
3.
The text of the Articles of Incorporation as amended and heretofore is hereby
amended to read as herein set forth in full:
ARTICLES OF
INCORPORATION
OF
CHINA XD PLASTICS COMPANY LIMITED
I.
The
total number of shares of all classes which the Corporation has authority to issue is
550,000,000, of which 500,000,000 shares shall be designated as Common Stock
with a par value of $.0001 per share, and 50,000,000 shares shall be designated as
Preferred Stock with a par value of $.0001 per share.
The
designations and the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and conditions of
redemption of the shares of each class of stock are as follows:
A.
Preferred Stock
The
Preferred Stock may be issued from time to time by the Board of Directors as shares of one
or more series. The description of shares of Preferred Stock, including any preferences,
conversion and other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption shall be as set forth in
resolutions adopted by the Board of Directors, and Articles of Amendment shall be filed as
required by law with respect to issuance of such Preferred Stock, prior to the issuance of
any shares of Preferred Stock.
The
Board of Directors is expressly authorized, at any time, by adopting resolutions providing
for the issuance of, dividing of such shares into series or providing for a change in the
number of, shares of any Preferred Stock and, if and to the extent from time to time
required by law, by filing Articles of Amendment which are effective without Shareholder
action to increase or decrease the number of shares included in the Preferred Stock, but
not below the number of shares then issued, and to set or change in any one or more
respects the designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms and conditions of
redemption relating to the shares of Preferred Stock. Notwithstanding the foregoing, the
Board of Directors shall not be authorized to change the rights of holders of the Common
Stock of the Corporation to vote one vote per share on all matters submitted for
shareholder action. The authority of the Board of Directors with respect to the Preferred
Stock shall include, but not be limited to, setting or changing the following:
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1.
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the
annual dividend rate, if any, on shares of Preferred Stock, the times of
payment and the date from which dividends shall be accumulated, if
dividends are to be cumulative;
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2.
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whether
the shares of Preferred Stock shall be redeemable and, if so, the
redemption price and the terms and conditions of such redemption;
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3.
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the
obligation, if any, of the Corporation to redeem shares of Preferred Stock
pursuant to a sinking fund;
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4.
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whether
shares of Preferred Stock shall be convertible into, or exchangeable
for, shares of stock of any other class or classes and, if so, the
terms and conditions of such conversion or exchange, including the
price or prices or the rate or rates of conversion or exchange and
the terms of adjustment, if any;
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5.
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whether
the shares of Preferred Stock shall have voting rights, in addition to
the voting rights provided by law, and, if so, the extent of such
voting rights;
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6.
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the
rights of the shares of Preferred Stock in the event of voluntary or
involuntary liquidation, dissolution or winding-up of the
Corporation; and
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7.
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any
other relative rights, powers, preferences, qualifications, limitations or
restrictions thereof relating to the Preferred Stock.
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The
shares of Preferred Stock of any one series shall be identical with each other in all
respects except as to the dates from and after which dividends thereon shall cumulate, if
cumulative.
B
COMMON STOCK
Subject
to all of the rights of the Preferred Stock as expressly provide herein, by law or by the
Board of Directors pursuant to this Article I, the Common Stock of the Corporation shall
possess all such rights and privileges as are afforded to capital stock by applicable law
in the absence of any express grant of rights or privileges in the Corporations
Articles of Incorporation, including, but not limited to, the following rights and
privileges:
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(1)
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dividends
may be declared and paid or set apart for payment upon the Common
Stock out of any assets or funds of the Corporation legally available
for the payment of dividends;
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(2)
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the
holders of Common Stock shall have the unlimited right to vote for the
election of directors and on all other matters requiring stockholder
action, each share being entitled to one vote; and
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(3)
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upon
the voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation the net assets of the Corporation available for
distribution shall be distributed pro rata to the holders of the
Common Stock in accordance with their respective rights and
interests.
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II.
The
governing board of the corporation shall be styled as a Board of Directors,
and any member of said Board shall be styled as a Director.
The
number of members constituting the first Board of Directors of the corporation is three;
and the name and the post office box or street address, either residence or business, of
each of said members are as follows:
NAME
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ADDRESS
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Jie Han
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c/o Harbin Xinda Macromolecule Material Co., Ltd., No. 9
Qinling Road, Yingbin Road Centralized Industrial Park,
Harbin Development Zone, Heilongjiang Province, P.R. China.
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Qingwei Ma
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c/o Harbin Xinda Macromolecule Material Co., Ltd., No. 9
Qinling Road, Yingbin Road Centralized Industrial Park,
Harbin Development Zone, Heilongjiang Province, P.R. China.
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Junjie Ma
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c/o Harbin Xinda Macromolecule Material Co., Ltd., No. 9
Qinling Road, Yingbin Road Centralized Industrial Park,
Harbin Development Zone, Heilongjiang Province, P.R. China.
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The
number of directors of the corporation may be increased or decreased in the manner
provided in the Bylaws of the corporation; provided, that the number of directors shall
never be less than one. In the interim between elections of directors by stockholders
entitled to vote, all vacancies, including vacancies caused by an increase in the number
of directors and including vacancies resulting from the removal of directors by the
stockholders entitled to vote which are not filled by said stockholders, may be filled by
the remaining directors, though less than a quorum.
III.
The
personal liability of the directors of the corporation is hereby eliminated to the fullest
extent permitted by the General Corporation Law of the State of Nevada, as the same may be
amended and supplemented.
IV.
The
corporation shall, to the fullest extent permitted by the General Corporation Law of the
State of Nevada, as the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said Law from and against any and all
of the expenses, liabilities, or other matters referred to in or covered by said Law, and
the indemnification provided for herein shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under any Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee, or agent and
shall inure to the benefit of the heirs, executors, and administrators of such a person.
V.
The
Board of Directors of the Corporation may, from time to time, and at its discretion, cause
the Corporation to purchase its own shares and such shares may be reissued by the
Corporation.
VI.
The
corporation reserves the right to amend, alter, change, or repeal any provision contained
in these Articles of Incorporation in the manner now or hereafter prescribed by statute,
and all rights conferred upon stockholders herein are granted subject to this reservation.
VII.
The
Board of directors is hereby authorized to take any and all actions without shareholder
approval, which are allowed by the General Corporation Law of the state of Nevada.
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