-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mh+Fqofan8gySKjs132TUc86BmBI2+7dWWgwlvbGFoTMx1IQ8h6QeWfP+ByTZPUC j7bOgCZuzT8EfvPEIHSLjQ== 0001019687-05-001957.txt : 20050715 0001019687-05-001957.hdr.sgml : 20050715 20050714203928 ACCESSION NUMBER: 0001019687-05-001957 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050715 DATE AS OF CHANGE: 20050714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: China Evergreen Environmental CORP CENTRAL INDEX KEY: 0001083459 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 880409151 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-26175 FILM NUMBER: 05955674 BUSINESS ADDRESS: STREET 1: 5/F GUOWEI BLDG STREET 2: 73 XIANLIE MIDDLE ROAD CITY: GUANGZHOU, GUANGDONG STATE: F4 ZIP: 00000 BUSINESS PHONE: 86-20-8432-7909 MAIL ADDRESS: STREET 1: 5/F GUOWEI BLDG STREET 2: 73 XIANLIE MIDDLE ROAD CITY: GUANGZHOU, GUANGDONG STATE: F4 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: DISCOVERY INVESTMENTS INC DATE OF NAME CHANGE: 19990407 10KSB/A 1 china_10ksba-123104.txt - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-KSB/A |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2004 -OR- |_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 000-26175 -------------------- CHINA EVERGREEN ENVIRONMENTAL CORPORATION (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER) NEVADA 88-0409151 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) FLOOR 5, GUOWEI BUILDING 73 XIANLIE MIDDLE ROAD GUANGZHOU, GUANGDONG, CHINA 510095 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (86-20) 87327909 (ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE) -------------------- Securities registered pursuant to section 12 (b) of the Act: NONE Securities registered pursuant to section 12(g) of the Act: COMMON STOCK, PAR VALUE $.03 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB/A or any amendment to this Form 10-KSB/A. |X| The registrant's revenues for its most recent fiscal year were $9,366,513. The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of July 12, 2005 was approximately $4,362,240. The number of shares of the common outstanding as of July 12, 2005 was 99,999,997. DOCUMENTS INCORPORATED BY REFERENCED: NONE. EXPLANATORY NOTE China Evergreen Environmental Corporation is filing this Amendment No. 1 to its Annual Report on Form 10-KSB for the year ended December 31, 2004 to provide additional disclosure concerning the business of the company and to file as exhibits certain contracts. The Items in our Form 10-KSB for the year ended December 31, 2004 that are substantially amended and restated are as follows: Part I: Item 1 - Description of Business; and Part III: Item 13 - Exhibits. The remaining Items contained within this Amendment No. 1 to Annual Report on Form 10-KSB substantially consist of all other Items originally contained in our Annual Report on Form 10-KSB for the year ended December 31, 2004 in the form filed on April 15, 2005, except for certain editorial changes of a non-substantive nature and to update certain other disclosures. -i- UNLESS OTHERWISE INDICATED, ALL REFERENCES TO OUR COMPANY INCLUDE OUR WHOLLY AND MAJORITY OWNED SUBSIDIARIES. ALL OF OUR SALES AND EXPENSES ARE DENOMINATED IN RENMINBI ("RMB"), THE NATIONAL CURRENCY OF THE PEOPLE'S REPUBLIC OF CHINA. SOLELY FOR THE CONVENIENCE OF THE READER, CERTAIN FINANCIAL INFORMATION AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004 HAVE BEEN CONVERTED INTO UNITED STATES DOLLARS. ASSETS AND LIABILITIES ARE TRANSLATED AT THE EXCHANGE RATE IN EFFECT AT PERIOD END. INCOME STATEMENT ACCOUNTS ARE TRANSLATED AT THE AVERAGE RATE OF EXCHANGE PREVAILING DURING THE PERIOD. NO REPRESENTATION IS MADE THAT THE RMB AMOUNTS COULD HAVE BEEN, OR COULD BE, CONVERTED INTO UNITED STATES DOLLARS AT THAT RATE OR AT ANY OTHER CERTAIN RATE AS OF THE RESPECTIVE DATES OR AT ANY OTHER DATE. THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT HISTORICAL ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), INCLUDING STATEMENTS, WITHOUT LIMITATION, REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. WE INTEND THAT SUCH FORWARD-LOOKING STATEMENTS BE SUBJECT TO THE SAFE-HARBOR PROVIDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS RELATE TO, AMONG OTHER THINGS: (1) EXPECTED REVENUE AND EARNINGS GROWTH; (2) ESTIMATES REGARDING THE SIZE OF TARGET MARKETS; AND (3) REGULATION OF OUR INDUSTRIES AND MARKETS BY THE CHINESE GOVERNMENT. THESE STATEMENTS ARE QUALIFIED BY IMPORTANT FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED BY THE FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE RISK FACTORS DESCRIBED ELSEWHERE IN THIS ANNUAL REPORT. PART I ITEM 1. DESCRIPTION OF BUSINESS. We are a leading waste water engineering company in the People's Republic of China (the "PRC"). Through our majority owned subsidiaries, we are engaged in the design, construction, implementation of and investment in industrial and municipal waste water treatment facilities throughout the PRC. We provide turnkey waste water treatment engineering design and contracting. We hold 90% and 35%, respectively, of the equity interest in the following two water treatment facilities operated through build, operate and transfer (BOT) arrangements with the PRC government: (i) Tian Jin Shi Sheng Water Treatment Company Limited ("TJSH"), which commissioned water treatment in November 2003 and has a daily treatment capacity of approximately 10,000 tons; and (ii) Xin Le Sheng Mei Water Purifying Company Limited ("XL"), which also commissioned water treatment in November 2003 and has a daily treatment capacity of 40,000 tons. We have been retained as the manager to manage both TJSH and XL. The fees from XL and TJSH did not represent a material portion of our revenue during 2004. We also developed a BOT water treatment facility project in Hai Yang City with capacity of 20,000 tons per day. We began constructing this project in April 2004 and completed the project and commenced water treatment in June 2005. We are also developing another BOT water treatment facility project in Beijing with planned capacity of 20,000 tons per day. We began construction of this project in July 2004 and expect the completion of the project and commencement of water treatment by September 2005. The fees from these projects are expected to strengthen our net sales in the future. CORPORATE HISTORY Our company was organized as a Nevada corporation on September 10, 1996 under the name Discovery Investments, Inc., and was previously engaged in the business of seeking, investigating and, if such investigation warranted, acquiring an interest in a business opportunity. During the two years prior to the transaction described below, we had no operations or employees and owned no real estate. On October 15, 2004, we were the subject of a reverse acquisition by Evergreen Asset Group Limited, an International Business Company organized under the laws of the British Virgin Islands ("Evergreen"), pursuant to which we acquired 100% of the outstanding shares of Evergreen capital stock in exchange for a controlling interest in our common stock. Pursuant to a securities -1- purchase agreement dated September 9, 2004, as amended, we issued 83,500,000 shares of our common stock (representing 83.5% of our outstanding capital stock) in exchange for all of the issued and outstanding shares of Evergreen capital stock transferred to us by the Evergreen shareholders at the closing. At the close of the reverse acquisition, all of our pre-closing officers and directors resigned and our current officers and directors were appointed to serve in their present capacities. Following the close of the reverse acquisition, we changed our corporate name from Discovery Investments, Inc. to China Evergreen Environmental Corporation. In April 2005, we conducted a private placement of 20 investment units, at $25,000 per unit, for gross proceeds of $500,000. Each unit consisted of (a) a 12% convertible debenture in the original principal amount of $25,000, convertible into shares of our common stock at the rate of the lesser of (i) $0.20 per share or (ii) a 10% discount to the price per share of common stock (or conversion price per share of common stock) of the next private placement conducted by us prior to any conversion of the debenture, and (b) 125,000 detachable warrants to purchase one share each of our common stock at an exercise price of $0.20 per share, expiring ten years from their date of issuance. The debentures are due and payable August 1, 2005. We granted the investors limited registration rights for the common shares underlying their debentures and warrants. Westminster Securities Corporation acted as placement agent for this offering on our behalf. Our executive offices are located at Floor 5, Guowei Building, 73 Xianlie Middle Road, Guangzhou, Guangdong, China; telephone number (86-20) 87327909. OUR BUSINESS GENERAL We are a leading waste water engineering company in the People's Republic of China (the "PRC"). Through our majority owned subsidiaries, we are engaged in the design, construction, implementation of and investment in industrial and municipal waste water treatment facilities throughout the PRC. Our business was originally established in 1999 by our Chairman, Mr. Chong Liang Pu, with a focus on developing innovative biochemical technologies and processes for waste water treatment. We have the exclusive rights to MHA biological treatment processes technologies ("MHA") and GM Bio-carriers. Both are the subject of patents owned by our Chairman, Mr. Pu, and we have acquired the exclusive rights pursuant to a license agreement with Mr. Pu. Both technologies were developed to improve the efficiency and effectiveness of waste water treatment processes and reduce the initial investment and on-going operating cost of waste water treatment facilities. We have applied biotechnological processes to waste water treatment and have developed relationships with the Chinese environmental authorities at both national and provincial levels throughout China. Since 2000, we have successfully completed the design and construction of over 14 waste water facilities across China with total daily capacity of over 120,000 tons (inclusive of three BOT waste water treatment facilities with daily capacity of 70,000 tons). Our customers include municipal governments, food processing and beverage companies and industrial companies. Because of these achievements, we have been recognized as a "Key Enterprise in Environmental Industry in PRC" by the General Bureau of Environmental Protection of China and are viewed as a "High-Tech Enterprise" by the Bureau of Science and Technology of Guangzhou, PRC. INDUSTRY BACKGROUND WASTE WATER TREATMENT MARKETS IN THE PRC. The waste water treatment business is in a developmental stage in China. Following decades of rapid industrialization and urbanization resulting from China's breakneck economic expansion, demands for urban and industrial waste water treatment are immense. In 2002, total volume of municipal and industrial waste water produced reached 23 billion and 26 billion tons, respectively, of which only approximately 25% was treated in some form. The government, which views environmental issues as a policy priority, has targeted a 90% treatment ratio by 2030. This targeted growth, combined with a policy of privatizing all existing government facilities, is resulting in extraordinary high levels of expansion in an industry that did not effectively exist until the 1980s. -2- In order to promote investment in the waste water treatment industry, the central government has created incentives such as tax relief and higher throughput fees which can improve the profitability of certain municipal projects. FRESH WATER MARKETS. Before 2003, the facilities for fresh water supply in the PRC were owned and operated by the agencies of local governments. As industrial, economic and population growth and chronic pollution has placed intense demands on the water supply in China, the fresh water supply has had a serious shortage. Similar to the waste water treatment industry, the PRC government has opened up the fresh water supply business to private sector and international operators. OUR BUSINESS ACTIVITIES There are different types and quantities of pollutants in water due to the environment, conditions and purpose for which the water is used. Municipal water has organic matters including nitrogen and phosphorus. The composition of such municipal wastewater is relatively stable. In contrast, pollutants in water discharged from industries include organic pollutants, inorganic matters, metal ions and salt ion. We adopt varying treatment processes for different industrial wastewater. We provide turn-key engineering, equipment and chemical sales for industrial and municipal waste water treatment facilities in China. We also invest in, manage and operate our own water treatment facilities through BOT arrangements in the PRC. TURN-KEY WASTE WATER ENGINEERING. We provide turn-key waste water treatment engineering services to both public and private sectors. Our public sector clients include municipal governments at the city, district and town levels. Our private sector clients include heavy industries, such as steel, car manufacturing, electronic; light industries, such as chemical, food and beverage, paper, printing and breweries; and others, including hospitals and the pharmaceutical industry. The industrial wastewater qualities differ due to the different industrial products and manufacturing processes. These contracts are awarded either by public tender or by direct contract. A typical turn-key waste water treatment project can be classified into three phases; (1) survey and design, (2) construction and equipment installation, and (3) operation and management services. From 2000 to 2004, we completed the following turnkey projects: Yongji Development Zone Wastewater Treatment Plant (Phase 1), Guangdong Nanhai City Jinsha Town Wastewater Treatment Plant, Guangdong Sanshui Baini Wastewater Treatment Plant and Guangzhou Yantang Wastewater Treatment Plant. The following table sets forth the Company's turnkey projects which are still in process: NAME OF NEW TURN-KEY PROJECT CAPACITY/PER DAY DATE OF COMMENCEMENT - -------------------- ---------------- -------------------- Lechang Wastewater Treatment Plant. 12,500 tons Commenced in May 2005 and expected to (Phase 1) handover in the end of 2005 Tianjin City Meichang Town Wastewater 3,000 tons Expected to commence in July 2005 Treatment Plant
INVESTMENT IN BOT WASTE WATER TREATMENT FACILITIES. We also invest in waste water treatment facilities through BOT arrangements. BOT projects provide us with a stable and guaranteed income source under a long-term (usually 20-30 year) contract granted by municipal governments to build and operate a waste water plant. BOT project land is typically contributed by the municipal government with the operator providing investment and daily management. After the contract period, the project is transferred to the local government. After we secure a contract for a BOT project from a municipal government and the financing for such project is in place, we will proceed to construct the facility. We will own and operate the facility after the project is completed. The typical capital return period of a BOT project is approximately 5-6 years if it is not divested earlier. -3- The following table sets forth the BOT projects which we have completed or are in process: OPERATION DATE OF NAME OF BOT PROJECT OUR INVESTMENT CAPACITY/PER DAY PERIOD COMMENCEMENT - ------------------- -------------- ---------------- ----------- ------------ Tianjin Wuqing Wastewater RMB 9 million 10,000 tons 20 years November 2003 Treatment Plant (Phase 1) Xinle Wastewater Treatment Plant RMB 34 million 40,000 tons 22 years October 2003 Haiyang Wastewater Treatment RMB 30 million 20,000 tons 22 years June 2005 Plant Beijing Tianzhu Wastewater RMB 20 million 20,000 tons 25 years Operation expected to Treatment Plant (Phase 1) commence in third quarter of 2005 Handan Fengfeng Mining Area RMB 29.25 million 33,000 tons 22 years Operation expected to Wastewater Treatment Plant commence in first (Phase 1) quarter of 2006
OUR PRODUCTION PROCESS Though the chemicals used for treating municipal and industrial wastewater qualities are different due to the different sources of wastewater for municipal wastewater treatment and different industrial product and manufacturing process for industrial wastewater treatment, the treatment process is largely similar. During the wastewater treatment process, the wastewater is first collected by a pipeline network system and then transported to a sand sedimentation pool. The wastewater will then go through the MHA waste water treatment process, which is a natural, chemical free, biological and mineral based process that facilitates the rapid growth of bacteria in order to improve the efficiency of degrading the micro-organism materials in the wastewater and for more efficient operation and reduced energy consumption. After the MHA waste water treatment process, the wastewater is then transported to the sedimentation pool to remove the fine particles in the wastewater. The wastewater will then be sterilized in the sterilization pool and be transported to the water outlet. OUR PROJECT MANAGEMENT PROCESS The following is the flow chart of our project management process for both turn-key wastewater engineering projects and BOT projects: Market --> Project --> Tender --> Design and --> Procurement ------ Intelligence Tracking Process Development | | ------------------------------------------------------------------------------------ | | Fine-tuning ----> Assembly and --> Testing --> Commissioning --> and On-site --> Quality Control Installation /Handover Service
MARKET INTELLIGENCE. The starting point for all our projects is market intelligence so that our management is able to decide which projects they wish to secure for the benefit of the Company. Our marketing personnel are in charge of market information on potential projects on a regular and ad-hoc basis. Our management is able to identify and decide on projects which we may potentially bid for. -4- PROJECT TRACKING. Based on the information gathered through market intelligence and the subsequent comprehensive analysis conducted on such information, our management will decide on which projects to pursue. We carry out internal evaluations which consist of three steps: initial evaluation, revaluation and valuation by professional. We also engage external advisors to carry out external evaluation. We will then embark on determining what the tender rules and conditions are and the capital requirements and technologies used for the project. Project tracking allows us to plan ahead and make the necessary cost planning. TENDER PROCESS. Once we decide to proceed to tender for a particular project, we will form a tender committee comprising marketing personnel and technical personnel, who will be responsible for compiling the tender documents to be submitted for tender within the stipulated deadline. The tender committee will compile internal costing and budgetary estimates of labor and material costs based on quotations from the relevant suppliers and factor in a suitable profit margin in determining our tender pricing. DESIGN AND DEVELOPMENT. After signing of the contract, we will appoint a project team to be responsible for the execution of the project, including an ad-hoc research and development team to handle the design and development of that particular project. The research and development team will follow our overall guidelines to analyze, assess and determine the design and specifications of a system which will ensure that all of our customers' requirements are met. The design and development process includes collection of information, site survey, key design concept, design specification, individual design, evaluation, revaluation and issue for construction. In addition to our own design and development capabilities, we have also entered into collaboration arrangements with other parties to test our equipment to ensure its suitability and effectiveness. PROCUREMENT. After the necessary design and analysis, the specifications of the system are confirmed, and our procurement department will proceed to purchase all the materials and equipment required or appoint appropriate sub-contractors to carry out certain parts of the project. CONSTRUCTION. The construction process includes subcontracting and site supervision. During construction, we will send site representative to control and supervise the construction. ASSEMBLY AND INSTALLATION. We will carry out assembly and installation of equipment and/or system and coordinate the assembly and installation fully with the construction process to ensure all equipment and/or system are properly assembled and installed. We will send technical staff to assist and guide the assembly and installation. TESTING. After the equipment and/or system has been assembled and installed, we will test the system in accordance with industrial and national rules and regulations formulated by the relevant PRC authorities. COMMISSIONING AND FINE-TUNING. For turnkey projects, should the system pass all tests, we will proceed to hand over the system to our customers. 5%-10% of the total contract value will be will be treated as retention monies during the warranty period of up to 12 months requirement. Our technical personnel will carry out fine-tuning and on-site services. After successful commissioning of the entire system, the retention monies will be paid by our customers to us after the warranty period of up to 12 months. For BOT projects, the plant will start operation after passing all tests. The technical team will carry out fine-tuning and on-site services. The operation team will follow the operational guidelines and monitor the quality of treated water. COMPETITION We believe our main competitor is Beijing Capital Co., Ltd., a subsidiary of Capital Group, which has identified investment, development, operation and management in Chinese water industry as its core business. Beijing Capital provides comprehensive environment management service. Beijing Capital's key advantages over us are capital resources and strong human resources as they are a long-standing, leading environmental enterprise. We also compete with several other environmental and water treatment companies. We believe that we compete primarily on the basis of contract pricing. Though many of our competitors offer similar but less cost effective services, they may have greater financial resources and hence be able to secure contracts with reduced operating margins but more competitive pricing. However, we believe having access to the capital -5- market in the United States through our public listing will help to differentiate us from our competition. Another area of competition comes from local protectionism where local governments wish to protect local environmental businesses. In order for us to overcome this kind of competition, we rely on our financial and technical resources. OUR COMPETITIVE STRENGTHS Based on the performance of our projects, we believe that we are a leading provider of waste water engineering company in PRC. Key elements of our competitive strengths include: SUFFICIENT CAPITAL RESOURCES. The threshold of capital requirements for entering the waste water treatment segment and the initial capital investment of waste water treatment facilities and projects, especially BOT projects, is relatively high. Based on our good track record and relationships with local governments in China, we believe we are capable of obtaining sufficient capital resources to fund our operation of projects and expansion plan. EXPERIENCED MANAGEMENT TEAM AND STRONG RESEARCH AND DEVELOPMENT CAPABILITY. We have a qualified and experienced management team and staff who possess strong technical capabilities and who specialize in project management, project design and research and development in relation to the water purification and wastewater treatment industry. Among our senior management, most possess degrees or senior technical qualifications. Members of our senior management team also have prior experience in managing large corporations and are familiar with all levels of management. Most of our management and staff have strong technical expertise and are professionally trained. We place great emphasis on technical research and development, and typically set up research and development teams for specific projects to handle the design, development and improvement of such projects. We also keep track of the latest developments in water treatment technology through our advisors and consultants who are experts in the water purification and waste water treatment industry. We have established a long-term cooperation with the Chinese Academy of Science at Guangdong and a number of universities to maintain its superiority in developing innovative wastewater treatment technology. We believe that our management experience and our strong technical capabilities provide us with a competitive edge over our competitors. GOOD TRACK RECORD AND PROFESSIONAL QUALITY. We believe that our good track record and goodwill that we have built up in the provision of water treatment systems for the municipal government and industrial waste water treatment give us an edge over our competitors. Due to our strong track record, we have been awarded various certifications by different environmental institutions, including certifications of Quality Facility for Environmental Protection, Gold Price of 2nd Chinese Patent Technology Fair, World Chinese Scientific and Technology Invention Prize, certificates of "Quality Branded Environmental Protection" and "Asia International Scientific and Technology Improvement Prize". These certificates typically strengthen our ability to tender for BOT projects with the municipal government and also turnkey projects for industrial waste water treatment. EFFECTIVE MARKET NETWORK. We emphasize the importance of marketing and have people specialized in promotion of our company and securing projects. We have an extensive marketing network in Shangdong, Tianjin, Neijing, Handan Hebei, Xianyang Shangxi and Guangdong, where we have BOT projects. Such offices provide feedback on market intelligence and deal with existing and potential customers. Project selection is partially based on intelligence feedback from these networks. We retain a team of former senior government officials with considerable influence on local and central governments in China. This team identifies and helps to secure major environmental projects for the group. The team also provides timely feedback of market conditions and deal with our existing and potential customers regularly. LONG-TERM RELATIONSHIPS WITH ACADEMIC INSTITUTIONS. We have good and long-term relationships with Guangdong Province Environmental Protection Design Institute and North-Eastern Environmental Protection Design Institute, who provide important technical support in design and project execution. -6- CUSTOMERS, SALES AND MARKETING Many of our principal customers are local governments, food and beverage processing companies and industrial companies that use our technologies to treat their waste water. Our largest customers have historically accounted for a significant percentage of our net sales. Net sales to our largest customer, True Global Limited, accounted for approximately 97% of our net sales in 2004. We sold our investment in a BOT project, Xian Yang Bai Cheng Environmental Protection Co. Ltd., in the fourth quarter of 2004 to True Global Limited. We market and sell our products through our direct sales force and independent sales representatives throughout the PRC. Our sales and marketing team is responsible for evaluating the marketplace, generating leads and creating sales programs. We use a "Project-Company" strategy for each BOT project, establishing a company in the location of the project, responsible for construction and operation of the project. Through establishing a good relationship with the local government, the Project-Company markets its business in the location. Our on-site direct service organization provides ongoing services to customers using our products. In order to compete effectively, we focus on projects of a scale between 10,000 tons and 50,000 tons of waste water per day, where we can achieve a balance between economies of scale arising from our technology and our available capital base. RESEARCH AND DEVELOPMENT Our research and development efforts are directed toward enhancing our existing technology and products and developing our next generation of technology. We have the exclusive rights to MHA biological treatment processes technologies ("MHA") and GM Bio-carriers. Both are the subject of patents owned by our Chairman, Mr. Pu, and we have acquired the exclusive rights pursuant to a license agreement with Mr. Pu. We have applied both technologies to improve the efficiency and effectiveness of waste water treatment processes as well as to reduce the initial investment and on-going operating cost of waste water treatment facilities. The advantages of MHA are: o Proprietary design of water flow control mixer to ensure even distribution of waste treatment bacteria in the treatment facility. o Proprietary design of no-oxygen, low-oxygen and oxygen tanks to reduce energy consumption and ensure low sludge build up in the treatment process. o Proprietary blend of waste water treatment bacteria (i.e., photosynthetic, lactobacillus, yeast, streptonyces, etc.) of over 50 types of different degradation and effectiveness to achieve toxic, aromatic and micro-organism free water of release. -7- The following chart shows the comparison of percentages of saving between using MHA and traditional waste water treatment technology. PERCENTAGE OF SAVINGS THROUGH MHA TECHNOLOGY [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIALS] Land Electricity Residual Operation Use Cost Sludge Cost -------------------------------------------- Conventional 100% 100% 100% 100% MHA 60% 70% 70% 70% GM biological-carrier is a natural, chemical-free, biological and mineral based process that facilitates the rapid growth of bacteria in order to improve the efficiency of degrading the micro-organism materials in the waste water. Installation of such carriers into the waste treatment process facilitates bacterial growth for more efficient operation and reduced energy consumption. Currently we are developing technology with universities and research institutions in Guangdong Province and have on staff a chief scientist, who is a researcher in the field of environmental protection, and two research fellows. We are planning to invite additional experts in the waste water treatment field to join our company. QUALITY CONTROL Our quality control department is headed by Ying Mo Zhang, who has more than 30 years of relevant experience. Mr Zhang has been an engineer and a general manager at several companies, and Vice Chairman of our company, and he is familiar with resource allocation, quality control and environmental facility management control. To ensure the quality of our products and services, we carry out stringent quality control checks at every stage of project execution. QUALITY CONTROL DURING DESIGN, RESEARCH AND DEVELOPMENT. The design of every project is carried out by our experienced staff following strict guidelines. We have also established a three-tier examination and verification system. A strict examination and approval system is also adopted in respect of any design changes. QUALITY CONTROL DURING PROCUREMENT. To ensure the quality of equipment and materials procured, we maintain a list of suppliers and sub-contractors whose goods and services meet our quality control standards. We purchase our materials and equipment only from these suppliers, and such materials and equipment are subject to further inspections and checks by our quality control staff upon arrival at our production facilities. Goods which do not meet our quality control standards are rejected. -8- QUALITY CONTROL DURING ASSEMBLY AND INTEGRATION. As a general policy, our sub-contractors selected and appointed by us to carry out engineering, assembly and integration works should be long established and have good track records. QUALITY CONTROL DURING DELIVERY AND INSTALLATION. To ensure that our qualified sub-contractors comply with our quality control standards during delivery and installation, we also task our engineers with formulating a quality control and progress plan, and to identify the key quality control points of the delivery and installation procedure. Such engineers will supervise our sub-contractors during delivery and installation. QUALITY CONTROL DURING OPERATION FOR BOT PROJECTS. Our operation team starts their training prior to the commencement of operation. After test run and commissioning, the operation team will take over the operation. We have very strict guidelines for the operating team to ensure quality of clean water. A production report is to be faxed to the head office everyday and we will perform regular tests to ensure the treated water meet high quality standard. We also conduct regular training to ensure that our operation teams are equipped with the latest know-how. COOPERATIVE PARTNERS AND SUPPLIERS We outsource the design and construction of our subsystems to a number of cooperative partners and key suppliers and maintain close relationships with them. Our cooperative partners include East-North Design Institution of China Civil Engineering, Guangzhou Design Institution of Environmental Protection Engineering, and the 20th Group of China Railway Company. There are three main types of equipment for our waste water treatment and potable water projects: (i) electrical equipment which includes various types of sewage pumps, slush pumps and other water pumps, separators, sludge scrapers, mixers, air compressors, filters, dehydrators, blow fans, etc; (ii) automated control systems and electrical parts; and (iii) various test, analysis, detection and monitoring instruments. All purchases from foreign companies are made through their authorized dealers/agents in the PRC. We adhere closely to the principles of total quality management. Our customers, suppliers and employees are encouraged to provide feedback and suggestions for improvements in products and services. The following table sets forth our major suppliers of equipment and materials: COMPONENT, RAW MATERIALS AND OUR MAJOR SUPPLIERS EQUIPMENTS Waste water treatment analytical Hach Company instruments Blow fan systems HV-Turbo A/S Sewage pumps, slush pumps, other German Pump Industry Company water pumps and mixers PLC automated control systems Mitsubishi Electric Electrical parts Schneider Electric Low Voltage (Tianjin) Co. Automated systems Xian Huiyou Automated Engineering Company INTELLECTUAL PROPERTY We seek to protect our intellectual property by way of our license rights to patents on proprietary features of our advanced bio-chemical treatment technology and processing systems for waste water treatment and by challenging third parties that we believe infringe on our licensed patents. We have obtained the exclusive right to use two patents owned by our Chairman, Mr. Pu, for our MHA and GM Bio-carriers technologies. We also protect our intellectual property rights with nondisclosure and confidentiality agreements with employees, consultants and key customers. -9- EMPLOYEES As of December 31, 2004, we had 52 employees, of whom 8 were engaged in sales, marketing and service, 12 in research, development and engineering, 25 in finance and administration and 7 in operations. None of our employees are represented by a collective bargaining agreement, and we believe that we have satisfactory relations with our employees. ENVIRONMENTAL One of our core values is protecting the environment in which we operate and the environment in which our equipment operates. Compliance with laws and regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had any material effects on our capital expenditures, earnings or competitive position. We do not anticipate any material capital expenditures for environmental control facilities in 2005. REGULATION China's numerous ongoing water reforms are moving toward a user-pay market-driven sector. Legislation serves as the basis to regulate and enforce these reforms. The Water Resource Law, amended and put into effect on October 1, 2002, significantly changes water resource management systems, water resource protection, water conservation, and legal responsibilities. ENVIRONMENTAL LAWS AND REGULATIONS In China, environmental laws and regulations are stipulated and implemented through legislation and through administrative authorities at various levels of government. Current environmental laws and regulations can be classified into two categories: environmental management and environmental pollution prevention and control. All environmental laws and regulations are stipulated on the basis of the Environmental Protection Law (EPL). EPL, effective in December 1989, sets the framework for environmental management and pollution control legislation in China. ENVIRONMENTAL MANAGEMENT LAW AND REGULATION. China's environmental management measures include environmental impact assessment (EIA), the Three Synchronies Policy, permitting requirements, and reporting requirements. Each of these is described below: 1. ENVIRONMENTAL IMPACT ASSESSMENT. The 1989 Environmental Impact Assessment Law was revised in October 2002. These revisions became effective in September 2003 and apply to all construction projects that may negatively impact the environment. An EIA must be prepared during the project feasibility stage to assess the project's environmental impact. EIA approval is necessary to secure a construction and operating permit. 2. THREE SYNCHRONIES POLICY. Article 26 of the EPL, defines the Three Synchronies Policy as the installation of pollution prevention and control facilities in a construction project to be undertaken concurrently with the main construction phase. The pollution prevention and control facilities are to be installed and commissioned only after they are inspected and approved by the Environmental Protection Bureau (EPB). 3. PERMITTING REQUIREMENTS. Pollution discharges in China are subject to registration and permitting requirements. The EPL defines requirements for pollution discharge registration and permits. Pollution discharges must be registered with the relevant environmental authority. A pollution discharge permit is issued after registration. The Management Regulation on the Registration of Discharged Pollutants, issued by the State Environmental Protection Administration (SEPA), effective Oct. 1, 1992, details requirements for pollution discharge registration. At the state level, the Department of Pollution Control under SEPA implements pollution discharge registration and permitting policies. Pollution control departments under local EPBs are in charge of the registration procedures and issue a pollution discharge permit. -10- 4. REPORTING REQUIREMENTS. According to Article 31 of the EPL, any organization that causes or has a potential to cause an accident resulting in environmental pollution must promptly take measures to prevent and control the pollution hazard and notify the relevant authority. In addition, enterprises and institutions that have a greater likelihood to cause severe pollution accidents must adopt effective pollution prevention measures. ENVIRONMENTAL POLLUTION LAW AND REGULATION. Environmental pollution prevention and control measures in China apply to various environmental media, including water, water supply, wastewater discharge, air emissions, hazardous waste management, noise, and soil and groundwater. In November 2004, the management rules regarding environmental pollution prevention facilities operation permit was enacted and it set forth the requirements for getting a permit and how the facilities must be operated. The following is a summary of environmental pollution laws and regulations regarding water, water supply and waste water discharge in China: WATER. Three laws apply to the water sector: 1. The Water Resources Law emphasizes the uniform management of river basins and the macro-management of water distribution and consumption. In addition, the law identifies a water quality management system. 2. The 1984 Water Pollution Prevention and Control Law (WPL) applies to discharges to rivers, lakes, canals, reservoirs, and groundwater. The WPL contains sections pertaining to water quality and discharge standards, pollution prevention, surface water, and groundwater. Amendments in 1996 introduced further controls on river basins, including requirements for cities and towns to establish central sewage treatment plants and to set treatment fees, mass-loading controls, provisions for strengthening the supervision and management of water pollution, and non-point-source pollution controls. 3. The Implementation Regulation of Water Pollution Prevention and Control Law was enacted on March 20, 2000. This law regulates the supervision and management of surface and ground water pollution, prevention, and control measures. WATER SUPPLY. In urban areas, water is usually supplied by the municipal water utility companies, which are responsible for ensuring that water quality complies with the National Drinking Water Standard (GB5749-85). A groundwater abstraction permit is required if any company intends to use groundwater directly. In Northern China, however, the use of groundwater is strictly controlled because of significant water shortages and ground settlement issues. Users must apply to provincial or higher level administrative committees for a groundwater abstraction permit. WASTEWATER DISCHARGE. Two types of wastewater discharge systems are defined in China: (1) polluted wastewater discharges (typically industrial and domestic wastewater) and (2) non-polluted wastewater discharges (for example, storm water). Separate drainage systems for polluted and non-polluted discharges are required for a facility in which a municipal sewer system is available. ENVIRONMENTAL ENFORCEMENT In China, methods of enforcing environmental legislation include discharge fees, surcharge fees, fines, and administrative sanctions. Pollutant discharge activity is subject to a discharge permit, which must be registered and obtained before the pollutants are generated. -11- In major pollution control areas, such as Shanghai and Beijing, mass-loading targets are established and allocated to major emission facilities by the local EPB. In some pilot locations, emission quotas can be traded among facilities. In areas with significant pollution problems, such as those impacted by sulfur dioxide emissions, acid rain, and water quality deterioration, specific discharge limitations are adopted to prevent further degradation. There are specific items within the Constitution of the People's Republic of China and the PRC Criminal Law to strengthen the enforcement of environmental legislation by disciplinary sanction, civil liability, and even criminal liability. Disciplinary sanctions may come in the form of a warning, a fine, a requirement to install environmental protection equipment, or a requirement to cease operations. Criminal liability can also be passed on to the legal representative of an enterprise if the polluting activity caused severe damage to property, health, or interests of the state or its citizens. In these cases, the individual deemed responsible may be prosecuted. Civil liability also exists and is aimed at activities that may result in civil disputes. Generally, the dispute may be settled through financial compensation by the facility that caused the damage. ITEM 1A. CAUTIONARY STATEMENT REGARDING FUTURE RESULTS, FORWARD-LOOKING INFORMATION AND CERTAIN IMPORTANT FACTORS We make written and oral statements from time to time regarding our business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimates," "projects," "believes," "expects," "anticipates," "intends," "target," "goal," "plans," "objective," "should" or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other representatives of us. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement made by or on behalf of us speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement which may be made by or on behalf of us. In addition to other matters identified or described by us from time to time in filings with the SEC, there are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement that may be made by or on behalf of us. Some of these important risk factors, but not necessarily all important factors, include the following: WE ARE DEPENDENT ON THE STATE OF THE PRC'S ECONOMY AS ALL OF OUR BUSINESS IS CONDUCTED IN THE PRC. All our business operations are conducted in the PRC and all of our customers are also located in the PRC. Accordingly, any significant slowdown in the PRC economy may cause the waste water treatment industry to reduce expenditure or delay the building of new facilities or projects for waste water treatment. This may in turn lead to a decline in the demand for our products and services. That would have a material adverse effect on our business, financial condition and results of operations. -12- WE MAY NOT BE ABLE TO SECURE NEW CUSTOMERS. Our business is project-based, and many of our major customers are non-recurring customers. With the exception of True Global Limited, our other customers accounted for only 3% of our revenue in 2004 and we do not expect them to continue to be our major customers because of the nature of the industry. If we fail to secure projects from new customers, our revenues will decline and our business, prospects, financial condition and results of operations could be materially and adversely affected. OUR BUSINESS COULD BE AFFECTED BY COST OVERRUNS, PROJECT DELAYS AND/OR INCORRECT ESTIMATION OF PROJECT COSTS. As our business is project-based, it is important that we manage our projects efficiently in terms of time, procurement of materials and allocation of resources. If our initial cost estimates are incorrect or delays occur in a project resulting in cost overruns, the profitability of that project will be adversely affected. Currently, we offer some of our customers a warranty period of up to 12 months after the commissioning of the water treatment projects, during which we are obliged to provide free rectification work against any manufacturing defects. Cost overruns due to additional rectification work and delays in completion of projects would adversely affect our profitability. We may also face potential liability from legal suits brought against us by our customers for causing loss due to any delay in completing a project. Mismanagement of or mistakes made during our projects will adversely affect our profitability as well as our reputation among our customers. We may also face potential liability from legal suits brought against us by our customers who have suffered loss due to such mismanagement or mistakes. This would also adversely affect our profitability and financial position. OUR BUSINESS WOULD BE AFFECTED IF WE ARE UNABLE TO ATTRACT AND RETAIN SUFFICIENT NUMBERS OF SKILLED EMPLOYEES AND PROFESSIONALS. We may face difficulties in recruiting skilled personnel in our industry due to its specialized nature. Our continued success depends largely on our ability to attract and retain highly skilled executive, managerial and technical employees. If we are unable to attract and retain a sufficient number of suitably skilled and qualified personnel, our business would be materially and adversely affected. We may also have to pay substantial wages to attract sufficient numbers of skilled employees and professionals, which would also adversely affect our operating margins. FAILURE TO RETAIN SERVICES OF KEY PERSONNEL WILL AFFECT OUR OPERATIONS AND RESULTS. Our success to date has been largely due to the contributions of our executive officers. The continued success of our business is very much dependent on the goodwill that they have developed in the industry over the past several years. Our continued success is dependent, to a large extent, on our ability to retain the services of our executive officers. The loss of any of our executive officers' services due to resignation, retirement, illness or otherwise without suitable replacement or the inability to attract and retain qualified personnel would adversely affect our operations and hence, our revenue and profits. WE ARE SUBJECT TO RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGES. We are a chemical free, biological and mineral based wastewater treatment company, and in order to maintain our customer-base and market share, we must ensure that we are able to continually provide relevant solutions to our customers that meet their needs. However, there are rapid technological changes and improvements in wastewater treatment technologies and equipment. In the event that we are unable develop or to source for new and improved chemical free, biological and mineral based wastewater treatment systems to keep up with such technological changes and to meet the developing needs of our customers, we may not be able to maintain our competitive edge or our market share, and our profits will be adversely affected. WE MAY NOT BE ABLE TO PROTECT OUR PROCESSES, TECHNOLOGIES AND SYSTEMS AGAINST CLAIMS BY OTHER PARTIES. Although we have two registered patents in respect of the processes, technologies and systems we use frequently in our systems, we have not purchased or applied for any patents other than these as we are of the view that it may not be cost-effective to do so. For such other processes, technologies and systems for which we have not applied for or purchased or been licensed to use patents, we may have no legal recourse to protecting our rights in the event that they are replicated by other parties. If our competitors are able to replicate our processes, technologies and systems at lower costs, we may lose our competitive edge and our profitability will be adversely affected. -13- WE MAY FACE CLAIMS FOR INFRINGEMENT OF THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS. We may face claims from third parties in respect of the infringement of any intellectual property rights owned by such third parties. There is no assurance that third parties will not assert claims to our processes, technologies and systems. In such an event, we may need to acquire licenses to, or to contest the validity of, issued or pending patents or claims of third parties. There can be no assurance that any license acquired under such patents would be made available to us on acceptable terms, if at all, or that we would prevail in any such contest. In addition, we would incur substantial costs and spend substantial amounts of time in defending ourselves in or contesting suits brought against us for alleged infringement of another party's patent rights. As such, our operations and business may be adversely affected by such civil actions. We rely on trade secrets, technology and know-how, which we seek to protect, in part, by confidentiality provisions in contracts with our customers and our employees. There can be no assurance that these agreements will not be breached, or that we will have adequate remedies for any breach, or that other parties may not obtain knowledge of our trade secrets and processes, technology and systems. Should these events occur, our business and hence, our profitability, will be adversely affected. WE MAY REQUIRE ADDITIONAL FUNDING FOR OUR FUTURE GROWTH. Our future growth will depend to a large extent on our ability to secure and invest in BOT projects which require a higher amount of capital investment. In order to obtain additional capital to develop these growth opportunities, we may issue additional shares of our equity securities. If new shares placed to new and/or existing shareholders are issued, they may be priced at a discount to the then prevailing market price of our shares, in which case, existing shareholders' equity interests may be diluted. If we fail to utilize the new equity to generate a commensurate increase in earnings, our earnings per share will be diluted, and this could lead to a decline in our share price. Any additional debt financing may, apart from increasing interest expense, contains restrictive covenants with respect to dividends, future fund raising exercises and other financial and operational matters. OUR CUSTOMERS MAY MAKE CLAIMS AGAINST US AND/OR TERMINATE OUR SERVICES IN WHOLE OR IN PART PREMATURELY SHOULD WE FAIL TO IMPLEMENT PROJECTS WHICH FULLY SATISFY THEIR REQUIREMENTS AND EXPECTATIONS. Failure to implement projects which fully satisfy the requirements and expectations of our customers or defective system structure or products as a result of design or workmanship or due to acts of nature may lead to claims against us and/or termination of our services in whole or in part prematurely. This may arise from a variety of factors including unsatisfactory design or implementation, staff turnover, human errors or misinterpretation of and failure to adhere to regulations and procedures. This may adversely affect our profits and reputation. WE ARE EXPOSED TO CREDIT RISKS OF OUR CUSTOMERS. DEFAULTS IN PAYMENT BY OUR CUSTOMERS WILL AFFECT OUR FINANCIAL POSITION AND OUR PROFITABILITY. As at December 31, 2004, accounts receivables of RMB 9.46 million accounted for approximately 60% of our current assets. Therefore, our financial position and profitability are dependent on the credit worthiness of our customers. Generally, our credit terms vary from 90 days to 180 days. Defaults in payment by our customers would adversely affect our profitability and cash flow. There was no allowance for doubtful amounts for the year ended December 31, 2004. We are unable to provide assurance that risks of default by our customers would not increase in the future, or that we will not experience cash flow problems as a result of such defaults. Should these develop into actual events, our operations and profitability will be adversely affected. WE ARE RELIANT ON A FEW MAJOR SUPPLIERS. We are dependent on our major suppliers for the timely delivery of materials and equipment that we require for the equipment and systems we install.. Should our major suppliers fail to deliver the materials and equipment on time, and if we are unable to source these materials and equipment from alternative suppliers on a timely basis, our project timeline will be delayed, thereby affecting delivery to our customers. This in turn would adversely affect our reputation if our customers lose confidence in our services and as a result, our revenue and profitability would be adversely affected. WE ARE SUBJECT TO RISKS RELATING TO BOT PROJECTS IN WHICH WE HAVE STARTED TO INVEST. We have begun to invest capital in BOT projects which require high up front capital expenditure. Our returns from BOT projects are derived from fees paid by the PRC government and such BOT projects are able to generate a steady and recurring source of income for us over a sustained period of time between 20 and 25 years. However, our BOT projects are exposed to risks such as the -14- occurrence of natural disasters or the imposition of more stringent government regulations, which may result in the disruption to our BOT projects. Our investment returns from these BOT projects may thus be materially affected should any of such risks materialize. WE RELY ON SUBCONTRACTORS FOR OUR PROJECTS. As we may from time to time subcontract some parts of our projects to subcontractors, such as engineering, assembly and integration works, we face the risk of unreliability of work performed by our subcontractors. Should our subcontractors default on their contractual obligations and work specifications, our ability to deliver the end product or service to our customers in accordance with quality and/or timing specifications may, in turn, be compromised. Furthermore, if we are unable to secure competitive rates from our subcontractors, our financial performance may be adversely affected. THE REGISTERED CAPITAL OF OUR PRC SUBSIDIARIES MAY, IN SOME CASES, LIMIT THE SIZE OF THE PROJECTS WE BID FOR. We tender for projects in the normal course of business. There are instances where companies require tendering companies to have a minimum registered share capital equivalent to the worth of the project. Therefore, the size of the projects that we are able to successfully tender for may sometimes be dependent on the registered capital of our subsidiaries. Although some customers may take into account other factors like our trading status and our track record, we are unable to assure you that we would be able to secure projects which are valued at more than our registered capital. Consequently, our revenue, business and financial results may be adversely and materially affected. WE ARE SUBJECT TO FOREIGN EXCHANGE RISKS. Our dominant transactional currency for 2004 was the Chinese RMB, including the cost of materials which are imported by our suppliers. With costs mainly denominated in RMB, our transactional foreign exchange exposure for the past few years was insignificant. However, as our suppliers take into account the fluctuations in foreign exchange rates when they price the imported materials which we procure from them, such fluctuations in foreign exchange rates may result in changes in the purchase price of imported materials. Any future significant fluctuations in foreign exchange rates may have a material impact on our financial performance in the event that we are unable to transfer the increased costs to our customers. WE MAY BE ADVERSELY AFFECTED BY SLOW DOWNS IN THE PRC ECONOMY OWING TO UNFORESEEN CIRCUMSTANCES, SUCH AS AN OUTBREAK OF INFECTIOUS DISEASE. Our business is dependent on the number of contracts we are able to secure from our customers. Unforeseen circumstances such as an outbreak of infectious disease may lead to a decline in global and regional business, which may in turn lead to a decline in demand for our services. Furthermore, should such unforeseen circumstances cause disruptions to our customers' operations, they may undertake cost-cutting measures such as cutting capital expenditure and deferring projects such as installation of water treatment systems. This would adversely affect the demand for our business. OUR SUBSIDIARIES, OPERATIONS AND SIGNIFICANT ASSETS ARE LOCATED IN THE PRC. SHAREHOLDERS MAY FIND IT DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST THE ASSETS OF OUR COMPANY, OUR DIRECTORS AND EXECUTIVE OFFICERS. Our subsidiaries' operations and significant assets are located in the PRC. In addition, most of our executive officers and our directors are non-residents of the U.S., and substantially all the assets of these persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons. OUR OPERATIONS COULD BE ADVERSELY AFFECTED BY CHANGES IN THE POLITICAL AND ECONOMIC CONDITIONS IN THE PRC. The PRC is our main market and accounted for all of our revenue in 2004. Therefore, we face risks related to conducting business in the PRC. Changes in the social, economic and political conditions of the PRC may adversely affect our business. Unfavorable changes in government policies, political unrest and economic developments may also have a negative impact on our operations. Since the adoption of the "open door policy" in 1978 and the "socialist market economy" in 1993, the PRC government has been reforming and is expected to continue to reform its economic and political systems. Any changes in the political and economic policy of the PRC government may lead to changes in the laws and regulations or the interpretation of the same, as well as changes in the foreign exchange regulations, taxation and import and export restrictions, -15- which may in turn adversely affect our financial performance. While the current policy of the PRC government seems to be one of imposing economic reform policies to encourage foreign investments and greater economic decentralization, there is no assurance that such a policy will continue to prevail in the future. INTRODUCTION OF NEW LAWS OR CHANGES TO EXISTING LAWS BY THE PRC GOVERNMENT MAY ADVERSELY AFFECT OUR BUSINESS. The PRC legal system is a codified legal system made up of written laws, regulations, circulars, administrative directives and internal guidelines. Unlike common law jurisdictions like the U.S., decided cases (which may be taken as reference) do not form part of the legal structure of the PRC and thus have no binding effect. Furthermore, in line with its transformation from a centrally planned economy to a more free market-oriented economy, the PRC government is still in the process of developing a comprehensive set of laws and regulations. As the legal system in the PRC is still evolving, laws and regulations or the interpretation of the same may be subject to further changes. For example, the PRC government may impose restrictions on the amount of tariff that may be payable by municipal governments to waste water treatment service providers like us. Also, more stringent environmental regulations may also affect our ability to comply with, or our costs to comply with, such regulations. Such changes, if implemented, may adversely affect our business or financial results. WE MAY BE SUBJECT TO FOREIGN EXCHANGE CONTROLS IN THE PRC. Our PRC subsidiaries are subject to PRC rules and regulations on currency conversion. In the PRC, the State Administration for Foreign Exchange ("SAFE") regulates the conversion of the RMB into foreign currencies. Currently, foreign investment enterprises ("FIEs") are required to apply to SAFE for "Foreign Exchange Registration Certificate for FlEs". All of our subsidiaries are FIEs. With such registration certifications (which need to be renewed annually), FlEs are allowed to open foreign currency accounts including the "recurrent account" and the "capital account". Currently, conversion within the scope of the "recurrent account" can be effected without requiring the approval of SAFE. However, conversion of currency in the "capital account" (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE. ITEM 2. DESCRIPTION OF PROPERTY We lease many of our facilities, consisting principally of administration, operations, research and development, finance and sales offices. Our principal executive offices consist of 400 square meters of office space that we lease and which are located at the Floor 5, Guowei Building, 73 Xianlie Middle Road, Guangzhou, Guangdong, China. We lease this space pursuant to a one year lease at a rate of rmb 240,000 per year. We believe that our offices in China provide sufficient service capacity for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS. Neither our company nor any of our properties are currently subject to any pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The following matters were submitted to our stockholders for approval by written consent during the fourth quarter of our fiscal year ended December 31, 2004: (a) amendments to our articles of incorporation (the "Charter Amendments") to: (i) change our corporate name to "China Evergreen Environmental Corporation"; (ii) increase the authorized number of shares of common stock ("Common Stock") to 200,000,000; -16- (iii) authorize 50,000,000 shares of blank-check preferred stock (the "Preferred Stock"), whereby the board of directors of the Company is authorized to establish, from the authorized shares of Preferred Stock, one or more classes or series of shares, to designate each such class and series, and to fix the rights and preferences of each such class and series; (iv) delete from our articles of incorporation the first paragraph of Article XIX regarding indemnification of directors and officers; and (v) update the address for the Company's agent for service of process in Nevada and remove provisions not otherwise required to be located in the articles of incorporation under Nevada law; and (b) amendments to our bylaws (the "Bylaws Amendments") to: (i) change Section 3 of Article II regarding the number of authorized directors; and (ii) delete a portion of Section 2 of Article VIII regarding the board of director's authority to change the authorized number of directors. The Charter Amendments and the Bylaws Amendments were approved by the affirmative written consent of stockholders of the Company representing a majority of the outstanding shares of Common Stock, as of November 17, 2004, each effective as of December 13, 2004. -17- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. MARKET INFORMATION Our common stock is traded on the OTC Bulletin Board ("OTCBB") under the symbol "CEEC". The following table sets forth, for the periods indicated, the high and low sale prices of our common stock as reported on the OTCBB. We consider our common stock to be thinly traded and that any reported bid or sale prices may not be a true market-based valuation of the common stock. QUARTER ENDED HIGH LOW ------------- ---- --- March 31, 2003 $0.11 $0.11 June 30, 2003 $0.08 $0.08 September 30, 2003 $0.059 $0.06 December 31, 2003 $0.074 $0.075 March 31, 2004 $0.54 $0.10 June 30, 2004 $0.58 $0.365 September 30, 2004 $0.65 $0.38 December 31, 2004 $0.55 $0.35 HOLDERS As of July 12, 2005, there were 45 record holders of our common stock. DIVIDENDS Our policy is to retain earnings to provide funds for the operation and expansion of our business. We have not paid cash dividends on our common stock and do not anticipate that we will do so in the foreseeable future. The payment of dividends in the future will depend on our growth, profitability, financial condition and other factors that our board of directors may deem relevant. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS We did not have any securities underlying outstanding options and securities remaining available for issuance under any equity compensation plans as of December 31, 2004. SALES OF UNREGISTERED SECURITIES During the fiscal year ended December 31, 2004, we issued 83,500,000 unregistered shares of common stock to the shareholders of Evergreen Asset Group Limited. This offering was made pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and Rule 506 of thereunder. -18- ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. GENERAL We design, construct, and invest in waste water treatment projects in the PRC. We sell materials and products related to environmental protection. We also operate waste water treatment facilities and tap water facilities under our BOT model. In 2004, we derived all of our net sales from BOT projects. Our customers include municipal governments in the PRC, food processing and beverage companies and industrial companies. In 2004, net sales to our largest customer, True Global Limited, accounted for 97% of our total net sales. We were incorporated under the laws of the State of Nevada on September 10, 1996. Prior to the transaction mentioned below, our corporate name was Discovery Investments, Inc. For the prior two years we had not generated significant revenues and were considered a development stage company as defined in Statement of Financial Accounting Standards No. 7. We were seeking business opportunities or potential business acquisitions. Pursuant to a securities purchase agreement and plan of reorganization dated September 9, 2004, as amended, between our company, Evergreen Asset Group Limited, an International Business Company organized under the laws of the British Virgin Islands ("Evergreen"), and the stockholders of Evergreen, we acquired 100% of the issued and outstanding shares of Evergreen's capital stock. We issued 83,500,000 shares of our common stock in exchange for all of the issued and outstanding shares of Evergreen capital stock. Since the stockholders of Evergreen acquired approximately 83.5% of our outstanding shares and the Evergreen management team and board of directors became the management team and board of directors of our company, according to FASB Statement No. 141 - "BUSINESS COMBINATIONS," this acquisition has been treated as a recapitalization for accounting purposes, in a manner similar to reverse acquisition accounting. In accounting for this transaction: o Evergreen is deemed to be the purchaser and surviving company for accounting purposes. Accordingly, its net assets are included in the balance sheet at their historical book values and the results of operations of Evergreen have been presented for the comparative prior period; o Control of the net assets and business of our company was acquired effective October 15, 2004. This transaction has been accounted for as a purchase of the assets and liabilities of our company by Evergreen. The historical cost of the net liabilities assumed was $0.00. As a result of the transaction described above we changed our name from Discovery Investments, Inc. to China Evergreen Environmental Corporation. CRITICAL ACCOUNTING POLICIES The following is a discussion of those accounting policies that we deem to be "critical" -- that is, they are important to the portrayal of our financial condition and results, and they reflect management's reliance on estimates regarding matters that are inherently uncertain. REVENUE RECOGNITION. Revenue from fixed price long-term contracts is recognized on the percentage of completion method for individual contracts. Revenues are recognized based on the ratio that costs incurred bear to total estimated contract costs. The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance and estimated losses on uncompleted contracts are made in the period in which such losses are determinable. In instances when the work performed on fixed price agreements is of relatively short duration, we use the completed contract method of accounting whereby revenue is recognized when the work is completed. Revenue arising from waste water treatment is recognized based on waste water treated as recorded by meters read during the year. -19- IMPAIRMENT OF ASSETS. Our policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in the evaluation include current operating results, trends and whether the anticipated undiscounted estimated future cash flows are less than the carrying value. ALLOWANCES FOR ACCOUNTS RECEIVABLES. Our provisioning policy for bad and doubtful debt is based on the evaluation of collectability and aging analysis of accounts receivables and on management's judgment. We do not require collateral or other security to support client's receivables. We conduct periodic review of our clients' financial condition and customer payment practice to minimize collection risk on accounts receivables. This review is based on a considerable amount of judgment which is required in assessing the ultimate realization of these receivables, including the current creditworthiness and the past collection history of each customer. During the 2004 financial period, we had not made any allowance for doubtful debts. CREDIT POLICY. In 2004 and 2003, our accounts receivables were US$0.08 million and US$9.46 million, respectively. The sharp increase in accounts receivables in 2004 was due to receivables from True Global Limited, which amounted to US$ 9.41 million, as a result of the sale of the Xianyang East Suburbs Wastewater Treatment Plant BOT Project. There is no allowance for doubtful amounts for both 2004 and 2003. For turnkey projects, we bill our customers based on the percentage of completion as set forth in the contract signed with our customers whereas for BOT projects, we will start billing our customers monthly once the wastewater treatment facilities start operation for the operating period as stipulated in the BOT agreements. RESULTS OF OPERATIONS The following table sets forth the items in our consolidated statements of operations for the periods indicated. FISCAL YEAR ENDED DECEMBER 31, ------------------------------------- 2004 2003 ------------------------------------- Net sales $ 9,366,513 $ 2,889,094 Cost of goods sold 6,025,435 1,828,801 Gross profit 3,341,078 1,060,293 Selling, general and administrative 1,395,169 355,413 Income from operations 1,945,909 704,880 Other income 19,295 9,240 Interest expense (2,420) (28,590) Share of results in XL 91,740 - Gain on disposal of interest in XY 2,029,720 - Impairment loss on other investment - (370,097) Income before income tax 4,084,244 315,433 Income tax expense (467,911) (104,093) Minority interests 80,616 (42,993) Net income 3,696,949 168,347 NET SALES. Net sales increased 224.2% from $2.89 million in 2003 to $9.37 million in 2004. The 2004 increase in net sales was primarily from our sale of our investment in the waste water treatment project of Xian Yang City, Shanxi Province, PRC. The percentage of net sales attributable to operating the waste water treatment plants and fresh water plants was not significant in 2004, but we expect such fees to increase in 2005. We derived our net sales in 2003 mainly from turn-key engineering projects. GROSS PROFIT. Gross profit increased 215.1% from $1.06 million in 2003 to $3.34 million in 2004 and, as a percentage of net sales, decreased slightly from 36.69% in 2003 to 35.67% in 2004. The increase in gross profit for 2004 was primarily the result of an increase in our revenue. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs increased 292.5% from $0.36 million in 2003 to $1.4 million in 2004, and as a percentage of net sales, increased from 12.30% to 14.89%. The increase in costs in 2004 was primarily the result of higher expenditures to support our increased sales. -20- OPERATING INCOME. Operating income increased 176.06% from $0.7 million in 2003 to $1.95 million in 2004, and as a percentage of net sales, operating income decreased slightly from 24.4% in 2003 to 20.77% in 2004. The increase in operating income for 2004 was primarily the result of an increased net sales. GAIN ON DISPOSAL OF INTEREST IN SUBSIDIARY XY. We recorded a $2.02 million gain in 2004 on the disposal of our entire 90% attributable interest in Xian Yang Bai Sheng Water Purifying Company Limited ("XY") at a consideration of $4,130,435. The gain represents the difference between the disposal proceeds and our attributable share of net assets of XY at the date of disposal. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2004, we had $0.34 million in cash and cash equivalents. During 2004, we created net cash resources of approximately $2.2 million by operating activities. We used net cash of $4.85 million for investing activities in 2004. This use of cash was primarily the result of acquisition of 90% equity interests in each of XXM, XY, HY and BJHT, all of which are PRC incorporated companies established in the PRC with limited liability, and acquisition of infrastructure assets. The net cash provided by financing activities was about $2.93 million, and the increase primarily resulted from paid-in capital by our principal shareholder. We have an unsecured loan of about $0.23 million with a Chinese bank which is interest bearing at 6.64% per annum. Under the BOT agreements, we have capital commitments for constructing the waste water treatment plants in Bei Jin and Hai Yang Cities. The total contracts due in 2004 within two years is about $3.1 million. In April 2005, we conducted a private placement of 20 investment units, at $25,000 per unit, for gross proceeds of $500,000. Each unit consisted of (a) one 12% convertible debenture in the original principal amount of $25,000, convertible into shares of our common stock at the rate of the lesser of (i) $0.20 per share or (ii) a 10% discount to the price per share of common stock (or conversion price per share of common stock) of the next private placement conducted by us prior to any conversion of the debenture, and (b) 125,000 detachable warrants to purchase one share each of our common stock at an exercise price of $0.20 per share, expiring ten years from their date of issuance. The debentures are due and payable August 1, 2005. Our business forecasts project that our cash position, cash flow and our working capital line of credit will be sufficient to meet our corporate, operating and capital requirements throughout 2005. However, we may need additional access to long-term capital for acquisitions or other expansion projects. OTHER MATTERS The impact of inflation and the effect of foreign exchange rate changes during 2004 have not had a material impact on our business and financial results. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet financing arrangements. -21- ITEM 7. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm......................F-1 Consolidated Balance Sheets at December 31, 2004 and 2003....................F-2 Consolidated Statements of Operations for the years ended December 31, 2004 and 2003 ...............................................F-3 Consolidated Statements of Stockholders' Equity .............................F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003.................................................F-5 Notes to Consolidated Financial Statements...................................F-6 -22- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of China Evergreen Environmental Corp. We have audited the accompanying consolidated balance sheets of China Evergreen Environmental Corp. (the "Company") and its subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2004 and 2003 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. /s/ PKF Certified Public Accountants Hong Kong March 11, 2005, except for note 34 as to which the date is April 15, 2005 F-1 CHINA EVERGREEN ENVIRONMENTAL CORP. CONSOLIDATED BALANCE SHEETS DECEMBER 31, ------------------------------------ 2004 2003 USD USD ASSETS Current assets Cash and cash equivalents 336,079 54,556 Inventories, net (Note 9) - 12,559 Accounts receivable (Note 10) 9,462,999 84,359 Prepayment, deposits and other receivables (Note 11) 777,365 1,183,354 Amounts due from related companies (Note 12) 3,158,328 703,103 Amounts due from directors (Note 13) 26,794 - Amount due from an associate (Note 14) 1,744,775 3,588,453 Other investment (Note 15) - 28,454 Deferred tax assets (Note 28) 199,981 197,395 ---------------- ---------------- Total current assets 15,706,321 5,852,233 Infrastructure assets, net (Note 5) 3,305,089 983,895 Property, plant and equipment, net (Note 6) 330,865 361,332 Convertible note receivable (Notes 7 and 20) 1,366,997 - Construction-in-progress - 6,869 Deposits paid for acquisition of property, plant and equipment (Note 32) 543,478 2,619,566 Interests in an associate (Note 8) 345,363 253,623 ---------------- ---------------- Total assets 21,598,113 10,077,518 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Unsecured loan (Note 16) 229,468 1,386,715 Other borrowing (Note 17) 24,155 24,155 Accounts payable 8,755,148 1,811,010 Accrued liabilities (Note 18) 526,068 1,026,060 Amounts due to directors (Note 13) 606,645 740,460 Amounts due to related companies (Note 19) 2,864,506 910,723 Deposit received for disposal of a subsidiary (Note 20) 350,514 - Income tax payable 626,249 118,816 ---------------- ---------------- Total liabilities 13,982,753 6,017,939 ---------------- ---------------- Minority interests (Note 21) 159,642 449,515 ---------------- ---------------- Stockholders' equity Common stock, USD0.001 par value, 200,000,000 shares authorized; 99,999,997 shares issued and outstanding at December 31, 2004; 29,059,007 shares issued and outstanding at December 31, 2003 (Note 23) 83,800 3,792,391 Additional paid-in capital (Note 24) 3,857,296 - Retained earnings/(accumulated deficit) 3,514,622 (182,327) ---------------- ---------------- Total stockholders' equity 7,455,718 3,610,064 ---------------- ---------------- Total liabilities and stockholders' equity 21,598,113 10,077,518 ================ ================ see accompanying notes to consolidated financial statements
F-2 CHINA EVERGREEN ENVIRONMENTAL CORP. CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, ------------------------------------ 2004 2003 USD USD Revenue (Note 30) 9,366,513 2,889,094 Cost of revenue (6,025,435) (1,828,801) ---------------- ---------------- Gross profit 3,341,078 1,060,293 Depreciation and amortization (66,413) (17,941) General and administrative expenses (1,328,756) (337,472) ---------------- ---------------- Income from operations 1,945,909 704,880 Other income (Note 25) 19,295 9,240 Interest expense (Note 26) (2,420) (28,590) Share of results in an associate - XL 91,740 - Gain on disposal of interest in a subsidiary - XY (Note 27) 2,029,720 - Impairment loss on other investment - (370,097) ---------------- ---------------- Income before income tax 4,084,244 315,433 Income tax expense (Note 28) (467,911) (104,093) Minority interests (Note 21) 80,616 (42,993) ---------------- ---------------- Net income 3,696,949 168,347 ================ ================ Basic net income per share (Note 22) 0.043 0.002 ================ ================ see accompanying notes to consolidated financial statements
F-3 CHINA EVERGREEN ENVIRONMENTAL CORP. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY COMMON STOCK -------------------------- ADDITIONAL TOTAL PAID-IN ACCUMULATED STOCKHOLDERS' NO. OF AMOUNT CAPITAL DEFICIT EQUITY SHARES USD USD USD USD At January 1, 2003 - 1,292,391 - (350,674) 941,717 Initial capital injection of XY and HY - 2,500,000 - - 2,500,000 Net income - - - 168,347 168,347 ------------ ------------ ------------ -------------- -------------- At December 31, 2003 - 3,792,391 - (182,327) 3,610,064 ============ ============ ============ ============== ============== At January 1, 2004 - 3,792,391 - (182,327) 3,610,064 At January 1, 2004 - CEEC share capital 29,059,007 - - - - Initial capital injection of BJHTSY - 217,392 - - 217,392 Elimination of capital upon the acquisition of XXM, XY, HY and BJHTSY by EGAG - (4,009,783) - - (4,009,783) Initial capital injection of EGAG (Notes 2(ii) and 23) - 300 - - 300 Additional paid-in capital of EGAG (Note 24) - - 3,857,296 - 3,857,296 Issue of shares (Note 23) 1,200,000 - - - - Cancellation of shares before reverse acquisition (Notes 2(ii) and 23) (13,759,010) - - - - Acquisition of EGAG (Notes 2(ii) and 23) 83,500,000 83,500 - - 83,500 Net income - - - 3,696,949 3,696,949 ------------ ------------ ------------ -------------- -------------- At December 31, 2004 99,999,997 83,800 3,857,296 3,514,622 7,455,718 ============ ============ ============ ============== ============== see accompanying notes to consolidated financial statements
F-4 CHINA EVERGREEN ENVIRONMENTAL CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, -------------------------------- 2004 2003 USD USD Cash flows from operating activities : Net income 3,696,949 168,347 Adjustments to reconcile net income to net cash provided by operating activities : Depreciation and amortization 66,413 17,941 Impairment loss on other investment - 370,097 Provision of inventories 12,559 - Increase in deferred tax assets (42,644) (14,723) (Decrease)/increase in minority interests (56,462) 320,771 Gain on disposal of interest in a subsidiary - XY (Note 27) (2,029,720) - Share of results in an associate - XL (91,740) - Changes in operating assets and liabilities : Decrease in inventories - 239 Increase in accounts receivable (7,422,118) (23,992) Decrease/(increase) in prepayment, deposits and other receivables 298,576 (1,055,993) Decrease/(increase) in amounts due from related companies 1,012,593 (838,692) (Increase)/decrease in amounts due from directors (722,263) 1,104,381 Increase in accounts payable 6,944,138 1,807,138 (Decrease)/increase in accrued liabilities (533,723) 49,301 Increase in amounts due to directors 561,655 7,246 Increase in income tax payable 507,433 118,816 -------------- -------------- Net cash provided by operating activities 2,201,646 2,030,877 -------------- -------------- Cash flows from investing activities : Deposit paid for acquisition of property, plant and equipment (543,478) (2,619,566) Cash inflow arising from disposal of interest in a subsidiary - XY (Note 33(iii)) 2,168,806 - Acquisition of property, plant and equipment (4,691) (23,817) Acquisition of infrastructure assets (2,405,113) (433,170) Construction-in-progress - (6,869) Decrease in amount due from an associate (55,682) (3,069,129) Acquisition of XXM, XY, HY and BJHTSY (4,009,783) - -------------- -------------- Net cash used in investing activities (4,849,941) (6,152,551) -------------- -------------- Cash flows from financing activities : New unsecured loans - 1,386,715 Repayment of unsecured loans (1,157,247) - Initial capital injection of HY and XY - 2,500,000 Initial capital injection of EGAG 300 - Paid-in capital of EGAG (Note 24) 4,086,765 - Decrease in amount due to a related company - (185,798) -------------- -------------- Net cash provided by financing activities 2,929,818 3,700,917 -------------- -------------- Net increase/(decrease) in cash and cash equivalents 281,523 (420,757) Cash and cash equivalents, beginning of year 54,556 475,313 -------------- -------------- Cash and cash equivalents, end of year 336,079 54,556 ============== ============== see accompanying notes to consolidated financial statements
F-5 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. CHANGE OF COMPANY NAME The Company was incorporated in the State of Nevada on September 10, 1996. Following a reverse takeover transaction as detailed in note 2(ii), the Company has ended its development stage and is now engaging in the provision of the business as set out in note 3. On November 12, 2004, the name of the Company was changed from Discovery Investment Inc. to China Evergreen Environmental Corp. ("CEEC"), with all the required filings submitted to the United States Securities and Exchange Commission. 2. BASIS OF PRESENTATION (i) The accompanying consolidated financial statements of CEEC and its subsidiaries (the "Group") have been prepared in accordance with generally accepted accounting principles in the United States of America. All significant intercompany transactions and balances have been eliminated in consolidation. (ii) On October 15, 2004, CEEC completed a share exchange with the stakeholders of Evergreen Asset Group Limited ("EGAG") which was incorporated in the British Virgin Islands on April 20, 2004 under the International Business Companies Act, British Virgin Islands (the "Exchange") (Details of the group reorganization of EGAG was set out in note 2(iii)). Before the Exchange, CEEC caused its stakeholders to cancel and return to treasury, for no consideration, 13,759,010 outstanding shares of common stock. In the Exchange, CEEC acquired 300 shares representing all the issued and outstanding common stock of EGAG from the stakeholders of EGAG (the "Shareholders") in exchange for the issuance of 83,500,000 shares of common stock of CEEC to the Shareholders. The Exchange resulted in a change of control of CEEC. Upon completion of the Exchange, CEEC has a total of 99,999,997 shares issued and outstanding, of which 83,500,000 or 83.5% are owned by the Shareholders. As the Exchange resulted in the former stakeholders of EGAG owning greater than 50% of the common stock of CEEC, the Exchange has been treated as a reverse takeover with EGAG as the accounting acquirer (legal subsidiary) and CEEC as the accounting acquiree (legal parent). F-6 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PRESENTATION (CONT'D) Accordingly, the purchase method under reverse takeover accounting has been applied except that no goodwill is recorded on the consolidated balance sheet, as such : (a) The consolidated financial statements are issued under the name of the legal parent, CEEC, but are a continuation of the financial statements of EGAG. The comparative figures are those of EGAG. (b) EGAG is deemed to be the acquirer for accounting purposes and as such, its assets and liabilities are included in the consolidated financial statements at their historical carrying values. (c) The common stock and accumulated deficit of CEEC up to the date of the Exchange are eliminated. (d) The capital structure of the Company is that of CEEC, but the dollar amount of the issued share capital in the consolidated balance sheet is that of EGAG immediately prior to the Exchange plus the value of shares issued by CEEC to acquire EGAG. (e) The value of shares issued by CEEC is determined to be their par value as CEEC had net liabilities at the date of the Exchange. (f) The par value of CEEC common stock and the net liabilities of CEEC at the date of the Exchange are written off to the consolidated statement of operations. (iii) Pursuant to a group reorganization (the "Reorganization") which was completed in July 2004, EGAG became the holding company of the commonly controlled entities by the acquisition of 90% equity interests in each of Guang Dong Xin Xing Mei Biology Company Limited ("XXM"), Xian Yang Bai Sheng Water Purifying Company Limited ("XY"), Hai Yang City Sheng Shi Environment Protection Company Limited ("HY") and Bei Jing Hao Tai Shi Yuan Water Purifying Company Limited ("BJHTSY") for cash consideration of RMB12,601,000, RMB18,000,000, RMB2,700,000 and RMB1,800,000 respectively, all of which are domestic incorporated companies established in the People's Republic of China (the "PRC") with limited liability, the particulars of which are set out below :- F-7 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. BASIS OF PRESENTATION (CONT'D) DATE OF ATTRIBUTABLE EQUITY REGISTERED NAME OF COMPANY ESTABLISHMENT INTEREST % CAPITAL ---------------------- DIRECT INDIRECT RMB Guang Dong Xin Xing Mei Biology May 18, 1999 90 - 11,890,000 Company Limited ("XXM") Tian Jin Shi Sheng Water Treatment November, 19 - 81 2,000,000 Company Limited ("TJ") 2002 Xian Yang Bai Sheng Water May 19, 2003 90 - 20,000,000 Purifying Company Limited ("XY") Hai Yang City Sheng Shi Environment July 30, 2003 90 - 3,000,000 Protection Company Limited ("HY") Bei Jing Hao Tai Shi Yuan Water May 26, 2004 90 - 2,000,000 Purifying Company Limited ("BJHTSY")
3. DESCRIPTION OF BUSINESS The principal activities of the Group are the research and development of waste water, garbage treatment and aqueous purifying techniques, investment and construction of waste water treatment plant and sales of environment protection related products. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting years. Although management believes that the estimates and assumptions used in preparing the accompanying consolidated financial statements and related notes are reasonable in light of known facts and circumstances, actual results could differ from those estimates. F-8 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) CASH AND CASH EQUIVALENTS Cash equivalents are highly liquid investments and have maturities of three months or less at the date of purchase. INVENTORIES Inventories are valued at the lower of cost or market with cost determined on a first-in, first-out method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation and amortization and impairment loss. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives :- Office equipment 5 years Furniture and fixtures 5 years Tools and equipment 5 years Motor vehicles 10 years Waste water treatment plant 20 years INFRASTRUCTURE ASSETS Infrastructure assets represents the cost of construction of the waste water treatment plants under the Build-Operate-Transfer ("BOT") agreements with the PRC government. The cost includes development and construction expenditure incurred and other direct costs attributable to the development. No depreciation and amortization is provided in respect of infrastructure assets until such time as the relevant assets are completed and put into operational use. On completion, depreciation and amortization are provided using the straight-line method over the operation periods. IMPAIRMENT OF ASSETS The Group's policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in the evaluation include current operating results, trends and anticipated undiscounted future cash flows. An impairment loss is recognized to the extent that the sum of undiscounted estimated future cash flows that is expected to result from the use of the asset, or other measure of fair value, is less than the carrying value. F-9 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) ASSOCIATE An associate is one, not being a subsidiary or a joint venture, in which the Company is in a position to exercise significant influence, including participation in financial and operating policy decisions. Details of the associate are set out in note 8 to the consolidated financial statements. Interests in an associate is stated in the consolidated balance sheet at the Group's share of the net assets under the equity method of accounting, as reduced by any identified impairment loss. The results of the associate are included in the consolidated income statement to the extent of post-acquisition results attributable to the Group. OTHER INVESTMENT Other investment includes equity investment in a private company and is carried at fair value. Unless there has been a permanent impairment to the value of the investment, the change in fair value is reported as a separate component of other comprehensive income or loss. Permanent impairment to the value of the investment is recognized in the consolidated statements of operations. RESEARCH AND DEVELOPMENT COSTS Research and development costs comprise all cost which are directly attributable to research and development activities or which can be allocated on a reasonable basis to such activities. As no research and development costs satisfy the criteria for the recognition of such costs as an asset during the year, such costs are therefore recognized as an expense in the period in which they are incurred. CONCENTRATION OF CREDIT RISK Concentration of credit risk is limited to accounts receivable and is subject to the financial conditions of a major customer which is stated in note 30 to the consolidated financial statements. The Group does not require collateral or other security to support client's receivables. The Group conducts periodic reviews of its clients' financial condition and customer payment practices to minimize collection risk on accounts receivable. FINANCIAL INSTRUMENTS The carrying amounts of all financial instruments approximate fair value. The carrying amounts of cash, accounts receivable, related parties receivable, unsecured loans, accounts payable and related parties payable approximate fair value due to the short-term nature of these items. The carrying amounts of borrowings approximate the fair value based on the Group's expected borrowing rate for debt with similar remaining maturities and comparable risk. F-10 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) REVENUE RECOGNITION Revenue from fixed price long-term contracts is recognized on the percentage of completion method for individual contracts. Revenues are recognized in the ratio that costs incurred bear to total estimated contract costs. The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance, estimated profitability and final contract settlements may result in revisions to costs and income in the period in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable. In instances when the work performed on fixed price agreements is of relatively short duration, we use the completed contract method of accounting whereby revenue is recognized when the work is completed. Revenue arising from waste water treatment is recognized based on waste water treated as recorded by meters read during the year. COST OF REVENUES Cost of revenues comprises labor and other cost of personnel directly engaged in providing the services, subcontracting and attributable overhead costs. Cost of revenues does not include any allocation of depreciation or amortization expense. INCOME TAXES The Group utilizes the asset and liability method of accounting for income taxes whereby deferred taxes are determined based on the temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS The Group uses China Renminbi ("RMB") as the functional currency, which is not freely convertible into foreign currencies. Transactions denominated in currencies other than RMB are translated into RMB at the applicable rates of exchange prevailing at the dates of the transactions, quoted by the People's Bank of China ("the PBOC"). Monetary assets and liabilities denominated in other currencies are translated into RMB at rates of exchange quoted by the PBOC prevailing at the balance sheet date. Exchange gains or losses arising from changes in exchange rates subsequent to the transactions dates for monetary assets and liabilities denominated in other currencies are included in the determination of net income for the respective period. F-11 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS (CONT'D) For financial reporting purposes, RMB has been translated into USD as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at period end. Income statement accounts are translated at the average rate of exchange prevailing during the 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 - foreign currency translation adjustments". Gains and losses resulting from foreign currency transactions are included in other comprehensive income/(loss). Foreign currency translation adjustment was not material. During 2004 and 2003, there have been no significant change in exchange rates. Accordingly, there are no changes in other comprehensive income/(loss). INCOME PER SHARE Basic income per share is computed by dividing the net income for the year by the weighted average number of common shares outstanding during the year. Diluted income per share is computed by dividing the net income for the year by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options, unvested restricted common stock and contingently issuable shares that are probable of being issued, are included in diluted income per share to the extent such shares are dilutive. In accordance with SFAS 128, "Earnings Per Share", the Company uses income from continuing operations, net of income taxes as the "control number" in determining whether common equivalent shares are dilutive or anti-dilutive in periods where discontinued operations are reported. NEW ACCOUNTING PRONOUNCEMENTS (i) The Statement of Financial Accounting Standards No.150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150") was issued in May 2003. This statement affects the classification, measurement and disclosure requirements of the following three types of freestanding financial instruments :- 1) mandatory redeemable shares, which the issuing company is obligated to buy back with cash or other assets; 2) instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets, which include put options and forward purchase contracts; and F-12 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) NEW ACCOUNTING PRONOUNCEMENTS (CONT'D) 3) obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers' shares. In general, SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement had no impact on the Group's results of operations or financial position. (ii) Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities ("VIE")" ("FIN 46"), was issued in January 2003. FIN 46 requires that if an entity is the primary beneficiary of a variable interest entity, the assets, liabilities and results of operations of the variable interest entity should be included in the consolidated financial statements of the entity. The provisions of FIN 46 are effective immediately for all arrangements entered into after January 31, 2003. In December 2003, the Financial Accounting Standards Board ("FASB") completed deliberations on proposed modifications to FIN 46 and re-issued FIN 46 ("Revised Interpretation") resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003 but prior to January 1, 2004 may be accounted for either based on the original interpretation or the Revised Interpretation. The adoption of these interpretations had no impact on the Group's results of operation or financial position. (iii) SFAS 132 (revised 2003), "Employer's Disclosure about Pensions and Other Post-Retirement Benefits" was issued in December 2003. SFAS 132 (revised) revised employer's disclosure about pension plans and other post-retirement benefit plans. SFAS 132 (revised) requires additional disclosures in annual financial statements about the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other post-retirement benefit plans. The annual disclosure requirements are effective for fiscal years ended after December 15, 2003. SFAS 132 (revised) also requires interim disclosure of the elements of net periodic benefit cost and the total amount of contributions paid or expected to be paid during the current fiscal year if significantly different from amounts previously disclosed. The interim disclosure requirements of SFAS 132 (revised) are effective for interim periods beginning after December 15, 2003. The adoption of this statement had no impact on the Group's results of operation or financial position. F-13 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) NEW ACCOUNTING PRONOUNCEMENTS (CONT'D) The details of the Group's pension plans are disclosed in note 29 to the consolidated financial statements (iv) In November 2004, the FASB issued SFAS No. 151 "Inventory costs - an amendment of ARB No. 43, Chapter 4". SFAS 151 amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. SFAS No. 151 is effective for inventory costs incurred during fiscal year beginning after June 15, 2005. The adoption of this standard has no impact on the Company's results of operations or financial position. (v) In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This Standard addresses the accounting for transactions in which a company receives employee services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. This Standard eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and requires that such transactions be accounted for using a fair-value-based method. The Standard is effective for periods beginning after June 15, 2005. The Group is currently assessing the impact of this Standard on its results of operations and financial position. 5. INFRASTRUCTURE ASSETS, NET Infrastructure assets, net represented the construction costs of three waste water treatment plants in the PRC under the BOT agreements as follows :- DECEMBER 31, ----------------------------------- 2004 2003 USD USD Construction costs :- Infrastructure assets of TJ 983,895 983,895 Infrastructure assets of HY 1,951,566 - Infrastructure assets of BJHTSY 418,823 - --------------- ---------------- Total 3,354,284 983,895 Less : Accumulated amortization (49,195) - --------------- ---------------- Infrastructure assets, net 3,305,089 983,895 =============== ================
Amortization expenses for 2004 and 2003 amounted to USD49,195 and USDNil respectively. F-14 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net consisted of the following :- DECEMBER 31, ----------------------------------- 2004 2003 USD USD Purchase cost :- Office equipment - 6,356 Furniture and fixtures 6,063 11,063 Tools and equipment 25,270 20,539 Motor vehicles 121,739 133,318 Waste water treatment plant 235,053 231,946 --------------- ---------------- Total 388,125 403,222 Less : Accumulated depreciation and amortization (57,260) (41,890) --------------- ---------------- Property, plant and equipment, net 330,865 361,332 =============== ================ Depreciation and amortization expenses for 2004 and 2003 amounted to USD17,218 and USD17,941 respectively. There was no impairment loss for 2004 and 2003. 7. CONVERTIBLE NOTE RECEIVABLE DECEMBER 31, ----------------------------------- 2004 2003 USD USD Convertible note - Note 20 1,366,997 - =============== ================
F-15 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INTERESTS IN AN ASSOCIATE DECEMBER 31, ----------------------------------- 2004 2003 USD USD Share of net assets 345,363 253,623 =============== ================ (a) Details of the associate as of December 31, 2004 are as follows :- PERCENTAGE OF EQUITY NAME OF ASSOCIATE HOLDING Xin Le Sheng Mei Water Purifying Company Limited 35% (b) Information extracted from the audited financial statements of the associate for the years ended December 31, 2004 and 2003 is as follows :- YEAR ENDED DECEMBER 31, ----------------------------------- 2004 2003 USD USD (i) Statements of operations Turnover 1,149,275 - =============== ================ Net profit/(loss) 452,007 (74,785) =============== ================
F-16 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, ----------------------------------- 2004 2003 USD USD (ii) Balance sheet Infrastructure assets 4,412,073 4,592,842 Property plant and equipment, net - 25,586 Cash and cash equivalents 591 21,104 Inventories 37,418 30,117 Prepayment, deposits and other receivables 1,576,542 551,488 Deferred tax assets 32,211 - Other investment - 36,232 Accounts payable (630,808) (324,119) Amount due to XXM (3,586,400) (3,519,575) Other current liabilities (745,238) (769,292) --------------- ---------------- Net assets 1,096,389 644,383 =============== ================ 9. INVENTORIES, NET DECEMBER 31, ----------------------------------- 2004 2003 USD USD Finished goods 12,559 12,559 Less : Provision for obsolescence (12,559) - --------------- ---------------- Finished goods, net - 12,559 =============== ================ 10. ACCOUNTS RECEIVABLE DECEMBER 31, ----------------------------------- 2004 2003 USD USD Accounts receivable 9,462,999 84,359 =============== ================
There was no allowance for doubtful amounts for the year ended December 31, 2004 and 2003. F-17 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. PREPAYMENT, DEPOSITS AND OTHER RECEIVABLES DECEMBER 31, ----------------------------------- 2004 2003 USD USD Prepayment 47,186 37,403 Deposits - 670,048 Other receivables 730,179 475,903 --------------- ---------------- 777,365 1,183,354 =============== ================
12. AMOUNTS DUE FROM RELATED COMPANIES At December 31, 2004 and 2003, it mainly represents amount due from Guang Dong Xin Sheng Environmental Protection Company Limited in which Mr. Pu Chongliang ("Mr. Pu"), a director who is also a stockholder of the Company, is also a director and has equity interests. All amounts are interest-free, unsecured and repayable on demand. 13. AMOUNTS DUE FROM/TO DIRECTORS The amounts are interest-free, unsecured and repayable on demand. 14. AMOUNT DUE FROM AN ASSOCIATE The amount is interest-free, unsecured and repayable on demand. F-18 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. OTHER INVESTMENT DECEMBER 31, ----------------------------------- 2004 2003 USD USD Unlisted equity, at cost - 398,551 =============== ================ Unlisted equity, at fair value - 28,454 =============== ================ The amount represents 55% equity interest in XL and was disposed to an independent third party, a wholly-owned subsidiary of China Silver Dragon Group Limited ("CSD"), a listed company in Hong Kong, in 2004. 16. UNSECURED LOAN The amount represents a loan borrowed from a financial institution which is interest bearing at 6.6375% per annum, unsecured and repayable on demand. 17. OTHER BORROWING The amount represents a loan borrowed from the government for research and development of the application of the waste water treatment system. The amount is interest-free, unsecured and repayable on demand. 18. ACCRUED LIABILITIES At December 31, 2004 and 2003, accrued liabilities comprised of the following :- DECEMBER 31, ----------------------------------- 2004 2003 USD USD Acquisition of property, plant and equipment - 550,725 Payroll 1,859 529 PRC tax 153,340 161,927 Staff welfare 30,124 28,195 Other payable 336,566 205,693 Other accruals 4,179 78,991 --------------- ---------------- Total 526,068 1,026,060 =============== ================
F-19 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. AMOUNTS DUE TO RELATED COMPANIES At December 31, 2004 and 2003, it mainly represents amount due to Bei Jing Zhao Cheng Chuang Zhan Investment Company Limited ("BJZC") in which Mr. Pu has equity interests. All amounts are interest-free, unsecured and repayable on demand. 20. DEPOSIT RECEIVED FOR DISPOSAL OF A SUBSIDIARY On December 17, 2003, XXM entered into two sale and purchase agreements with an independent third party, a wholly-owned subsidiary of CSD, a listed company in Hong Kong, in relation to the disposal of 55% equity interest in TJ and XL and the stockholder's loans at a consideration of USD350,514 and USD1,927,815 respectively. The total consideration of USD2,278,329 will be settled by cash of USD911,332 within one year and by issuing a convertible note of USD1,366,997. The convertible note bears interest at 6% per annum with maturity date of three years from the date of issuance and are repayable after three years from the date of issuance or convertible into shares of CSD at the conversion price of approximately USD 0.103 subject to adjustments as stipulated in the convertible note at any time after six months from the date of issuance. At December 31, 2004, the equity interest in XL were disposed to CSD while the procedure for disposal of stake in TJ could not be completed due to prohibition by the government of Tian Jin city, so the amount represented the outstanding deposit received for disposal of TJ. 21. MINORITY INTERESTS DECEMBER 31, ----------------------------------- 2004 2003 USD USD At January 1 449,515 128,744 Minority interests in the consolidated statements of operations (80,616) 42,993 Initial capital injection of XY and HY - 277,778 Initial capital injection of BJHTSY 24,154 - Release on disposal of XY (Note 32(iii)) (233,411) - --------------- ---------------- At December 31 159,642 449,515 =============== ================
F-20 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. BASIC NET INCOME PER SHARE (i) The basic net income per share is calculated using the net income and the weighted average number of shares outstanding during the year. YEAR ENDED DECEMBER 31, -------------------------------------- 2004 2003 Net income (USD) 3,696,949 168,347 ================= ================= Weighted average number of common shares outstanding 86,970,079 83,500,000# ================= ================= Basic net income per share (USD) 0.043 0.002 ================= =================
# The number represents the number of shares issued by CEEC for the Exchange. (ii) The diluted net income per share is not presented as there is no dilutive effect for years ended December 31, 2004 and 2003. F-21 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23. COMMON STOCK NO. OF AMOUNT SHARES USD Authorized :- Common stock at USD0.001 par value At January 1, 2004 100,000,000 100,000 Increase on November 12, 2004 - Note 23(i) 100,000,000 100,000 ----------------- ----------------- At December 31, 2004 200,000,000 200,000 ================= ================= Preferred stock at USD0.001 par value Increase on November 12, 2004 and at December 31, 2004 - Note 23(i) 50,000,000 50,000 ================= ================= Issued and outstanding :- Common stock at USD0.001 par value At January 1, 2004 CEEC share capital 29,059,007 - EGAG share capital - 300 Shares issued 1,200,000 - Shares cancelled before the Exchange (13,759,010) - Shares issued for acquisition of EGAG (Note 2(ii)) 83,500,000 83,500 ----------------- ----------------- At December 31, 2004 99,999,997 83,800 ================= =================
Note : (i) Pursuant to a board resolution passed on November 12, 2004, the authorized number of shares of common stock was increased from 100,000,000 to 200,000,000 and also 50,000,000 shares of preferred stock was authorized. 24. ADDITIONAL PAID-IN CAPITAL The amount represents additional paid-in capital of USD4,086,765 paid by the stakeholders of EGAG upon the issue of 100 shares of EGAG and the merger difference of USD229,469 (equivalent to RMB1,900,000) arising from the Reorganization as set out in Note 2(iii). F-22 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25. OTHER INCOME YEAR ENDED DECEMBER 31, ----------------------------------- 2004 2003 USD USD Bank interest income 5,215 8,578 Other income 14,080 662 --------------- ---------------- 19,295 9,240 =============== ================ 26. INTEREST EXPENSE YEAR ENDED DECEMBER 31, ----------------------------------- 2004 2003 USD USD Interest on bank and other loans wholly repayable within one year 2,420 28,590 =============== ================
27. GAIN ON DISPOSAL OF INTEREST IN A SUBSIDIARY - XY On October 5, 2004, EGAG entered into an agreement with True Global Limited, an independent third party, to dispose of its entire 90% direct interest in XY at a consideration of USD4,130,435. The gain represents the difference between the disposal proceeds and the Group's attributable share of net assets of XY at the date of disposal. F-23 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28. INCOME TAXES The income tax expense consisted of the following :- YEAR ENDED DECEMBER 31, ----------------------------------- 2004 2003 USD USD Current tax : PRC (510,555) (118,816) Deferred tax : PRC 42,644 14,723 --------------- ---------------- Total income tax expense (467,911) (104,093) =============== ================ No provision for income tax has been made for the Company for the year due to the net loss and no state income tax in Nevada, the state of the Company's domicile and operations. The current tax for the year represents the provision for PRC enterprise income tax calculated at the standard income tax rate of 33% on the assessable profits of the PRC's subsidiaries and the standard withholding income tax rate of 10% on the assessable profits generated by EGAG, a company incorporated in the British Virgin Islands, in the PRC. Income tax expense can be reconciled with the amount computed by applying the statutory income tax rate to income before income tax as follows :- YEAR ENDED DECEMBER 31, ----------------------------------- 2004 2003 USD USD Income before income tax 4,084,244 315,433 =============== ================ Expected income tax expense at PRC statutory income tax rate of 33% (1,347,801) (104,093) Income not taxable for tax purposes 36,305 - Tax rate differential 1,104,152 - Valuation allowances (260,567) - --------------- ---------------- Income tax expense (467,911) (104,093) =============== ================
The major components of deferred tax assets recognized in the consolidated balance sheets as of December 31, 2004 and 2003 were as follows :- F-24 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28. INCOME TAXES (CONT'D) DECEMBER 31, ----------------------------------- 2004 2003 USD USD Expenses that are reported in financial statements prior to becoming deductible for tax purposes 1,251,825 1,083,570 Revenue recognized for financial reporting purposes before being recognized for tax purposes (1,051,844) (886,175) Tax losses of CEEC and XXM 264,201 - Valuation allowances (264,201) - --------------- ---------------- 199,981 197,395 =============== ================
At December 31, 2004, XXM had unutilized tax losses amounted to USD789,598 which can be carried forward five years from the year of loss with expiry in 2009. The net federal tax loss of CEEC will expire in 2020. 29. PENSION PLANS As stipulated by the PRC government regulations, the Group is required to contribute to PRC insurance companies organized by the PRC government which are responsible for the payments of pension benefits to retired staff. The monthly contribution was equal to 12% of the salaries of the existing staff. The Group has no obligation for the payment of pension benefits beyond the annual contributions described above. Pension contributions for 2004 and 2003 amounted to USD13,981 and USD8,767 respectively. 30. CONCENTRATION The Group's major customer is True Global Limited, an independent third party, which accounted for 97% of the Group's total revenue of 2004 in relation to the construction of the waste water treatment plant of XY. F-25 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31. COMMITMENTS Capital commitment At December 31, 2004, capital expenditure contracted for but not recognized in these financial statements was as follows :- DECEMBER 31, ----------------------------------- 2004 2003 USD USD Capital expenditures 3,103,042 26,207,729 =============== ================ The amount represents the unpaid amount of the total contract sum for constructing the waste water treatment plants in Bei Jing and Hai Yang cities under the BOT agreements and is expected to be paid as follows :- DECEMBER 31, ----------------------------------- 2004 2003 USD USD Within 2 years 3,103,042 15,338,164 After 2 years - 10,869,565 --------------- ---------------- 3,103,042 26,207,729 =============== ================
32. RELATED PARTY TRANSACTIONS Apart from those as disclosed in notes 12 to 14 and 19, the Group paid deposit of USD543,478 to BJZC for acquisition of property, plant and equipment during the year. F-26 CHINA EVERGREEN ENVIRONMENTAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33. SUPPLEMENTAL CASH FLOW INFORMATION YEAR ENDED DECEMBER 31, ----------------------------------- 2004 2003 USD USD (i) Interest paid 2,420 28,590 (ii) Non-cash investing activities Infrastructure assets (Note 5) 632,232 550,725 Convertible note receivable (Notes 7 and 20) 1,366,997 - =============== ================ (iii) During the year, the Group disposed of a subsidiary - XY. The fair value of the net assets disposed of was as follows :- USD Cash and cash equivalents 5,107 Prepayment, deposits and other receivables 702,560 Deferred tax assets 40,058 Infrastructure assets, net 666,956 Property, plant and equipment, net 17,940 Deposits paid for acquisition of property, plant and equipment 2,310,386 Accrued liabilities (15,318) Amount due to related company (1,393,563) Minority interests (233,411) --------------- 2,100,715 Gain on disposal of interest in a subsidiary - XY 2,029,720 --------------- 4,130,435 =============== Satisfied by :- Cash 2,173,913 Accounts receivable 1,956,522 --------------- 4,130,435 =============== An analysis of net cash inflow of cash and cash equivalents in respect of the disposal of interest in a subsidiary :- Cash consideration 2,173,913 Cash and cash equivalents disposed (5,107) --------------- Net cash inflow of cash and cash equivalents 2,168,806 =============== 34. SUBSEQUENT EVENTS In April 2005, the Company conducted the private placement sale of 20 units, at USD25,000 per unit, for the gross proceeds of USD500,000. Each unit consisted of (a) one 12% convertible debenture in the original principal amount of USD25,000, convertible into shares of the Company's common stock at the rate of the lesser of (i) USD0.20 per share or (ii) a 10% discount to the price per share of common stock (or conversion price per share of common stock) of the next private placement conducted by the Company prior to any conversion of the debenture, and (b) 125,000 detachable warrants to purchase one share each of the Company's common stock at an exercise price of USD0.20 per share, expiring ten years from their date of issuance. The debentures are due and payable August 1, 2005.
F-27 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On December 22, 2004, our board of directors approved a change in auditors. Our board approved the dismissal of Wm. Andrew Campbell C.A. as our independent public accountant and the selection of PKF Hong Kong SAR, as their replacement. Wm. Andrew Campbell C.A 's report on our financial statements for the fiscal year ended December 31, 2003 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to audit scope, procedure or accounting principles except that the reports were modified as to uncertainty and contained a disclosure stating that the financial statements were prepared based on the assumption that we would continue as a going concern. During our fiscal year ended December 31, 2003 and the subsequent interim period through December 22, 2004, there were no disagreements between us and Wm. Andrew Campbell C.A on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Wm. Andrew Campbell C.A 's satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their reports on our financial statement for such years; and there were no reportable events as described in Item 304(a)(1)(iv) of Regulation S-B. We provided Wm. Andrew Campbell C.A with a copy of the foregoing disclosures and Wm. Andrew Campbell C.A has stated in writing its agreement with the foregoing disclosures. In addition, during our two most recent fiscal years ended December 31, 2003 and 2002 and the subsequent interim periods, we did not consult with PKF Hong Kong SAR with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-B. -23- ITEM 8A. CONTROLS AND PROCEDURES Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer have reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures are effective as of the end of the period covered by this report. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the last day they were evaluated. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. ITEM 8B. OTHER INFORMATION Not applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Set forth below are our executive officers and directors. NAME AGE POSITION - ---------------------- ------- ----------------------------------------------- Chong Liang Pu 46 Chief Executive Officer, President and Director Ren Cai Ding 46 Chief Financial Officer Jia He Li 62 Chief Operating Officer Shi Rong Jiang 30 Director Lin Hong Ye 62 Director Mr. Pu has served as our chief executive officer, president and a director since October 2004. Mr. Pu founded Evergreen and has acted as its chairman and president since April 2004. From May 1999 until April 2004, Mr. Pu was the chief executive officer and general manager of Guang Dong Xin Xing Mei Biology Company Limited, a majority-owned subsidiary of Evergreen. Mr. Ding has served as our chief financial officer since October 2004. From December 2003 until October 2004, Mr. Ding served as the chief financial officer and financial manager of Guang Dong Xin Xing Mei Biology Company Limited, a majority-owned subsidiary of Evergreen. From January 2000 until December 2003, Mr. Ding was a financial manager of Guangzhou Yitao Group Co., Ltd., a real estate development company in the PRC. In 1999, Mr. Ding was the chief financial officer and head of the auditing department of Shenzhen Wei Ang Appliance Development Co., Ltd., a household appliance manufacturer in the PRC. Mr. Li has served as our chief operating officer since October 2004. Immediately prior to joining our company, Mr. Li was the assistant to the general manager of Evergreen and the deputy general manager of Guang Dong Xin Xing Mei Biology Company Limited, a majority-owned subsidiary of Evergreen. From March 2003 until April 2004, Mr. Li was the deputy general manager of Baijitan Hot Spring Co., Ltd., a hotel resort and spa operator in the PRC. From 1999 until March 2003, Mr. Li was a freelance project promoter, developer and designer for various development projects in the PRC. -24- Ms. Jiang has served as member of our board of directors since October 2004. Between June 2002 and October 2004, Ms. Jiang served as the assistant to the president of Guangdong Xinsheng Environmental Investment Group Limited. From May 1999 to June 2002, Ms. Jiang was assistant to the general manager of Guangdong Xinxingmei Environment Protection Company, a majority-owned subsidiary of Evergreen. Mr. Ye has served as member of our board of directors since October 2004. Between May 2000 and October 2004, Mr. Ye served as the vice president of the Guangdong Branch of the Chinese Academy of Sciences. AUDIT COMMITTEE FINANCIAL EXPERT We do not have an audit committee nor do we have a financial expert associated with an audit committee. CODE OF ETHICS We have adopted a code of ethics that applies to the principal executive officer and principal financial and accounting officer. We will provide to any person without charge, upon request, a copy of our code of ethics. Requests may be directed to our principal executive offices at Floor 5, Guowei Building, 73 Xianlie Middle Road, Guangzhou, Guangdong, China. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than 10% beneficial owners are also required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file. None of our officers, directors or 10% shareholders have filed any of the reports required to be filed under Section 16(a). ITEM 10. EXECUTIVE COMPENSATION. CASH COMPENSATION OF EXECUTIVE OFFICERS. The following table sets forth the cash compensation paid by the company to its chief executive officer for services rendered during the fiscal years ended December 31, 2004 and 2003. ANNUAL COMPENSATION LONG-TERM COMPENSATION --------------------------------------- ----------------------------- NAME AND POSITION YEAR SALARY BONUS OTHER ANNUAL RESTRICTED COMMON SHARES ALL OTHER COMPENSATION STOCK UNDERLYING COMPENSATION AWARDS ($) OPTIONS GRANTED (# SHARES) - -------------------------- ------ --------- ----- -------------- ------------ ---------------- ------------ Chong Liang Pu, 2004 $24,000 -0- -0- -0- -0- -0- Chief Executive Officer 2003 $24,000 -0- -0 -0- -0- -0-
COMPENSATION OF DIRECTORS. Members of our board of directors do not receive cash compensation for their services as directors, although some Directors are reimbursed for reasonable expenses incurred in attending board or committee meetings. In the future, we may have to consider compensating any outside directors that become members of our board of directors. -25- ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of the shares of our common stock as of July 12, 2005 by (i) each person who is known by us to be the beneficial owner of more than five percent (5%) of the issued and outstanding shares of our common stock, (ii) each of our directors and executive officers and (iii) all directors and executive officers as a group. Except as otherwise stated, the mailing address for each person identified below is Floor 5, Guowei Building, 73 Xianlie Middle Road, Guangzhou, Guangdong, 510095, China. NAME NUMBER OF SHARES PERCENTAGE OWNED --------------------- -------------------- Chong Liang Pu 57,489,750 57.5% Shi Rong Jiang 5,101,000 5.10% Jia He Li -0- 0% Lin Hong Ye -0- 0% Ren Cai Ding -0- 0% Gao Yongping 10,145,250 10.1% This table is based upon information derived from our stock records. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the shareholders named in this table has sole or shared voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based upon 99,999,997 shares of common stock outstanding as of July 12, 2005. EQUITY COMPENSATION PLANS The following table sets forth certain information as of December 31, 2004 concerning our equity compensation plans: Number of Common Shares to Be Issued Upon Weighted- Average Number of Common Exercise of Outstanding Exercise Price of Shares Remaining Plan Category Options Outstanding Options Available for Issuance - ------------------ -------------------------- ---------------------- ---------------------- None
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. We paid a deposit of $543,478 to Bei Jing Zhao Cheng Chuang Zhan Investment Company Limited, in which Mr. Pu has equity interests, for acquisition of property, plant and equipment during the year. We hold the exclusive rights to use MHA biological treatment processes technologies and GM Bio-carriers. Both are the subject of patents owned by our Chairman, Mr. Pu. Pursuant to an agreement with Mr. Pu dated October 20, 2004, we acquired the exclusive rights to both patents in perpetuity and free of charge. ITEM 13. EXHIBITS. INDEX TO EXHIBITS 2.1 Securities Purchase Agreement and Plan of Reorganization (1) 2.2 Amendment No. 1 to Securities Purchase Agreement and Plan of Reorganization (1) 3.3 Certificate of Amended and Restated Articles of Incorporation (3) -26- 3.4 Amendments to Bylaws (3) 10.1 BOT Investment and Operation Contract for Sewage Treatment Plant dated December 30, 2003 between Guangdong Xinsheng Environmental Protection Co., Ltd. and City Administration of Feng Feng Mining Area of Handon City, Hebei Province 10.2 Investment Management Contract dated August 14, 2002 between Guangdong Xinxingmei Environmental Protection Science and Technology Investment Co., Ltd. and The People's Government of Wuqing District, Tianjin City 10.3 BOT Investment Contract dated July 4, 2003 between Guandong Xinsheng Environmental Co., Ltd. and People's Government of Shunyi District, Beijing 10.4 Contract for BOT Project Investment and Operation dated June 30, 2003 between Guandong Xingsheng Environmental Co., Ltd. and Shandong Haiyang Planning and Construction Administration 10.5 Agreement dated October 20, 2004 between Chong Liang Pu and Guang Dong Xin Xing Mei Biology Company Limited 16 Letter re Change in Certified Registered Public Account (2) 21.1 List of Subsidiaries 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - --------------- (1) Previously filed as part of the Company's current report on Form 8-K filed with the Securities and Exchange Commission on October 21, 2004. (2) Previously filed as part of the Company's current report on Form 8-K/A filed with the Securities and Exchange Commission on December 30, 2004. (3) Previously filed as part of our annual report on Form 10-KSB filed with the Securities and Exchange Commission on April 15, 2005. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Our board of directors has selected PKF as our independent accountants to audit our consolidated financial statements for the fiscal year 2004. Wm Andrew Campbell previously audited our consolidated financial statements for the two fiscal years ended December 31, 2003 and 2002. AUDIT AND NON-AUDIT FEES Aggregate fees for professional services rendered to us by our accountants for the years ended December 31, 2004 and 2003 were as follows: Services Provided 2004 2003 -------------------------------- ------------- ----------- Audit Fees...................... $56,410 $1,000 Audit Related Fees.............. -0- -0- Tax Fees........................ -0- -0- All Other Fees.................. -0- -0- ------------- ----------- Total................... $56,410 $1,000 -27- AUDIT FEES. The aggregate fees billed by PKF and Wm. Andrew Campbell for the years ended December 31, 2004 and 2003, respectively, were for the audits of our financial statements and reviews of our interim financial statements included in our annual and quarterly reports. AUDIT RELATED FEES. There were no fees billed for the years ended December 31, 2004 and 2003 for the audit or review of our financial statement that are not reported under Audit Fees. TAX FEES. There were no fees billed for the years ended December 31, 2004 and 2003 for professional services for tax compliance, tax advice and tax planning. ALL OTHER FEES. There were no billed for the years ended December 31, 2004 and 2003 for services other than the services described above. PRE-APPROVAL POLICIES AND PROCEDURES We have implemented pre-approval policies and procedures related to the provision of audit and non-audit services. Under these procedures, our board of directors pre-approves all services to be provided by PKF and the estimated fees related to these services. -28- SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHINA EVERGREEN ENVIRONMENTAL CORPORATION Date: July 13, 2005 By: /s/ Chong Liang Pu -------------------------------------- Chong Liang Pu, President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Chong Liang Pu President, Chief Executive Officer, July 13, 2005 - ------------------ and Director CHONG LIANG PU /s/ Ren Cai Ding Chief Executive Officer July 13, 2005 - ---------------- REN CAI DING /s/ Lin Hong Ye Director July 13, 2005 - --------------- LIN HONG YE /s/ Shi Rong Jiang Director July 13, 2005 - ------------------ SHI RONG JIANG -29- EX-10.1 2 china_10ksba-ex1001.txt BOT INVESTMENT AND OPERATION CONTRACT EXHIBIT 10.1 GUANGDONG XINSHENG ENVIRONMENTAL PROTECTION INVESTMENT (GROUP) CO., LTD. FILE NO.: XIN-HAN-ZI (2005) 003 - -------------------------------------------------------------------------------- TO: URBAN ADMINISTRATIVE BUREAU OF FENGFENG MINERAL DISTRICT OF HANDAN CITY IN HEBEI PROVINCE To guarantee the effective operation of the Sewage Treatment Plant of Fengfeng Mineral District in Handan city and ensure the continuous implementation of the "BOT Investment and Operation Contract of Sewage Treatment Plant of Mineral Districts in Handan of Heibei Province", our company has incorporated Handan Chengsheng Water Service Co., Ltd. in Handan on January 12, 2005. Hereby our company authorizes Handan Chengsheng Water Service Co., Ltd. to take charge of the construction and operation of Sewage Treatment Plant of Fengfeng Mineral District and to fully act for us to handle all relating affairs. Handan Chengsheng Water Service Co., Ltd. has the right of enjoying all operational revenue after the start of the operation and bearing all rights, obligations and responsibilities stipulated in the "BOT Contract". We shall appreciate your cooperation and support. Thanks! GUANGDONG XINSHENG ENVIRONMENTAL PROTECTION INVESTMENT (GROUP) CO., LTD. Date: Jan. 20, 2005 BOT INVESTMENT AND OPERATION CONTRACT FOR HEBEI HANDAN FENGFENG MINING AREA SEWAGE TREATMENT PLANT CITY ADMINISTRATION OF FENGFENG MINING AREA OF HANDAN CITY, HEBEI PROVINCE GUANGDONG XINSHENG ENVIRONMENTAL PROTECTION CO., LTD. BOT INVESTMENT AND OPERATION CONTRACT FOR SEWAGE TREATMENT PLANT PARTY A: City Administration of Fengfeng Mining Area of Handan City, Hebei Province ADDRESS: No.1, Baowei Road, Fengfeng Mining Area, Handan, Hebei PARTY B: Guangdong Xinsheng Environmental Protection Co., Ltd. ADDRESS: 6/F, Guowei Mansion, No.73, Xianlie Middle Road, Guangzhou, Guangdong Party A transfers the franchise of the project of Fengfeng Mining Area Sewage Treatment Plant to party B in the form of BOT for party B to invest and operate according to relevant provisions of CONTRACT LAW OF THE PEOPLE'S REPUBLIC OF China, CONSTRUCTION LAW OF THE PEOPLE'S REPUBLIC OF CHINA, REGULATIONS FOR PROSPECTING AND DESIGN CONTRACT OF CONSTRUCTION PROJECT and NO.223 CITY CONSTRUCTION DOCUMENT [2001] BY MINISTRY OF CONSTRUCTION OF PRC, STATE ENVIRONMENTAL PROTECTION ADMINISTRATION OF CHINA. Upon the conclusion of the Contract, party B is entitled to the investment and operation right of the project. In order to define the rights, obligations and economic responsibilities of both parties during the process of construction and operation of the project, the Contract is entered into by both parties through mutual consultation for both parties to abide by. ARTICLE I. NAME, CONSTRUCTION SITE AND SCALE OF THE PROJECT 1.1 Name of the project: Handan Fengfeng Mining Area Sewage Treatment Plant 1.2 Construction site: West of Qianpuzi Village, Mafeng Road 1.3 Scale of the project: 33,000 tons/day 1.4 Total investment: Investment for the project is RMB 29.25 million, which will be borne by party B (including RMB 3 million for requisition of 50mu land and RMB 1.5 million for early period expenses). 1.5 Design requirement: Subject to the parameters stated in the Contract. 1.6 Term of Construction: Effective term of construction of the project is 365 days. In case of serious natural calamities, the term will be extended accordingly. 1.7 Term of Operation: 22 years 1.8 Coverage: 50mu 1 ARTICLE II. INVESTMENT AND OPERATION AND FORM OF SETTLEMENT 2.1 Party A transfers the investment, construction and operation right of Handan Fengfeng Mining Area Sewage Treatment Plant to party B in form of BOT for party B to make investment for it in full amount and take the full responsibility for the project's design, construction, operation and management. After the expiration of the Contract, party B shall transfer the sewage treatment plant to party A free of charge for party A to manage and shall ensure the normal operation of the sewage treatment plant at the time of transfer. 2.2 Party B selects MHA technology as the suitable technology for the sewage treatment plant, and at the time of designing the sewage treatment plant, it shall determine the inlet/outlet water quality for the design based on relevant policies and regulations of the state; party B shall ensure that the treated water quality meet the outlet water indexes stated in table 2.1. Design parameters of inlet/outlet water quality of the project and executive standard for acceptance inspection of the project are as follows: Table 2.1 ---------------------------------------------------------------------- Indexes Inlet water indexes Outlet water indexes ---------------------------------------------------------------------- CODcr (mg/L) =<350 60 ---------------------------------------------------------------------- BOD5 (mg/L) =<160 20 ---------------------------------------------------------------------- SS (mg/L) =<200 20 ---------------------------------------------------------------------- NH3-N (mg/L) =<35 15 ---------------------------------------------------------------------- TP (mg/L) =<3 1 ---------------------------------------------------------------------- PH (mg/L) 6-9 6-9 ---------------------------------------------------------------------- 2.3 In order to ensure party B's normal operation, recovery of investment and reasonable profit, both party A and B agree to the following matters: 2.3.1 Party A shall control the discharge standard for industrial sewage discharging into municipal sewage network. If the plant's discharge of sewage beyond the standard causes the sewage inlet water quality of the project exceeds the designed standard, which causes the sewage treatment cannot meet the standard, party A shall pay party B sewage treatment fee as per normal rate and at the same time party B shall make report to party A within 24 hours. Party A shall investigate the reason for exceeding the standard within 24 hours after receiving the report and take relevant measures. 2.3.2 Party A agrees that party B conducts annual planned shutdown maintenance during the term of operation. If the sewage treatment plant is planned to make maintenance, party B shall make application to local environmental authority 15 days in advance and give a written notice to party B. Only the approval of the environmental authority is got can party B conduct maintenance. During maintenance, party A shall not investigate party B's responsibility for outlet water exceeding the standard. Maintenance is allowed once every year, and the duration of maintenance shall not exceed 20 days. 2 2.3.3 Party A agrees that party B has suitable debugging time after maintenance (party B shall apply to party A for it before maintenance). Party B's debugging period for conformity of standard shall not exceed 28 days. 2.4 In water treatment, due to the fact that when the microorganisms are under 8iae entigrade, the treatment efficiency decreases greatly, so when the temperature of inlet water of the sewage treatment plant is lower than 7iae entigrade, if some outlet water indexes cannot meet the outlet water standard stated in table 2.1 hereof, the case is deemed as caused by natural reason and party B shall not be liable for it, and party A still deems the water as in conformity to the standard and pay sewage treatment fee to party B pursuant to the designed water volume and the payment standard stated in Article 2.6 and pay sewage discharge fee for exceeding the standard incurred thereby to environmental authority. 2.5 To ensure the smooth implementation of the project, party A shall coordinate the participation of banks at the project's location. Specific method is as this: After conclusion of the Contract, based on the project, party B shall set up a wholly owned specialized sewage treatment company at the local place as its economic entity to implement the project and shall be responsible for the project's preparation, construction and operation with full power. At the same time, party A is responsible for introducing a local bank to party B for party B to make negotiation about specific cooperation with it. Party B pledges its operation and fee collection right of the sewage treatment plant under the Contract to the bank to apply to it for loan for the project; proportion of the loan is 45% of the total investment of the Contract, and this loan shall be only used for construction and purchase of part of equipment of the project under the supervision of the bank. 55% capital owned by party B will be directly invested into the project for technology, design and equipment purchase. To ensure that the project can be completed safely, on time and with stated quality, party B shall effect insurance with an insurance company or seek a bonding company to make guarantee. To ensure recovery of the bank loan, the sewage treatment fee received by party A shall be deposited into the bank's special account and shall be settled under the supervision of the bank; party B shall also open a special account as settlement account. Party B shall regard the sewage treatment fee paid by party A as source of fund for repayment of the bank loan, and after transferring the sewage treatment fee received to the settlement account every month, party B shall repay the bank loan as per proportion agreed to by party B and the bank. 2.6 After Handan Fengfeng Mining Area Sewage Treatment Plant is constructed, the date on which the acceptance inspection of the project's debugging on completion is passed shall be the starting date of the term of operation of party B. From the starting date, the term of operation of party B is 22 years. During the term of operation, party B shall make management and operation with full power to recover its investment and obtain profit from operation. During the term of operation of party B, party A is responsible for depositing the sewage treatment fee received by the local government into the special account of the bank stated in Article 2.5 hereof as the source of fund to pay sewage treatment fee to party B and repay party B's bank loan. If party B cannot meet the outlet water standard stated in table 2.1 hereof, party A can refuse to pay the sewage treatment fee for this part of sewage. Settlement method is: Party A pays sewage treatment fee for the previous month to party B the 5th day every month. The fee rate for party A to pay sewage treatment fee excluding tax is (if party B needs to pay tax, party A shall supplement the same to party B in full amount): [omitted]. 3 2.7 Party A ensures that it will pay the sewage treatment fee in full amount to party B as scheduled every month for party B to recover its investment and make reasonable earnings. If the sewage treatment fee received by party A is not enough to pay the sewage treatment fee to party B, party A shall be responsible for raising fund from other channels, and party A's government shall issue a letter of guarantee for payment in full amount to ensure the payment of sewage treatment fee in full amount to party B on time. After expiration of the term of operation, Party B shall hand over the sewage treatment plant that is sound and that can operate safely and normally to party A, upon which, party B's operation and management right is finished. 2.8 The calculation method for party A to pay sewage treatment fee to party B: In constructing the sewage treatment plant, party B shall conduct design and construction work according to the sewage treatment volume determined by party A and install water meter at the back of water inlet pump of the sewage treatment plant and party A will regard the data on the meter as the basis for calculating the sewage treatment fee that should be paid to party B every month. If party A cannot supply the designed rated volume of sewage to party B for treatment, party A shall pay sewage treatment fee as per the designed rated volume to party B. Sewage treatment fee for the part in excess of the designed rated volume shall be paid as per the cost, i.e. [omitted]. 2.9 Meter reading time for the sewage treatment volume shall be 16:00, the 28th day of every month. Party B shall write the reading on the meter by the end of 16:00, the 28th day of every month on the meter reading settlement sheet, and party A shall, before 12:00 PM of the same day, send personnel to check the sheet and make calculation and sign on it, which is in triplicates, one copy of which for party A and B each and one copy for the bank. The bank regards the sheet as the basis for transfer of accounts, and shall directly transfer the money in party A's special account to party B's special account as per the amount on the sheet without party A's confirmation. If party A fails to send personnel to check the sheet and make calculation at the 28th day, after 12 o'clock that night party A shall be deemed as has approved the settlement sheet, and when the bank directly makes transfer of account according to party B's meter reading settlement sheet, party B shall have no objection. 2.10 During the term of operation, if the state's currency depreciates, the sewage treatment fee that should be paid by party A to party B shall be adjusted according to the depreciation coefficient published by the state. If there is inflation and rising prices, party A shall adjust the unit price for sewage treatment fee according to the price index published by the state and pay the supplemented fee to party B. If inflation and fluctuation of price index in accumulation does not exceed 15% on the base of the year in which the contract is signed, party A needs not to adjust the unit price; if it exceeds 15%, party A shall adjust the unit price for the sewage treatment fee that should be paid to party B according to the coefficient of the part in excess. And likewise, if price index falls by 15%, party A shall also adjust the settlement unit price accordingly. ARTICLE III. RESPONSIBILITIES OF PARTY A AND B 3.1 Party A's responsibility: 4 3.1.1 Party A is responsible for providing the 50mu of land (basic bearing of 7ton/m(2) should be ensured) for construction of the sewage treatment plant, and ensures that the price for the land is no more than RMB 60,000 per mu, and the cost for land requisition shall be borne by party B. During the term of the franchised operation of party B, party B bears no any tax or cost or fee related with the land for the sewage treatment plant and buildings on such land. 3.1.2 Timely provides relevant basic technical data: after signing the contract, party A will send design and construction notice to party B and at the same time, party A shall submit construction redline diagram, condition of underground facilities of the land to be used, pipe orifice and elevation of the sewage pipe entering the sewage treatment plant and elevation of water outlet and other basic design parameters to party B free of charge, and responsible for connecting the domestic water supply pipe and the two-circuit 10KV power source to the border of the sewage treatment plant. 3.1.3 Timely issues relevant policies about sewage treatment plant: Party A shall, within three months after the Contract is signed, effect the following relevant policies about sewage treatment plants of cities and districts issued by people's government of the city (district) to ensure the smooth implementation of the project: 1) Issues the method for the collection, management and settlement of sewage treatment fee according to the No.192 document [1999] jointly issued by the State Development Planning Commission, the Ministry of Construction of PRC and the State's Environmental Protection Administration of China. 2) Determines the settlement unit price, the opening bank and supervision body for payment of the sewage treatment fee and effect the relevant procedures, and regards them as the policy assurance for the implementation of the project. 3.1.4 Effect relevant procedures for the construction of the sewage treatment plant: Procedures for environmental evaluation, location planning, project initiation, application for approval, application for construction, party B's inter-regional construction procedures, construction license, road occupation, peripheral relations, environmental security and other matters related with the sewage treatment plant shall be done by party A and the costs incurred thereby shall be borne by party A. If party B suffers losses such as shutdown or punishment by reason of the above matters after entering the site for construction, party A shall be liable for it. 3.1.5 Party A gives notice for starting work to party B after party A has completed all relevant mattes, effected all the work stated in Article 3.1.3 and 3.1.4 and the condition for entering the site and starting the construction work is ready. 3.1.6 Organize acceptance inspection for the project: After the project is completed, acceptance inspection for the project quality shall be made based on the drawings and certificates jointly examined by both party A and B. Party A shall organize acceptance inspection within three days after receiving party B's application for acceptance inspection for the project. If party A fails to organize acceptance inspection within three days after receiving party B's application, it shall be deemed that party A has done the acceptance inspection and the inspection is passed, and party B can do debugging work. After the acceptance inspection is passed, party B shall complete the debugging within three months. Within seven days after receiving party B's application for acceptance inspection for conformity of standard, party A shall organize acceptance inspection for conformity of standard. If party A fails to organize acceptance inspection within seven days, it shall be deemed that the acceptance inspection for conformity of standard is passed, and the date on which the notice of acceptance inspection for conformity of standard is given is deemed as the starting date for party B to collect sewage treatment fee and conduct operation. The final indexes for acceptance inspection for conformity of standard and the operation indexes: indexes for outlet water can meet the indexes stated in table 2.1. If outlet water can meet the standard stated in table 2.1, the acceptance inspection shall be deemed as passed. 5 3.1.7 Deduction or exemption of taxes and charges during the term of construction: Construction and operation management of sewage treatment plant in itself is welfare project of municipal construction. Therefore, party A shall exempt the fixed assets investment direction regulating tax and other taxes and charges allowed by government of its level and the policy for environmental industry. For the taxes and charges imposed by the state during the term of construction, party A shall actively help party B to reduce and exempt from the same to ensure the recovery of party B's investment. 3.1.8 Party A is responsible for sending the sewage into the sewage treatment plant area of the project and discharging the treated water out of the facilities and buildings required, and is responsible for sending the sludge after dehydration produced in the sewage treatment plant out for treatment and all costs incurred thereby shall be borne by party A. Party B only bears operation fees for sewage treatment to conform to the standard and the dehydration of sludge. 3.2 Party B's responsibilities: 3.2.1 Party B makes requisition of 50mu of land for no more than RMB 60,000 per mu. 3.2.2 Preliminary design and construction drawing design within the scope of the old 33,000t sewage treatment plant. Within fifteen working days after receiving the design notice, party B shall submit preliminary design plant to party A, and complete construction design within one month after party A consents to the preliminary design plan; 3.2.3 Digging and backfilling of earth within the scope of the old 33,000t sewage treatment plant; 3.2.4 Civil engineering works of 33,000t/day sewage treatment plant (including interior fit-up, roads and walls of the plant area), auto-control and power distribution works (excluding power transformation works), water supply and drainage works, process equipment and installation works, planting works, fire fighting and flood works, etc; 3.2.4 Organizes to enter the site and start full-round construction within seven days after receiving party A's notice for entering the site and starting the work. 3.2.5 Responsible for all engineering debugging within the scope of the sewage treatment plant till conformity is met; 3.2.6 Organizes job training for workers till they can do their job independently; 3.2.7 Debugging shall be completed within three months after completion of the project and shall meet the treatment indexes stated in the Contract. 3.2.8 Responsible for the full-process operation and management during the term of operation. ARTICLE IV. AGREEMENT OF BOTH PARTIES 4.1 Party B provides advantageous bacteria and carriers of biochemical system, costs of which shall be borne by party B. 6 4.2 Party A organizes acceptance inspections, and Handan Monitoring Center Station undertakes the monitoring for the acceptance inspections. If the result of monitoring is up to the outlet water indexes stated in table 2.1 hereof, the acceptance inspection shall be deemed as passed. When necessary, party B may entrust the state's monitoring center station to do the monitoring and take the data monitored by the state's monitoring center station as authentic. The sewage treatment volume is designed and made by party B according to party A's requirement, and the acceptance inspection of it shall be based on the designed value. If party A cannot supply the sewage volume as designed for treatment by the sewage treatment plant or there is no discharge channel for sewage after treatment, party A shall be liable for it. If the sewage volume is insufficient or there is no discharge channel for sewage after treatment, acceptance inspection for the project done by party B will not be affected. At the same time, from the date on which the acceptance inspection is passed, sewage treatment fee will be charged based on the designed sewage treatment volume pursuant to Article 2.6 hereof. 4.3 Monitoring fee for acceptance inspection shall be borne by party B. Fee for non-routine monitoring shall be borne by the party who demands such monitoring. ARTICLE V. RESPONSIBILITY FOR DEFAULT 5.1 Default by party A: 5.1.1 Where party A cannot provide condition according to the Contract and causes losses to party B, party A shall compensate for all the losses suffered by party B, and extend the term of construction and operation by the days in delay. 5.1.2 Where party A fails to pay sewage treatment fee on time, party A shall, from the next day of the tenth day in delay, pay interest on the amount overdue to party B according to regulations of banking about deferred payment. Party A shall pay RMB 10,000 of penalty to party B for every day in delay of payment. 5.2 Default by party B: 5.2.1 Where party B fails to complete the project as scheduled in the Contract and as per the construction quality stated in Appendix I hereof, party B shall pay RMB10,000 of penalty to party A for every day in delay. 5.2.2 Where construction quality cannot meet the design specification and requirement, the case shall be handled according to the clauses stated in Appendix of the contract. 5.2.3 Where party B fails to make the sewage treatment up to the standard within the stated time, party B shall be responsible for debugging free of charge till the discharge standard stated in the Contract is met. Where party B still fails to make the sewage treatment up to the discharge standard stated in the Contract through debugging within 120 days from the date of commissioning, party A has the right to demand party B to invite experts to participate debugging again or make supplemental design and construction again, till the debugging meets the discharge standard stated in the Contract. ARTICLE VI. FORCE MAJEURE Force majeure means wars, turmoil, falling of flying objects in space, or explosion or fire that are not caused by reason of responsibility of either party A or B as well as natural calamities such as typhoon or earthquake that is irresistible by manpower. The state's relevant regulations shall apply to such cases. After force majeure happens, party B shall quickly take measures to reduce losses as most as possible and report to party A about the condition under the force majeure within 24 hours. The case will be handled by both party A and B through consultation. 7 ARTICLE VII. SAFE CONSTRUCTION 7.1 Party B shall abide the state's and local laws and regulations, construct fire prevention security facilities, and abide by and execute regulations about fire prevention, safe construction, civilized construction and construction at night. Otherwise, losses incurred thereby and punishment imposed therefore by relevant authorities shall be borne by party B. 7.2 Party B shall be liable for compensating for personal injury or death caused by reason of party B (including construction quality and accidents) within the scope of construction. 7.3 Party A shall be responsible for coordinating and handling the social security and surrounding relations of party B during the term of construction and operation. ARTICLE VIII. RESOLUTION OF DISPUTES Where disputes arise between both parties due to performance of the Contract, they should make friendly consultation first, and if consultation fails, the disputes may be submitted to Handan Arbitration Commission for arbitration. ARTICLE IX. EFFECTIVENESS OF THE CONTRACT The Contracts takes effect from the date on which both parties set their hands and affix their seals on it and ceases to have effect at the time the execution of the Contract is completed. The Contract is in nonuplicates, of which party A and B each has four, and the supervising & lending bank has one, and each copy has the same legal effect. 8 For matters not mentioned in the Contract, both parties shall resolve them through consultation and conclude supplementary clauses, which are a constituent part of the Contract and have the same legal effect as the Contract. Party A: Party B: Legal representative: Legal representative: Authorized representative: Authorized representative: Date Month Year 30 December 2003 9 Appendix I STATED MATTERS ABOUT CONSTRUCTION OF THE SEWAGE TREATMENT PLANT OF THE PROJECT ARTICLE I. STANDARD FOR CONSTRUCTION QUALITY The whole project is up to the standard for excellent projects; Safety, reliability and applicability of the project should be ensured; the state's standard for construction quality should be executed. ARTICLE II. GENERAL DUTIES OF PARTY A DURING THE TERM OF OPERATION 2.1 Party A's representative: Party A appoints representatives to the construction site, who will, according to the following requirements, exercise rights and perform duties under the Contract: 2.1.1 Party A's representatives can appoint relevant management personnel, who perform part or whole of the rights and duties of party A's representative and who can be withdrawn at any time. Appointment and withdrawal of personnel should be notified to party B five days in advance. 2.1.2 Directives and notices of party A's representative after signing by the representative itself will be given to party B's representative in written form, and such directives and notices shall take effect after party B's representative signs its name and write the time of receipt of such directives and notices on them. If party B deems that a directive issued by party A's representative is unreasonable, it shall bring forward a written request within 24 hours after receiving such directive, and party A's representative will make consultation with party B's representative for resolution of the case within 24 hours after receiving such request. 2.1.3 Party A's representative shall, according to the Contract, timely provide party B with supports, approvals, drawings needed and perform other obligations under the Contract, otherwise, party B will give a written notice about specific requirement, reason for need and consequence of delay to party A within 24 hours after the stated time. If party A fails to give a reply within 48 hours, it shall be liable for the economic costs incurred thereby and extend the term of construction accordingly and compensate for relevant losses suffered by party B. The chief supervision engineer entrusted by party A shall, according to the clauses of the Contract, exercise all or part of the rights of party A's representative under the Contract and perform the duties of party A's representative, but it has no right to cancel party B's rights or obligations under the Contract. If party A's representative or chief supervision engineer changes, party A shall give a notice to party B seven days in advance. The successor shall succeed its predecessor's duties (obligations under the Contract and commitments within the power of its position). 2.2 Party A's work. Party A is responsible for completing the following work: 2.2.1 Responsible for handling the procedures for approval of preliminary design plan. 2.2.2 Completes the procedures for licenses and approvals needed for construction application, temporary sites, occupied roads, buildings, installation, etc ten days before construction is started. 2.2.3 Notifies party B of the list of party A's on-site representatives (including supervision engineers) and the approval for starting construction before construction is started. 2.2.4 Provides party B with underground pipe network data under the construction site and it shall ensure the trueness and accuracy of such data; Consequences caused by deviation of such data shall be borne by party A. 2.2.5 Submits the bench marks and coordinates control points to party B in written form and makes on-site check. 10 2.2.6 Coordinates and handles the protection of underground pipe network at the periphery of construction site and adjacent buildings and structures, matters about costs needed thereby shall be handled through consultation. 2.2.7 Representatives sent to the construction site by party A shall supervise the scheduling and construction quality of the project and urge party B to handle pressure test for test pieces and materials and sorting of various technical data and statements well, and be responsible for issuing certificates and handle relevant matters with the range of their duties stated in the Contract. ARTICLE III. GENERAL DUTIES OF PARTY B DURING THE TERM OF CONSTRUCTION 3.1 Part B's representatives at the construction site. Party B shall appoint persons in charge at the construction site, who will, according to the following requirements, exercise rights and perform duties under the Contract: 3.1.1 Party B's demands, requests and notices should be sent to party A's representative in written form after party B's representative has signed on them. The demands, request and notices shall take effect after party A's representative signs its name and write the time of receiving such demands, requests and notices on the receipt. 3.1.2 Party B's representatives shall organize construction based on the design drawing and construction organization design (or construction plan) approved by party A and pursuant to the directives and demands issued by party A under the Contract. If party B's representative changes, party B shall give a notice to party A seven days in advance, and the successor shall bear the predecessor's duties (obligations under the Contract and commitments within the power of its position). 3.1.3 Party B's work. Party B is responsible for completing the following work: 3.1.4 Completes preliminary design plan, construction drawing design within the time stated in the Contract and submits preliminary design plan and construction drawing in quintuplicate to party A. 3.1.5 Five days after the preliminary design plan is consented by party A, party B shall submit power use and water use plan for construction to party A. Five days before starting of civil engineering, party B shall complete joint review of construction drawing, compilation of construction organization design, and construction scheduling plan and submit the same to party A for party A to supervise the execution of construction plan. Within one month after the construction is started, party B shall provide party A with the water and power use plan needed for the whole sewage treatment plant. 3.1.6 Five days before starting of construction, party B shall make a report about party B's on-site representatives and contract persons (including those of subcontracting units) to party A for party A to carry out supervision and checking. 3.1.7 Provides party A's representatives with annual, seasonal and monthly project scheduling plan and relevant scheduling statistical statements. If there construction accident happens, it shall write out special reports about it. 3.1.8 Abides by rules and regulations of local government and relevant authorities on construction sites and traffic, etc. Relevant procedures shall be handled by party A. 3.1.9 Party B shall conduct construction in strict accordance with construction drawing and instruction book (approved by party A) as well as operation rules for technical specifications for construction and well conduct tests of materials. Party B is subject to the supervision of quality supervision authorities and party A on construction quality. If party A finds that there is problem in key works, party A shall give written notice to party B, who must take effective measures for correction according to requirements of party A's representative. 3.1.10 Party B must organization implementation of the project according to the approved scheduling plan and be subject to the inspection and supervision of party A's representative. If the project's actual progress is inconsistent with the scheduling plan, party B shall suggest corrective measures according to requirements of party A's representative, submit the same to party A's representative for approval. 3.1.11 Party B is responsible for the protection of the underground pipe network at the construction site and adjacent buildings and structures, and shall ensure that the cleanness of the construction site meets relevant regulations. 11 EX-10.2 3 china_10ksba-ex1002.txt INVESTMENT MANAGEMENT CONTRACT EXHIBIT 10.2 INVESTMENT MANAGEMENT CONTRACT PARTY A: THE PEOPLE'S GOVERNMENT OF WUQING DISTRICT, TIANJIN CITY PARTY B: GUANGDONG XINXINGMEI ENVIRONMENT PROTECTION SCIENCE AND TECHNOLOGY INVESTMENT CO., LTD According to The Contract Law of the People's Republic of China and other related laws and regulations, Party A and Party B promised to manage Wuqing First Sewage Disposal Factory via the way of BOT. In order to clarify rights and obligations of two parties, it concludes the contract for mutual observance after negotiation of two parties. 1. CONSTRUCTION OF PROJECT OF SEWAGE DISPOSAL FACTORY 1.1 The name of project is Wuqing First Sewage Disposal Factory. (It is called the Sewage Disposal Factory). 1.2 The construction site is located in Tinan Road in the Wuqing Development District 1.3 The design capacity of disposal sewage of the project amounts to 10,000 tons/day. 1.4 The total sum of project pricing is assumed to RMB 8-9 million. 1.5 According to the stipulation on article 1.3 in the contract, Party B is responsible for project design, investment (financing), construction, debug and management. 1.6 Party B selects "MHA Sewage Disposal Techniques"(See attachment 1) as the applicable art for the project. In terms of project design, it shall take the bases of "Report of Evaluation on Environment Influence" and "Official Response of Evaluation on Environment Influence" in order to design the standard for water quality. The subject and index involved in "Report of Evaluation on Environment Influence" and "Official Response of Evaluation on Environment Influence" shall be taken as the design parameter. Chart 1.1 - --------------------------------------------------------------------------------------------- Subject Index of Water Access Index of Water Exceeding implements the first standard of GB8978-96 - --------------------------------------------------------------------------------------------- CODcr mg/L =<460 =<60 - --------------------------------------------------------------------------------------------- BOD5 mg/L =<180 =<20 - --------------------------------------------------------------------------------------------- SS mg/L =<260 =<20 - --------------------------------------------------------------------------------------------- Ammoniacal nitrogen mg/L =<35 =<15 - --------------------------------------------------------------------------------------------- Chroma diluted multiple =<128 =<20 - --------------------------------------------------------------------------------------------- phosphate mg/L =<4.0 =<1 - --------------------------------------------------------------------------------------------- PH 6-9 6-9 - ---------------------------------------------------------------------------------------------
1.7 Party B is responsible for the following duties 1) The primary design, the construction drawing design and the construction design within the extent of the Sewage Disposal Factory(pound)>> 2) The bidding for civil construction(pound)>> 3) The earthwork digging and backfilling within the bound of the sewage disposal factory(pound)>> 4) The civil construction project (including indoor fitment, road and fence in the factory), the electric power project, the project of water supply and drainage, the craftwork equipment and the installation project, the virescence project, the fire control, the flood prevention and etc within the bound of the sewage disposal factory. 5) The design and construction on the road, water and electricity between the bound of the sewage disposal factory and the construction red line. 2 6) The debugging on all the projects within the bound of the sewage disposal factory(pound)>> 7) The uncompleted matters that are promised by related laws, regulations, policies and the contract. 1.8 Party A is responsible for construction on architecture establishment out of water access and exceeding mouths of the sewage disposal factory, which ensures the smooth delivery of the sewage and the smooth discharging of the rinsing water. 1.9 Party A assists Party B to contact a local bank and apply for loans on construction of the sewage disposal factory. Party B is responsible for negotiating with the bank for the detailed sum and the form of the loans. 1.10 Party A is responsible for providing the land for the project covering 8 Mu for free, and meeting requirements for weight bearing of 9 tons per square meters on the base. The deadline of the land using right from Party B shall be the same with the deadline of the sewage disposal factory managed by Party B. 1.11 Party B is responsible for connecting road, water and electricity to the red line on the land before construction, and ensuring the flattening of the construction field 1.12 Party A assists Party B to transact businesses which are under the administration of sectors of Party A, such as project establishment, transferring of land using right and other related procedures on declaring response and establishment 1.13 Party A delivers the design and construction invitation for Party B, meanwhile, Party A provides basic design parameters such as red construction blueprint and underground construction within the range of land use, elevation of pipelines of water access and exceeding of the sewage disposal factory, points of water use and electricity use. After receiving the invitation from Party A, Party B shall complete the primary design blueprint within 30 working days. After agreement from Party A within 90 days since the next day, Party B shall complete construction design and deliver it to be checked by Party A. After qualification, Party A will sign in the checking contract. 1.14 When designing the project of the sewage disposal factory, Party B is responsible for design a calculation establishment each for both parties in the sewage factory for the sake of transportation undertaken by Party A for establishment of the sludge storage 3 1.15 After complete all declaring procedures and blueprint checking, and items promised on Article 1.11, Party A shall deliver the construction notice to Party B, and Party B shall start establishment within 7 days after it receives the notice. If the consecutive construction period for the project of the sewage disposal factory lasts for 300 days, the construction period shall be calculated right from the construction day. l.16 In the construction period of the project of the sewage disposal factory, Party A shall assist Party B to apply for related derating policies within the range of national policies, laws and regulations. And Party A shall coordinate in solving conflicts and problems found in local sites that influence the construction of Party B. 1.17 The debugging period for Party B lasts for 90 days after the completion of the project. Party A shall deliver the expenditure for the sewage disposal to Party B according to the amount of sewage disposed in practice and the standard of 0.40% RMB per ton. (When the sewage amount provided from Party A is lower than the minimal sewage amount promised on Article 2.5 in the contract, Party A will pay the expenditure for the sewage disposal to Party B according to the minimal sewage amount promised on Article 2.5 and the stand of 0.40% RMB per ton. 1.18 After completion of the project and qualification of the debugging, Party B will inform Party A for acceptance of the project. After receiving the notice of project acceptance within 7 days, according to the blueprint and the signature of both Parties, Party A shall complete acceptance for the project within 10 working days. If Party A can't complete the acceptance within the time, it is considered for qualification. 1.19 The acceptance and supervision unit for the water quality from the sewage project is Wuqing District Environment Supervision Station. Provided the supervision result meet the guideline listed in the chart of 1.1 in the contract sheet, it is considered as qualified acceptance. Party B can consign the national station to take the business of supervision if necessary, and take the supervised data from the national center station as the norm. The daily disposal scale for the acceptance of the sewage shall be based on the design scale. If Party A can't provide the amount of sewage for the sewage design, it doesn't influence the acceptance of the project. 2. MANAGEMENT OF THE SEWAGE DISPOSAL FACTORY 2.1 The confirmation on the period of management for Party B shall start from the qualification day of the project. The contract terminates on the same day 20 years later. Within the period, Party B shall manage the sewage disposal factory independently with the agreement. as the return for investment, Party B shall possess the profit made in the factory. 4 2.2 Within the management period, Party B is not allowed to transfer the right agreed in the contract independently. If needed, Party B shall consult from Party A for permission. 2.3 Within the management period, Party A confirms the undertaking unit for balancing the sewage disposal expenditure. After the authorization from Party B, Party A can make a formal document for attachment of the contract, which has the same legality with the contract. The sewage disposal factory will direct balance with the undertaken unit confirmed by Party A. 2.4 The pricing standards for the sewage disposal expenditure: [omitted]. 2.5 During the normal operation for the project, Party A ensures to provide the sewage disposal amount for 7000 tons per day in the first year; 8000 tons per day in the second year; 9000 tons per day in the third year; 1,0000 tons per day in the fourth year agreed on the article 1.3 in the contract. If Party A provides the sewage amount less than the agreement on the contract in the years above, it shall pay for the sewage disposal expenditure in real practice; If Party B provides the sewage amount more than the agreement on the contract in the years above, it also shall pay for the sewage disposal expenditure in real practice. Within 3 years on normal operation of the project, Party A shall pay the balance with 0.28 RMB per ton between the real amount of sewage in disposal (It shall be no less than the agreed minimal sewage amount) and the amount of sewage on design as the compensation for investment and construction from Party B. During the management period of Party B, if the sewage amount needed for disposal exceeds the design scale of the project, the two parties shall negotiate for spreading the sewage disposal factory. 2.6 The checking time for the sewage disposal is 4:00 pm on 28th every month. The balance unit of Party A and the sewage disposal factory will control each of the calculation meters, and check two records at 6:00 pm on the day before the validity of the signature. If the error for the recorded water amount between two meters is no more than 1,000 ton per month, it shall be calculated on the average point of data between two parties. Otherwise if the error is more than 1,000 ton per month, it shall check the meters of two parties. 5 2.7 It shall take the total number of the checking sheets approved by two parties as the payment credential for the sewage disposal expenditure. Party A shall deposit the expenditure for the sewage disposal on the agreed account. Before 5th every month, Party A shall transfer the balance into the account of Party B for the expenditure last month. (It shall postpone for 5 days at most in case of holidays). 2.8 Within the management period of Party B, in the case of large rise and fall for comprehensive INP published by the country, two parties can negotiate for adjusting the standard for the balance price. The year for concluding the contract shall be taken as the basis. According to the calculation of national statistics, if the rise and fall of comprehensive INP is no more than 15%, it will not adjust the standard for price; if it exceeds over 15%, the comprehensive INP will make corresponding adjustment accordingly. 2.9 After normal operation of the sewage disposal factory, Party B can make fixed checking for at least once every year according to the operation state. The checking time lasts for 30 days every time (including the debugging period). Party B shall inform Party A 7 days before the check and repair. When water quality exiting from the sewage disposal factory during the checking and debugging period meets the second standard, namely, GB 8978-96, Party A shall pay Party B with 0.40 RMB per ton for the real amount of disposal in practice. 2.10 Under the temperature of 8iae, the efficiency for the sewage disposal is distinctively reduced, therefore, when the sewage disposal factory finds the temperature of sewage is lower than 7iae, it shall inform Party A immediately to check the temperature of water. When two parties jointly confirm the water temperature access is lower than 7iae, and it dues to the natural reason for the guideline doesn't meet the agreed standard on the chart 1.1 of the contract. In that case, the sewage disposal factory will not take the responsibility, but Party A pays the expenditure for the amount in practice from the sewage disposal factory. 2.11 If the term of power cut is over 2 days due to the reason beyond the control of the sewage disposal factory (Party A will pay nothing to Party B within 2 days), which causes paralysis of the sewage disposal system, leads to the guideline for the water exceeding from the sewage disposal factory that can't meet the agreed standard on the chart 1.1 of the contract, Party A shall pay Party B for the expenditure of the sewage disposal according to the water amount agreed on the article 2.5 and the price standard agreed on the article 2.4 in the power period and the debugging period after power is on. (The debugging period lasts for 20 days). 6 2.12 Party A is responsible for transporting out dehydrated sewage produced from the sewage disposal. The sewage disposal factory is responsible for the expenditure engaged in qualification for sewage and the management expenditure applied in the dehydrated course of mud. 3. HANDOVER OF THE SEWAGE DISPOSAL FACTORY After the expiration of the management for Party B, it shall hand over the sewage disposal factory to Party A with establishments in good conditions, smooth operation without any dissension on property. 90 days before the formal handover, Party B shall deliver the handover notice to Party A. meanwhile, Party B shall provide all the craftwork and technology the sewage disposal to Party A, and takes responsibility for training technicians for Party A. After the handover, on the transferring period when Party A has yet to confirm other management units, Party B will keep management until the time when Party A confirms the management unit. (The time shall be no more than 60 days). If Party B tends to keep management, the two parties can negotiate for concluding the contract additionally. 4. OTHER ARTICLES(POUND)(0) 4.1 Party A shall publish the measures on imposition of the expenditure management on the sewage disposal. 4.2 Party A shall negotiate the water accessing index according to the chart 1:1 in the contract in order to control water quality of the industrial liquid water which is ejected into the administrative sewage network. If the water quality of the water ejected exceeds over the guideline listed in the chart 1.1 of the contract, which causes that the disposed sewage can't meet the guideline. In this case, Party B and the sewage disposal industry will take no responsibility. Party A shall pay the disposal expenditure for the sewage disposal industry agreed in the article 2.5. Party is responsible for the sewage disposal expenditure beyond the guideline. 4.3 During the administration of Party B. The price for the sewage disposal industry shall implement the municipal standard in Tianjin City. 4.4 Party B shall pay the expenditure of acceptance and supervision for the sewage disposal factory. The unit that requires supervision will pay the expenditure of supervision after being checked for approval. Party A is responsible for organizing the acceptance meeting and Party B is responsible for the expenditure. 7 4.5 Notice In the course of implementing the contract and any notice, it shall take the written form vie sending or registering for post, teleprinting or faxing. The address is stated as followings: Address of Party A: No. 118, Rongyang Xi Road, Wuqing District, Tianjin City Post code: 301700 Telephone: (022) 29341573 Fax: (022) 29326702 Address of Party B: The 6th Building, Guowei Mansion, No. 73, Xianlie Zhong Road, Guangzhou City, Guangdong Province Post code: 510095 Telephone: (020) 87327278 Fax: (020) 87326157 Any party that changes any item in the address above shall inform the other party 7 days in advance. The change is valid after the notice is confirmed. 4.6 If the compulsory criterions and standards for national sewage disposal factory changes, the new technology adopts for Party B shall meet the new standard regulated by the country. Two parties shall negotiate for compensating the investment from Party B with the delay of the management period. 5. RESPONSIBILITY OF BREACHING THE CONTRACT 5.1 Before the acceptance of the project, if Party A can't provide conditions agreed in the contract, which causes loss from Party B, hereby Party A shall be responsible for the real loss from Party B. After the sewage disposal factory is checked for approval and operated formally, if Party B stops production due to the reason from Party A, Party A shall pay for the sewage disposal expenditure during the period of stopping production according to the amount of sewage disposal regulated in the article 2.5 and the price regulated in the article 2.4. 8 5.2 If Party A doesn't pay the sewage disposal expenditure, right from the second day after 5 valid working days overdue, the defaulted sum of breaching contract shall be paid in the loan interest overdue. Meanwhile, Party A shall pay RMB 1,000 to Party B for the penal sum overdue for each day delayed. 5.3 If Party B can't complete the project or the project completed doesn't meet the design criterion or the construction quality is unqualified, Party B shall pay RMB 1,000 to Party A for the penal sum for each day delayed. 5.4 After the normal operation of the sewage disposal factory, if Party B breaches the following agreements due to the reason of Party B and the sewage disposal factory, Party B shall pay the sewage ejection expenditure to related sectors, additionally, it shall pay RMB 1,000 to Party A for the penal sum for each day delayed. 1) When Party provides the agreed amount of sewage to meet the contract, but the amount of sewage from the sewage disposal factory can't meet the amount agreed in the contract. 2) When the index for water accession exceeds over the chart 1.1 in the contract, and when the water quality disposed in Party B and the sewage disposal factory can't meet the index agreed in the contract. (Except the case that water quality leads the paralysis of the sewage disposal system). 5.5 After the termination of debugging, if water quality from the sewage disposal factory still can't meet the exiting guideline agreed in the chart 1.1 of the contract, Party A will not pay Party B the expenditure for the sewage disposal. After the termination of debugging, if the guideline for water accession can't exceed over the standard agreed in the chart 1.1 of the contract in the consecutive four months, and the disposed water quality still can't meet the standard agreed in the contract, the contract will be relieved independently. 5.6 Within the management period of Party B, if Party B transfers the right of management on the sewage disposal industry without permission from Party A, the contract will be suspended; consequently, Party B will be responsible for all the loss. If there are such unsolvable cases as bankruptcy close-down and etc from Party B, the right of management on the sewage disposal industry will be transferred to Party A, and Party B will be responsible for the original liability for the sewage disposal industry. 9 6. FORCE MAJEURE If the loss is caused by force majeure, neither of parties will take responsibility. 7. VALIDITY OF CONTRACT The contract has ten copies with the same validity. Party A and B hold 5 copies respectively. It is valid after the seal and signature of two parties. 8. DISPUTE SETTLEMENT Provided dispute occurs in the course when Party A and Party B carry out the contract, two parties shall negotiate for friendly solution. If otherwise, it shall be solved vie lawsuit in the People's Government that has the right of domination. The items that are not regulated in the contract shall be solved vie negotiation of two parties. The additional complementary articles signed are components of the contract, which has the same legal validity. The contract is signed in Yongyang Hotel in Wuqing District, Tianjin City. The contract has ten pages in all. PARTY A: THE PEOPLE'S GOVERNMENT OF PARTY B: GUANGDONG XINXINGMEI ENVIRONMENT WUQING DISTRICT, TIANJIN CITY PROTECTION SCIENCE AND TECHNOLOGY INVESTMENT CO., LTD LEGAL REPRESENTATIVE: LEGAL REPRESENTATIVE: AUGUST 14, 2002 AUGUST 14, 2002 10 EX-10.3 4 china_10ksba-ex1003.txt BOT INVESTMENT CONTRACT EXHIBIT 10.3 GUANGDONG XINSHENG ENVIRONMENTAL PROTECTION CO., LTD. FILE NO.: XIN-HAN-ZI (2004) 018 - -------------------------------------------------------------------------------- TO: THE PEOPLE'S GOVERNMENT OF SHUNYI DISTRICT OF BEIJING CITY To guarantee the effective operation of Tianzhu Sewage Treatment Plant of Shunyi District in Beijing City and ensure the continuous implementation of the "BOT Investment Contract of Beijing Tianzhu Sewage Treatment Plant", our company has incorporated Beijing Haotai Shiyuan Water Purification Co., Ltd. in Tianzhu town in Shunyi District on May 26, 2004. Hereby our company authorizes Beijing Haotai Shiyuan Water Purification Co., Ltd. to take charge of the construction and operation of Tianzhu Sewage Treatment Plant and to fully act for us to handle all affairs relating to Tianzhu Sewage Treatment Plant. Beijing Haotai Shiyuan Water Purification Co., Ltd. has the right of enjoying all operational revenue after the start of the operation and bearing all rights, obligations and responsibilities stipulated in the "BOT Contract". We shall appreciate your cooperation and support. Thanks! GUANGDONG XINSHENG ENVIRONMENTAL PROTECTION CO., LTD. Date: May 31, 2004 PEOPLE'S GOVERNMENT OF SHUNYI DISTRICT, BEIJING GUANGDONG XINSHENG ENVIRONMENTAL CO., LTD BEIJING TIANZHU SEWAGE DISPOSAL PLANT BOT INVESTMENT CONTRACT JULY, 2003 CHAPTER I GENERAL SPECIFICATIONS By virtue of provisions contained therein People's Republic of China, People's Government of Shunyi District of Beijing City and Guangdong Xinsheng Environmental Co., Ltd, on the basis of equality, mutual profit and after friendly covenants herein contained, have agreed that Guangdong Xinsheng Environmental Co., Ltd may construct, operate and transfer a sewage disposal plant by BOT investment approach at Tianzhu Real Estate Development Area of Shunyi District. The sewage disposal plant shall be constructed to have the treatment scale of 20kilo tons per day and affiliated infrastructure facilities shall be constructed to have the treatment scale of 40kilo tons per day. Occupied area shall be 16 acres. BOT investment hereinafter is referred to as the procedure that investors who have obtained franchise rights from franchisors (the government) invest, construct and operate a specified object. At close of the franchise term, the whole object shall be transferred to the franchisor. During the franchise term, the investor may recover cost and attain reasonable profit through object operation. CHAPTER II ALL PARTIES TO THE CONTRACT 1. This chapter is made into on the 4th day of July, 2003 by all parties as follow: Party A: People's Government of Shunyi District, Beijing. Operator of Party A: Administration Commission of Tianzhu Real Estate Development Area, Beijing. Party B: Guangdong Xinsheng Environmental Co., Ltd. Operator of Party B: Corporation reserved for the object.( Name is subject to decide) CHAPTER III CONTENTS AND TERMS OF FRANCHISE RIGHT 1. DEFINITION AND EXPLANATION Project: The word PROJECT is referred to as the feasibility study, design and service, construction, debugging, pilot running and running of the sewage disposal plant which has treatment capacity of 20k tons/day and affiliated infrastructure of which has 40k tons/day capacity. The name of the project is called Beijing Tianzhu Sewage Disposal Plant. Project cost: It is referred to as the cost contained herein Article 3 of this chapter. Period of construction: It begins 15 days later than the signing of contract and terminates on the date of acceptance inspection of the project by environmental administration after design, construction, equipment installation, debugging and pilot running. 1 Term of franchise rights: It begins since date when the whole project of Beijing Tianzhu Sewage Disposal Plant is completed, debugging is finished and the project is inspected and approved by environmental administration and will terminate on the corresponding date 25 years later. Completion date: It is referred to as the date when Beijing Tianzhu Sewage Disposal Plant is wholly completed, equipment debugging is successful, project inspection is accepted and qualified by environmental administration and the plant may be commercially operated. Force majeure: It is referred to herein Chapter 11. Project corporation: It is referred to as the limited corporation which must be commenced by Party B within 2 months later than validity of the contract and which is liable of the construction and operation of Beijing Tianzhu Sewage Disposal Plant. Transfer Date: It is referred to as the morrow of the termination date of franchise rights. Intactness: It is referred to as the status that there is no apparent destroy, no crack and no seepage with respect to buildings and structures and sewage disposal equipments shall run continuously and steadily. 2. PROJECT 2.1 The project is herein named Beijing Tianzhu Sewage Disposal Plant. 2.2 The project shall be located at Beijing Tianzhu Real Estate Development Area and its accurate position may be referred to as the layout map of Shunyi District, Beijing. 2.3 Contents, manner and terms of project franchise rights. Party B shall design, construct and operate the sewage disposal plant exclusively in the manner of BOT and at the close of franchise term Party B shall transfer the sewage disposal plant to Party B freely. The sewage disposal plant shall be operated exclusively by Party B for 25 years and it shall be transferred to Party B freely and intactly at the close of franchise term. 2.4 Construction period: 15 months (frozen period is excluded) which begins on 15 days (July 20th, 2003) later the signing of the contract and ends on the day (Oct 20th, 2004) of acceptance inspection by environmental authority (frozen period is excluded). 3. PROJECT COST 3.1 Gross cost: twenty million RMB yuan. 3.2 The project must be invested totally by Party B and the project corporation established by Party B during franchise term. Gross cost includes the parts as follows. (1) Cost of feasibility report, technical software, technical patent, design and technical service of sewage disposal plant, acceptance inspection, project supervision, project monitoring and environmental estimate. (2) Construction cost. (3) Equipment purchase, installation and debugging. 2 (4) Miscellaneous costs. CHAPTER IV LIABILITY OF PROJECT OPERATION 1. RESPONSIBILITIES OF PARTY B 1.1 Party B must remit total project investment RMB 20 million to local bank account of Party A within 15 days since the validity of the contract. In which 5 million Yuan shall be deposited into another account which is co-supervised by both parties. 1.2 Party B shall adopt MHA-2 technique in the disposal plant construction and Party B shall supply Party A with six sets of construction blueprint after its design is completed. Technique design blueprint and construction design blueprint shall be audited by Party A and qualified organization assigned by Party A within 10 working days. Only after acceptance signing may the project be started. It the period of blueprint auditing exceeds 10 days, the construction period shall be delayed correspondingly. 1.3 Party B shall be liable for investment, construction, operation and maintenance of whole project and shall ensure the disposal capacity of 20,000 tons per day of Beijing Tianzhu Sewage Disposal Plant. 1.4 Party B shall establish a project corporation within two months later than the validity day of contract and Party B shall ensure that the project corporation be compliance with the responsibilities of Party B herein the contract. Register capital of the project corporation shall be extracted from the bank account contained herein Article 1.1 of this chapter and remaining fund of shall be transferred to the account of the project corporation ever since the establishment of project corporation. A specified bank account of RMB 5 million shall be opened as co-supervised fund by both parties. If the construction cost of Party B reaches 5 million yuan, the RMB 5 million account may be relieved by Party A provided the certificate of Party B and Supervision Corporation, which means that Party B may deal with the 5 million yuan freely. 1.5 Party B shall be liable for building construction and equipment installation and debugging and the work shall be inspected and confirmed by supervision and monitoring organizations. In order to ensure project quality and service life, invitation to bidding and negotiation shall be processed by Party B on building construction and equipment and material purchase (patented goods is excluded). 1.6 Party B shall be liable for purchasing and management of various equipments and facilities during the franchise term of Beijing Tianzhu Sewage Disposal Plant and Party B shall have the proprietary rights of the equipments and facilities of Beijing Tianzhu Sewage Disposal Plant. Party B shall be liable for the maintenance, inspection and upkeep of the equipments according to running conditions to guarantee the equipment discharge in compliance with national standard and safety. 1.7 Party B shall make schedules for daily maintenance, medium repair and large repair of the equipments and facilities in every year. Prior to December 31st of every year, Party B must submit Party A with the schedules for inspection, medium repair and large repair of the equipments and facilities of next year which shall be executed under the monitoring of Party A. 1.8 Party B shall assist Party A with completion inspection of the project. 3 1.9 Party B shall accept the supervision on project quality from project inspection organizations of local government. Party B shall be liable for selecting eligible supervision organization and supervision costs. 1.10 Within two weeks after project acceptance inspection, Party B shall submit Party A with technical data, completion inspection data and properties listing in sextuplet. 1.11 At the expiry date of the 25 years franchise term, Party B shall transfer Beijing Tianzhu Sewage Disposal Plant freely and intactly on the transfer day to Party A and shall supply Party A with whole technical data on equipment operation and maintenance document (Party A may continue freely to utilize intellectual property rights which have be exerted to project construction and operation, but Party A shall have the liability and obligation to guarantee the intellectual property rights and may not extend usage without the consent of right owners). Party B shall be liable for technician training of Party A three months prior to transferring. 1.12 When second project stage is commenced, if Party A intends to select a new partner, Party A shall assist willingly. Under the same condition, Party B shall have priority right for second stage construction of sewage disposal plant. 1.13 After signing of contract herein and during the franchise term, Party B shall be liable for financing additional funding if project investment shall be supplemented by virtue of adjustment of national laws and Beijing's local regulations. If sewage disposal payment may thereby be adjusted, Party A and Party B shall negotiate and determine new charging standard of sewage disposal based on the principle of equality and reasonability. 1.14 Party B shall guarantee the completion and usage of Beijing Tianzhu Sewage Disposal Plant within the time limit contained herein the contract. 2. RESPONSIBILITIES OF PARTY A 2.1 Party A shall be liable for construction submission and sanction application (including construction license) and the fee shall be assumed by Party A. 2.2 Party A shall assist Party B with applying for preferential policy and reducing corresponding tax. 2.3 Party A shall pay disposal fee in time pursuant to provisions contained herein contract. 2.4 Party A shall be liable for collecting sewage and transfer it to the extent 1m within red lines of sewage disposal plant. 2.5 Party A shall be liable for the withdrawal lines of Beijing Tianzhu Sewage Disposal Plant (the withdrawal lines are connected 1m outside the red lines). 4 2.6 Ten days prior to project construction, Party A shall supply land for Beijing Tianzhu Sewage Disposal Plant which shall be used by Party B freely during the franchise term of Beijing Tianzhu Sewage Disposal Plant. During the franchise term, Party B shall not assume tax and fee related to land. 2.7 Prior to project construction, Party A shall supply permanent civil facilities (water, 10kv double loop electricity, gas and communication) and shall connect life pipes to the region 1m outside the red lines. 5 CHAPTER V SCHEDULE AND ARRANGEMENT OF PROJECT CONSTRUCTION 1. Within 30 days after Party A offered legal license of land usage and other data of Beijing Tianzhu Sewage Disposal Plant, Party B must commence the construction of Beijing Tianzhu Sewage Disposal Plant. Party A shall assume liability and obligation pursuant to provisions contained herein the contract. 2. If building construction is completed, Party B shall inform Party A in written form to apply for completion inspection on buildings and Party A shall attend the completion inspection within 10 days organized by Party B. If installation project is completed, Party B shall inform Party A in written form to apply for completion inspection on installation project and Party A shall attend the completion inspection within 10 days organized by Party B. If Party A does not attend completion inspection within 10 days, it shall be thought the quality was accepted and Party B may continue to work for next stage. 3. During construction, if time delaying not caused by Party B happens (clause of exemption is excluded), time period may be delayed correspondingly. If Party B is injured, the party who cause injury shall pay Party B indemnities. 4. Debugging 4.1 Ten days prior to debugging, Party B shall supply Party A with debugging plan and Party A shall reply in written form within five work days to Party B. Only after the conferment of Party A, may debugging plan be commenced. Party A shall assist Party B to guarantee normal conduction of debugging. If Party A does not reply within five work days, debugging plan shall be thought to be accepted and Party B may start debugging. 4.2 Party B shall be liable for whole procedure of debugging and Party A shall assign somebody to attend the whole procedure of debugging. 4.3 If debugging is completed, Party B may inform Party A to apply for inspection. If Party A can not organize inspection within 10 days after application, Party A shall pay Party B sewage disposal fee pursuant to Article 1.4 contained herein the contract from the 11th day. 4.4 The project must reach the discharge standard as provided herein the contract. 4.5 If sewage inflow is insufficient, standard inspection may not be affected. CHAPTER VI INVESTMENT RETURNS OF PROJECT 1. Environmental administration shall monitor and inspect inflow and outflow of Beijing Tianzhu Sewage Disposal Plant. If the inflow and outflow reaches stipulated standard contained herein the contract(pound)<172>the project shall be thought to be qualified and begin to be commercially run. Party A shall pay Party B sewage disposal fee by month. 6 2. Investment return (1) Charging standard without tax (zero tax rate) If sewage inflow is less than or equal to 16 kilo tons/day, Party A shall pay Party B according to 16 kilo tons/day with the unit price of [omitted] yuan/ton. If sewage inflow is less than or equal to 20 kilo tons/day, Party A shall pay Party B according to actual inflow with the unit price of [omitted] yuan/ton. If sewage inflow is larger than 20,000 tons/day, the exceeding part shall be paid with the unit price of [omitted] yuan/ton. (2) Charging standard with tax (value-added tax is excluded) If sewage inflow is less than or equal to 16 kilo tons/day, Party A shall pay Party B according to 16 kilo tons/day with the unit price of [omitted] yuan/ton. If sewage inflow is less than or equal to 20 kilo tons/day, Party A shall pay Party B according to actual inflow with the unit price of [omitted] yuan/ton. If sewage inflow is larger than 20,000 tons/day, the exceeding part shall be paid with the unit price of [omitted] yuan/ton. 3. Meter of sewage disposal volume of every month shall be read on 1st of next month. Party B shall document data till that day on meter bill and Party A shall assign somebody to check and sign on the bill prior to 12'clock on that day. The signed bill shall be triplet, two copies for Party A and Party B and one copy for bank. The bank shall transfer settlement payment to the account of Party B prior to 7th of that month. 4. During the operation period, if unit price of electricity varies exceeding 5% of unit price of electricity in April, 2003, sewage disposal fee may be varies correspondingly according to the same ratio. CHAPTER VII RIGHTS AND OBLIGATIONS FOR THE PARTIES HERETO 1. RIGHTS AND OBLIGATIONS FOR PARTY A 1.1 When the special permission operating right of BOT expires, Party A will own the managerial right, ownership and all the assets of the Beijing Tianzhu Sewage Disposal Plant, including equipments, facilities, technology, the data and the information, and other fixed assets. 1.2 In the five days after signing the Contract, Party A shall make available to Party B, such on the Administrative plan of the Sewage Farm, topographic diagram, sewage pipe chart, storm sewer chart, boundary and topographic chart of factory district on the ratio of 1 to 1000, data about the earthquake, meteorology, hydrology, topography, geology of factory district, and the caliber and the elevation of the main pipe in and out the farm in due course. 1.3 Party A is responsible to provide the quota handbook about building and installation of local municipal administration. 1.4 In the process, Party A has rights to supervise the quality and progress of the construction, and taking part in the inviting and discussing the sign on the purchase of materials and equipments. 7 1.5 Party A has right to choose the Partyicipator of the second phase of the project. On the equal level, Party B owns the priority. 1.6 The ownership of the water out from the Beijing Tianzhu Sewage Disposal Plant belongs to Party A. 1.7 Party A could verify the investment of project by Party B, to manage and supervise the payout from the condominium account with Party B as set in the Section 1.4 of Chapter 4. 1.8 Party A could supervise the whole process of the project. 1.9 During the period of special permission operating right, Party A could call for the information of financial affairs about special permission management from Party B and the project company. No matter whether profitable and how much in the period of special permission management, Party A shall not intervene or decrease the charge standard and not increase the burden of Party B. 1.10 As the Beijing Tianzhu Sewage Disposal Plant is a non-profit investment project of environmental protection, Party A shall reduce taxes and administrative charges according to the law and policy of state. 1.11 Party A guarantees the special permission operating right of 25 years according to chapters hereto. 2. RIGHTS AND OBLIGATIONS FOR PARTY B 2.1 When the special permission operating right of BOT expires (terminates), Party B and the project company shall hand over the whole ownership and managerial right of the Beijing Tianzhu Sewage Disposal Plant perfectly and freely to Party A on the day of handing-over (Party B will bear all the debts of it and its project corporations). 2.2 Party B shall choose proper construction company and overseeing unit with qualification and achievement of construction to construct and manage. 2.3 The main equipment and materials in project shall be purchased by the way of inviting and discussing the sign. The patent products could be chosen by Party B. 2.4 Party B shall abide the Contract Law of People's Republic of China strictly and guarantees the engineering construction fund be put into effect. Before constructing, Party B shall put the construction organization plan and the engineering construction plans on records to Party A. After starting working, Party B shall put the project progress report and the fund investment plan report to Party A each month. 2.5 Party B guarantees the normal operation and production of the farm and the quality of water to discharges the standard herein. 8 2.6 Party B provides technology in need of project and introduces managerial experience. If any problems of technology cause losses on environment and other aspects, Party B shall undertakes all the liability and compensate the economic loss. 2.7 Party B shall own legitimate right on the technology employed in the project. If any dissension about Intellectual property causes loss on Party A, Party B shall pay for it. 2.8 In the process of operation and management of the project, Party B shall recruit local workers and localize the technical personnel in order to implement the development of environmental protection undertakings by the project. 2.9 Party B shall abide all of the legal laws and regulations of People's Republic of China and carry out polices of local government. 2.10 After the taking over, the operation of the farm shall be guaranteed by the technology, software, blueprints and equipments handed over to Party A by Party B. 2.11 Party B shall consider the development of the second phase when designing the first phase of the Beijing Tianzhu Sewage Disposal Plant. CHAPTER VIII ARTICLES ABOUT HANDING OVER THE BEIJING TIANZHU SEWAGE DISPOSAL PLANT 1. In the period of building and special permission operating, the assets of the Beijing Tianzhu Sewage Disposal Plant belongs to Party B to exert. Party B and the project company could only impawn the special permission operating right and not mortgage, impawn the assets of the Beijing Tianzhu Sewage Disposal Plant or provide assurance in other ways, nor implement any lawful punishment on the assets of the Beijing Tianzhu Sewage Disposal Plant. On the day of handing-over, assets of the Beijing Tianzhu Sewage Disposal Plant shall be handed over to Party A and belongs to it. In the period of building and special permission operating, Party A assures that on whatever conditions and whencesoever, assets of the Beijing Tianzhu Sewage Disposal Plant and other lawful properties of Party B will not be expropriated, which is protected by the policy of local government. 2. On the day of handing-over, Party B and the project company shall assure such the farm is working normally and all the equipments are in good condition as are handed over free to Party A perfectly. Party B shall not stay nor ask for amends. 3. Six months before handing over, the Parties hereto shall discuss to decide the detailed list such as equipments, assets, creditor's rights, debt and documents, as well as the process and mechanism of handing over. 9 CHAPTER IX REQUIREMENT FOR TECHNOLOGY 1. GENERAL REQUEST 1.1 The construction time limit for the project is 15 months. 1.2 The techniques for getting rid of phosphor and azote must be considered during design to adapt the new standard. At the same time how to treat reclaimed water shall be taken into account synthetically. 1.3 The relation between the first and second phase must be considered roundly during the planar overall arrangement and the field to treat reclaimed water shall be reserved. 2. Water quality of inputting In accordance with the Discharge Standard of Water Pollutants in Beijing (Implementation), the water quality shall not be beyond the B kind standard for the discharge standard of such water pollutants as discharge into the city sewers (the sewers managed by the municipal administration), namely COD under 500 milligram per liter and BOD under 500 milligram per liter. Other part not be marked shall be in accordance with the standard of the inputting water of the GaoBeiDian Sewage Farm of Beijing. 3. WATER QUALITY OF OUTPUTTING 3.1 THE OUTLET OF OUTPUTTING WATER: the treated sewage by the Beijing Tianzhu Sewage Disposal Plant is direct put into the WenYu River. 3.2 The quality of outputting water must meet the requirements in the Discharge Standard of Water Pollutants in Beijing (Implementation): Chemical Oxygen Demand (COD) under 60 milligram per liter Biochemical Oxygen Demand after 5 days (BOD5) under 20 milligram per liter Suspension (SS) under 20 milligram per liter Ammonia nitrogen (NH3-N) under 8 milligram per lite Total Phosphorus (TP) under 1.0 milligram per liter Other indexes of pollutant must meet the requirements of the new second level of the Discharge Standard of Water Pollutants in Beijing (Implementation) as well as the corresponding discharge standard of the whole country. 4. THE DISCHARGE STANDARD OF SLUDGES: In accordance with the control standard of sludges of sewage farm for Beijing and the state one for town. 10 5. EMISSION STANDARD OF AIR POLLUTANTS: In accordance with the control standard of sludges of sewage farm for Beijing and the state one for town. CHAPTER X LIABILITY FOR BREACH OF CONTRACT 1. After 15 days exceeding the day signing this Contract, should Party B fails to send the investment funds namely RMB 20,000,000 into the account opened in the place of Party A by Party B, Party A shall have right to terminate the Contract. 2. Should the water quality of inputting meets the requirement in accordance with the Contract and of outputting exceed standard, Party A shall have right of refusing to pay the cost of treating sewage and Party B shall undertake the responsibility. 3. Should the water quality of inputting exceed standard and the equipment normally operate, Party B shall not undertake the responsibility of exceeding the standard of output. 4. Whether the water quality of inputting and outputting qualify is in accordance with the data of the Environmental Monitoring Department. Should the Party herein is inconsistent, the Central Station of State Environmental Protection Administration shall be invited to inspect and the data shall be the standard. 5. Whatever unexpected condition occurs, Party B shall notify Party A. 6. Should Party A not provide construction or normal operation condition for the construction tract of the Beijing Tianzhu Sewage Disposal Plant in set time so as to dally over the project, the project shall postponed. Should Party A not provide sewage for Party B after the project has been finished, Party A, in accordance with Chapter 6 hereto, shall pay the cost of treating sewage from the day beginning to debug after complete. 7. Should Party A fails to pay the cost of treating sewage after 1 month exceeding the time limit owing to Party A, Party A shall not only pay the cost in arrest of treating sewage but the penalty in according to 1% of total outstanding payment. Should Party A fails to pay the cost of treating sewage after 3 month exceeding the time limit, Party B shall have right to terminate the Contract. Should Party B terminate the Contract, Party A shall pay the actual penalty in accordance with the total sum of the cost of treating sewage in the period of the special permission management herein. 8. Should the project of the Beijing Tianzhu Sewage Disposal Plant be postponed with no cause of funds (Party B does not invest the total construct funds of RMB 20,000,000 in accordance with the provisions of this Contract), the project shall be postponed. 9. In the condition of normal operation, should the accumulative days exceeding standard exceed 31 in one year, Party A shall have right to deduct the cost of treating sewage during the days of exceeding standard. Should the accumulative days exceeding standard achieve 60 in one year, Party B shall increase the investment and adjust the techniques to achieve the standard. The additional investment shall be undertaken by Party B. 11 10. After this Contract signed, should any Party terminate this Contract without the agreement of the other Party, it shall mean a breach and the Party breaching the Contract shall pay for all the economic loss on the other Party except for owing to the other Party. CHAPTER XI FORCE MAJEURE As the consequence of Force Majeure, such as earth quakes, typhoons, flood, fires, wars of other natural calamities, which cannot be prevented or avoided, and accident of sudden power cut, directly affects the execution of this Contract, the Party that encounters the Force Majeure should notify the other Party of the Force Majeure or the accident. Valid documents to certify the happenings should be submitted to the other Party within fifteen days of the accident, and should be certified by the notarization department of the region where the accident took place. Disputes arising from cases of Force majeure shall be resolved through negotiations between the two Parties as to whether to terminate the Contract or partially fulfill the obligations of the Contract, or postpone the fulfillment of the Contract according to the effect of the accident on the fulfillment of the Contract. The legal obligation on the Party that encounters the Force Majeure or accident should be released during the Force Majeure or the accident of sudden power cut. CHAPTER XII DISPUTE RESOLVE Should any dispute arise from the implementation of or relating to the Contract, both Parties shall resolve them through friendly negotiations. If the discrepancies cannot be solved by negotiation, they should be submitted by both Parties to the People's Court where the Contract was signed for solution. CHAPTER XIII APPENDIX 1. After this Contract signed, should any Party put forward to terminating this Contract, the breaching Party shall pay for all the economic loss on the other Party. 2. On matter not covered by this Contract, both Parties (or both executive agents) shall sign another supplementary agreement to supply this Contract. During the fulfillment, both Parties (or both executive agents) shall sign another agreement or record the conference summary to amend and adjust this Contract. 3. This Contract shall come into effect from the day when the Contract is signed and capped with official seal. The Contract is duplicated in 8 copies, and each Party shall hold 4 copies. 12 4. Done in Shunyi District, Beijing Party A: People's Government of Shunyi Party B: Guangdong Xinsheng District, Beijing Enviromental Co..,Ltd Representative Legal representative Date: July 4, 2003 Date: July 4, 2003 13 EX-10.4 5 china_10ksba-ex1004.txt CONTRACT FOR BOT PROJECT INVESTMENT EXHIBIT 10.4 GUANGDONG XINSHENG ENVIRONMENTAL PROTECTION CO., LTD. FILE NO.: XIN-HAN-ZI (2004)004 - -------------------------------------------------------------------------------- TO: HAIYANG MUNICIPAL PLANNING AND CONSTRUCTION ADMINISTRATIVE BUREAU To guarantee the effective operation of Haiyang Sewage Treatment Plant and ensure the continuous implementation of the "BOT Investment and Operation Contract of Shangdong Haiyang Sewage Treatment Plant", our company has incorporated Haiyang Shengshi Environmental Protection Co., Ltd. in Haiyang city on July 30, 2003. Hereby our company authorizes Haiyang Shengshi Environmental Protection Co., Ltd. to take charge of the construction and operation of Haiyang Sewage Treatment Plant and to fully act for us to handle all relating affairs. Haiyang Shenshi Environmental Protection Co., Ltd. has the right of enjoying all operational revenue after the start of the operation and bearing all rights, obligations and responsibilities stipulated in the "BOT Contract". We shall appreciate your cooperation and support. Thanks! GUANGDONG XINSHENG ENVIRONMENTAL PROTECTION CO., LTD. Date: Feb. 10, 2004 SHANDONG HAIYANG SEWAGE TREATMENT PLANT CONTRACT FOR BOT PROJECT INVESTMENT AND OPERATION SHANDONG HAIYANG PLANNING AND CONSTRUCTION ADMINISTRATION GUANGDONG XINSHENG ENVIRONMENTAL PROTECTION CO., LTD. CONTRACT FOR BOT PROJECT (HAIYANG SEWAGE TREATMENT PLANT) INVESTMENT AND OPERATION PARTY A: Shandong Haiyang Planning and Construction Administration (hereinafter referred to as Party A) ADDRESS: 94 Hushan Street, Haiyang City, Shandong Province PARTY B: Guangdong Xinsheng Environmental Protection Co., Ltd. (hereinafter referred to as Party B) ADDRESS: 6/F, Guowei Building, 73 Xianlie Road Central, Guangzhou, Guangdong In accordance with relevant provisions of the Contract Law of the People's Republic of China, the Building Law of the People's Republic of China, Regulations on Contract for Survey and Design of Construction Project and Jian Cheng (2001) No. 223 Document issued by Ministry of Construction and Environmental Protection Bureau, Party A wholly assign Haiyang Sewage Treatment Plant to Party B in BOT form for investment and operation. After the signing of this contract, Party B shall own the investment and operation right of this project. In order to define the rights, obligations and economic responsibilities of both parties during project construction and operation, both parties enter into this contract for joint observation after consultation. ARTICLE 1 PROJECT NAME, CONSTRUCTION SITE AND PROJECT SCALE 1.1 Project name: Haiyang Sewage Treatment Plant 1.2 Construction site: Hexi, Zangjia Village, Yaiyang Touring and Vacationing Area 1.3 Project scale: Daily sewage treatment capacity: 50,000 tons (phase-I: 20,000 tons). The construction scale of the project hereunder: 20,000 tons. 1.4 Total amount of investment: The amount of investment in the project is RMB 30 million. Party B shall be responsible for the investment. 1.5 Content of construction: Sewage treatment plant with daily treatment capacity of 20,000 tons and its supporting facilities and greening in the plant. 1.6 Design requirements: As per the parameters agreed herein. 1.7 Construction period: The valid construction period of this project shall be 300 days. In case of rainstorm, flood, frost and extremely serious natural calamity, the construction period shall be extended accordingly. 1.8 Floor space: About 30 mu. ARTICLE 2 INVESTMENT, OPERATION AND SETTLEMENT MODE 2.1 Party A shall assign the right of investment construction and operation of Haiyang Sewage Treatment Plant in BOT manner. Party B shall make full investment in it and be solely responsible for the design, construction, operation and management of the project. Upon the expiration of the contract, Party B shall hand over the sewage treatment plant to Party A for management without compensation and guarantee the sewage treatment plant will operate normally at the time of handover. 2.2 Party B shall adopt MHA process as the applicable process of this sewage treatment plant and determine the designed influent and effluent water quality based on Environment Assessment Report provided by Party A and the Official Written Reply to Environmental Assessment issued by the local environmental protection bureau. Party B shall ensure the water quality after treatment shall meet level-2 discharge standard for secondary treatment in National Comprehensive Sewage Discharge Standard (GB8978-96). As agreed upon by both parties, the design parameters of influent and effluent water quality and the implementation standard of acceptance inspection are as follows: TABLE 2. 1 -------------------------------------------------------------------------- Indicator Influent water indicator Effluent Water indicator -------------------------------------------------------------------------- CODcr mg/L =<380 =<120 -------------------------------------------------------------------------- BOD5 mg/L =<180 =<30 -------------------------------------------------------------------------- SS mg/L =<200 =<30 -------------------------------------------------------------------------- Ammonia nitrogen (mg/l) =<40 =<25 -------------------------------------------------------------------------- P04(3) mg/L =<3.0 =<1.0 -------------------------------------------------------------------------- PH 6-9 6-9 -------------------------------------------------------------------------- 2.3 Party A shall control the standard for the discharge of industrial sewage into municipal sewage network according to national regulations. If the influent water quality of this project exceeds the standard agreed upon by both parties due to factories' excessive discharge so that sewage treatment fails to come up to standard, the liability therefor shall be borne by Party A instead of Party B. Besides, Party A shall still pay sewage treatment fee to Party B according to the status of normal running and pay excessive pollutant discharge fee collected by environmental protection department. 2.4 In order to ensure the smooth implementation of the project, Party A shall require the participation of local banks so as to give play to banks' function of recognition and supervision of this project. After the signing of this contract, Party B shall locally establish a wholly-owned specialized sewage treatment company based on this project as the economic entity for implementing this project. This company shall be solely responsible for the preparation for, construction, operation and management of the project. Party A shall allow Party B to pledge the right of operation of sewage treatment plant and charge collection hereunder to a bank to apply for the supporting loan of this project. In order to ensure the safe completion of this project on time and with agreed quality, Party B shall effect insurance with insurance companies or guarantee with guarantee companies for this project. In order to guarantee the recovery of Party B's investment, both parties shall respectively open a special account at the same agreed bank. The sewage treatment fee collected by Party A shall be deposited into such special bank account. The bank shall supervise settlement. Party B shall also open a special account at this bank as settlement account. 2.5 After the completion of Haiyang Sewage Treatment Plant, the date of completion and acceptance of the project shall be the starting day of Party B's operation period. Party B's operation period shall be 22 years. Party B shall conduct management by itself in the operation period and recover investment and obtain return from operation. During Party B's operation period, Party A shall be responsible for depositing sewage control fee collected with tap water into the special bank account designated by both parties as the fund source for paying sewage treatment fee of Party B and repaying loans. Method of settlement: Party A shall pay Party B sewage treatment fee for the previous month before the fifth day of each month (to be postponed if falling on holidays). The standard of sewage treatment fee (including tax) paid by Party A to Party B: [omitted]. The total period is 22 years. 2.6 Party A shall guarantee the monthly settlement of Party B's sewage treatment fee on time as Party B's recovered investment and reasonable return. If the sewage control fee collected by Party A is insufficient to pay Party B's sewage treatment fee, Party A shall be responsible for raising funds from other channels. The local government shall formulate the document of guaranteeing payment on time by governmental finance department. Party A shall guarantee full payment of sewage treatment fee to Party B on time. If Party A fails to pay sewage treatment fee to Party B, the financial unit or guarantee unit shall be responsible for payment until the end of operation period. Upon the expiration of the operation period, Party B shall deliver the sewage treatment plant in good condition that is able to safely and normally run to Party A without compensation and Party B's operation right, management right and ownership of limited assets shall be terminated. 2.7 The method of calculating sewage treatment fee paid by Party A to Party B: When Party B constructs the sewage treatment plant, it shall conduct design and construction according to the volume of sewage treatment determined by Party A and install flowmeter on influent water pump of the sewage treatment plant. Party A shall take the readings of the flowmeter as the basis for payment of sewage treatment fee to Party B. When Party A fails to provide sewage to Party B for treatment according to the rated sewage quantity, the quantity of influent water of Party A shall not be lower than 15,000 tons. Party A shall pay Party B's sewage treatment fee according to 75% of the rated quantity (limited to phase-I project only). Upon the expiration of the period of 2 years, if the quantity of water is lower than 20,000 tons per day, the fee shall be collected according to the standard of 20,000 tons per day. If the quantity is higher than 20,000 tons per day, the fee shall be collected according to the actual measurement. 2.8 The date of meter reading of monthly sewage treatment capacity shall be 28th day of a month. Party B shall copy the reading as of the current day to the meter reading and settlement sheet. Party A shall send personnel to verify the meter reading and settlement sheet before 12:00 p.m. of the current day. After being signed, the meter reading and settlement sheet shall be made out in triplicate, one copy for each party for future reference and one copy for the bank. The bank shall transfer the amount in Party A's special account directly into Party B's special account according to this meter reading and settlement sheet. 2.9 If the price rises due to the adjustment of national policy or market change during Party B's operation period and the accumulated margin of rise does not exceed 15% based on the price index published by the State in 2002, the charging standard of sewage treatment fee shall not be adjusted. If the margin of rise exceeds 15%, Party A shall adjust the unit settlement price of sewage treatment fee paid to Party B according to the coefficient of the exceeding part. 2.10 Before the signing of the contract by both parties, Party A's local government or competent governmental department shall promulgate the policy on levy and management of sewage treatment fee, clarify loan supervision bank, sewage treatment fee settlement unit, settlement guarantee and guarantor and relevant policies. Upon Party B's acceptance, the official documents shall be appendices attached hereto, take effect with this contract simultaneously and become the integral part of this contract. ARTICLE 3 RESPONSIBILITIES OF BOTH PARTIES PARTY A SHALL BE RESPONSIBLE FOR PROVIDING THE LAND OF 30 MU FOR CONSTRUCTION OF SEWAGE TREATMENT PLANT (PROVIDING GEOLOGIC INFORMATION OF LAND FOR DESIGN AND ENSURING FOUNDATION LOAD BEARING OF 15T/SQUARE METER) WITHOUT COMPENSATION AND THE GEOLOGIC STANDARDS OF SEWAGE TREATMENT PLANT AREA. PARTY A SHALL BE RESPONSIBLE FOR UTILITIES AND ROADS AND GUARANTEE THE SUPPLY OF WATER AND ELECTRICITY NECESSARY FOR PARTY B'S CONSTRUCTION. DURING PARTY B'S FRANCHISING PERIOD, PARTY B SHALL NOT BEAR THE TAXES AND EXPENSES RELATED TO THE LAND FOR THE SEWAGE TREATMENT PLANT. PARTY A SHALL PROVIDE 10KV TWO-CIRCUIT POWER SOURCE FOR PRODUCTION BEFORE TRIAL RUN, DELIVER IT TO THE PLACE OF TRANSFORMER WITHIN BATTERY LIMIT AND PROVIDE TRANSFORMERS. 3.1 The construction period of the sewage treatment plant is 9 months calculated according to the number of days for construction (from the date of settlement of all construction application procedures by Party A when Party B is able to officially enter the site for construction). After the completion of the project, acceptance inspection of the quality of the project shall be conducted based on the drawings reviewed by both parties and their attestation. Party A shall organize acceptance inspection within seven days after receipt of Party B's notice requesting acceptance inspection. If Party A fails to organize acceptance inspection without proper reasons within seven days after receipt of the notice, it shall be deemed to have accepted the quality of the project and Party B may conduct commissioning. Party B shall complete commissioning within three months after acceptance. Party A shall organize acceptance inspection within 10 days after receipt of Party B's notice requesting acceptance inspection. If Party A fails to organize acceptance inspection upon the expiration of the period of 10 days, it shall be deemed to have accepted the commissioning and the date of giving the notice shall be the starting day of Party B's collection of sewage treatment fee and operation. The final acceptance indicator: It means the effluent water meets the indicators specified in contract schedule 2.1. If effluent water meets the standard agreed in contract schedule 2.1, the project shall be deemed to come up to standard and be accepted. 3.2 The property right of sewage treatment plant shall be owned by Party A. The project itself is a municipal construction project with the nature of public welfare. Party B shall invest in and operate the project. Therefore, Party B shall enjoy the preferential policies of the government of the level concerned and environmental protection industry and those on taxes and levies during the period of construction and operation. 3.3 Party A shall be responsible for relevant procedures concerning the environmental assessment, position planning, project establishment, land requisition, application for approval and construction, obtainment of certificates and licenses (including Party B's non-local builder's license) and road occupation and bear relevant expenses. Party A shall be liable and compensate Party B for the losses incurred to Party B by work stoppage or punishment resulting from the above issues after Party B's entrance for construction. Meanwhile, Party A shall assist Party B in handling the matters concerning relationship with the neighborhood, environment, public security, etc. 3.4 After the signing of the contract, Party A shall issue design and construction notification to Party B. Meanwhile, Party A shall submit red line chart of construction, geologic report for design, the information about underground facilities within land scope and the elevation of the nozzle of sewage conduit to the sewage treatment plant and discharge opening to Party B free of charge. Party B shall submit preliminary design scheme to Party A according to the notification within thirty working days after provision of basic design parameters including the availability point of domestic water and electricity consumption of the sewage treatment plant. After Party A's consent, Party B shall complete construction design within 1 month and submit it to Party A for review. 3.5 Timely promulgation of relevant policies on the sewage treatment plant: Party A shall arrange the municipal (county) people's government to promulgate the following relevant policies on municipal (county) sewage treatment plant as the appendices attached hereto within three months after the signing of the contract to ensure the smooth implementation of this project: 1) The regulations on levy, management and settlement of sewage control fee issued according to the gist of (1999) No. 192 Document jointly issued by National Planning Commission, Ministry of Construction and State Environmental Protection Administration. 2) To determine the settlement unit that pays sewage treatment fee, account opening bank, supervision unit and guarantor and settle relevant procedures as the policy guarantee of the implementation of this project. 3) Party A shall assist Party B in successfully applying to banks for project supporting loans equivalent to 45% of the amount of total investment in the project hereunder and guarantee loan funds shall be available for use within three months after the signing of the contract. 3.6 Party B shall fully enter the site for construction within 10 days after all relevant matters of Party A have been settled, drawings have passed review, conditions for entrance and construction commencement have been satisfied and Party A's construction commencement notification is received. The following conditions shall be satisfied before entrance and construction commencement: 1) Drawings have passed review and Party A's representative has signed the review document; 2) The procedures concerning environmental assessment report, project establishment, official written reply, land requisition, application for approval and construction, builder's licence (including Party B's non-local construction certificate) have been settled. The roads outside battery limit are unblocked. Foundation load bearing of 15T/ square meter has been completed. The water and power supply for construction has been connected to the battery limit. 3) Party A's construction commencement notification has been received. 4) Supporting loans have been available from local banks. 3.7 Pricing of electricity charge: In addition to the preferential electricity rate offered by power supply bureau to municipal and environmental protection projects, other preferential policies shall be granted as far as possible. At present, electricity rate applicable to municipal facilities shall apply. 3.8 Party A shall be responsible for transporting sewage into the area of sewage treatment plant of this project and discharging the clean water after treatment out of required facilities and buildings. Party A shall be responsible for transporting out the sludge after dewatering for disposal. 3.9 The project of investment in the sewage treatment plant for which Party B shall be responsible includes: (1) The excavation and backfill of earth within the scope of the sewage treatment plant with the capacity of 20,000 tons per day; (2) Preliminary design, construction drawing design and proposal of construction plan within battery limit of the sewage treatment plant with the capacity of 20,000 tons per day; (3) Civil works (including offices, chemical laboratories, interior finish, roads in plant and enclosing wall), automatic control and power distribution works (not including power transformation works), water supply and sewerage works, technological equipment and installation works, landscape works, fire control and flood prevention works within battery limit of the sewage treatment plant with the capacity of 20,000 tons per day. Party B shall guarantee the built-up sewage treatment plant shall be a garden-type plant. (4) Party B shall construct the infrastructure supporting both phase-I and phase-II project at the time of construction of phase-I project of the sewage treatment plant. Phase-I and phase-II project shall be connected at the time of satisfying the demand of sewage treatment. The construction of phase-II project shall be constructed one year in advance. Its construction scale is 30,000 tons per day. The phase-II project shall be built up with lump-sum investment. Both parties shall renegotiate over concrete matters: (5) Commissioning of all works within battery limit of the sewage treatment plant; (6) The post training of operating workers of the plant and whole-process independent operation and management during operation period; (7) Party B shall complete commissioning and realize the agreed treatment effect within 3 months after the completion of the project; (8) Maintenance of the project of plant area during operation period. 3.10 Upon Party A's satisfying all provisions of Article 3.1 / 3.6 / 3.7 hereof, Party B shall pay performance bond of RMB 0.5 million in advance to Party A's account jointly supervised by both parties within 20 days after the signing of the contract. Upon the completion of civil work, Party A shall relieve supervision and Party B may freely dispose of this fund of RMB 0.5 million. 3.11 Party B shall establish a specialized sewage treatment company within 20 days after the signing of the contract and Party A shall assist in settling the procedure of registration. ARTICLE 4 AGREEMENT REACHED BY BOTH PARTIES 4.1 Party B shall provide advantageous inoculum and carrier of biochemical system. 4.2 Acceptance inspection and monitoring unit shall be Haiyang Environmental Protection and Monitoring Central Station. If the monitored result reaches the effluent water indicators listed in contract schedule 2.1, it shall be deemed to pass acceptance inspection. When necessary, Party B may entrust national central station to conduct monitoring and the data monitored by national central station shall apply. Sewage treatment capacity is designed by Party B according to Party A's requirements. If the quantity of sewage is insufficient at the time of acceptance inspection, so long as effluent water meets the standard specified in this contract, the sewage treatment capacity of this project shall be deemed to pass acceptance inspection and the acceptance inspection of the works done by Party B shall not be affected. 4.3 Party A shall permit Party B to conduct annual shutdown overhaul according to relevant regulations within the operation period and allow appropriate commissioning period after overhaul. 4.4 Party A shall have the right to conduct regular or irregular monitoring of the sewage treated and discharged by Party B. In case of coming up to standards, monitoring expenses shall be borne by Party A. In case of failure to come up to standards, monitoring expenses shall be borne by Party B. Non-routine monitoring expenses shall be paid by the party that requires monitoring. 4.5 The treated sewage water utilization and disposition right after the sewage treatment plant comes up to standards shall be owned by Party A. 4.6 Tentative plan for treated sewage water utilization: If the sewage fails to meet the standard of treated sewage water utilization after treatment by the sewage treatment plant, a treatment system of corresponding scale shall still be constructed for retreatment. If reasonable water rate and determined quantity of treated sewage water are available, Party B may continue to invest in and construct the supporting facilities of treated sewage water utilization system. Party A shall give priority to the connection of supporting facilities of the whole sewage treatment system by Party B. 4.7 Party B may conduct operation management in the manners including contracted operation by others and assignment of operation right during operation period, provided that it shall give prior notice to Party A and all liabilities therefor shall be borne by Party B. 4.8 If the sewage treatment system malfunctions due to long-time power failure not caused by reasons on the part of Party B after the sewage treatment plant is put into operation, Party B shall not be liable therefor. From the date of power failure to the date of acceptance of commissioning, Party A shall pay the sewage treatment fee according to the unit price specified in Article 2.5 and the rated quantity of water to Party B and the excessive pollutant discharge fee thus incurred to environmental protection department. ARTICLE 5 LIABILITY FOR BREACH OF CONTRACT 5.1 Party A's breach of contract: (1) If Party A fails to provide conditions as agreed herein and thus causes losses to Party B, it shall extend construction period and operation period according to the number of days of delay in addition to bearing all losses of Party B. (2) If Party A fails to pay sewage treatment fee on time, it shall pay Party B overdue interest and fine for delayed payment according to the amount of arrears and banks' regulations on deferred payment from the next day of the tenth day of delay as well as damages of RMB 10,000 for each day of delay. 5.2 Party B's breach of contract: If Party B fails to complete the project according to the construction period specified in the contract, it shall pay Party A damages of RMB 10,000 for each day of delay. (1) If construction quality fails to meet design criteria and requirements, the terms of the appendix attached hereto shall apply. (2) If Party B fails to make sewage treatment come up to standards within specified time, it shall be responsible for commissioning without compensation until meeting agreed discharge standard. If Party B fails to meet the agreed discharge standard through commissioning within 120 days from the date of commissioning and trial run, Party A shall have the right to require Party B to engage experts to participate in commissioning or carry out additional design and construction again until meeting discharge standard through commissioning. ARTICLE 6 FORCE MAJEURE Force majuere shall mean natural calamities beyond human resistance including explosion, fire, typhoon and earthquake caused by war, turmoil, falling of objects flying in the air or other reasons for which both parties are not responsible. Once a force majeure event occurs, Party B shall quickly take actions, endeavor to reduce losses and report the information about the injury to Party A's representative within 24 hours. In case of any loss thus incurred, the loss shall be borne by both parties according to relevant national regulations after consultation. ARTICLE 7 SAFE CONSTRUCTION 7.1 Party B shall observe national and local laws and regulations, set up fire safety and protection works, observe and implement regulations on fire prevention, safe construction, civilized construction and construction at night. Otherwise, Party B shall be responsible for the losses thus incurred or the punishment imposed by relevant department. 7.2 The liability for compensation in respect of personal injury accidents caused due to reasons on part of Party B (including project quality and unexpected accidents) within the scope of construction shall be borne by Party B. 7.3 Party A shall coordinate the public order and relationship with the neighborhood during the period of engineering construction and contracted operation. ARTICLE 8 SETTLEMENT OF DISPUTES Any dispute arising between both parties from the performance of this contract shall first be settled by through friendly consultation. If no settlement can be reached through consultation, the dispute shall be submitted to the arbitral agency at the place where Party A is located for settlement. ARTICLE 9 EFFECTIVENESS OF THE CONTRACT This contract shall take effect from the date of signing and sealing by both parties and signing and sealing by the guarantor and become invalid upon the completion of contract performance. This contract shall be made out in ____ originals, ___ for Party A, ___ for Party B, ___ for the guarantor and ___ for the supervising lending bank. Each shall have the same legal effect. The matters not dealt with herein shall be settled by both parties through consultation. Supplementary clauses separately signed shall be an integral part of this contract and shall have the same legal effect with this contract. PARTY A: PARTY B: GUANGDONG XINSHENG ENVIRONMENTAL PROTECTION CO., LTD. LEGAL REPRESENTATIVE LEGAL REPRESENTATIVE REPRESENTATIVE: REPRESENTATIVE: DATE: June 30, 2003 GUARANTOR: LEGAL REPRESENTATIVE: Annex 1 Matters agreed relating to the construction project of the sewage treatment plant CLAUSE 1 QUALITY STANDARD OF THE PROJECT The overall construction project shall satisfy the standard of excellent project so as to guarantee the safety, reliability and applicability of the construction project. The state project quality standard shall be applied. CLAUSE 2 GENERAL RESPONSIBILITIES OF PARTY A DURING THE PROCESS OF CONSTRUCTION 2.1 Representative of Party A: Party A shall station a representative to on the site of construction, who shall exercise the rights and fulfill the responsibilities agreed on in the contract: 2.1.1 The representative of Party A has the right of assigning the managing personnel to exercise or fulfill part or whole rights and responsibilities on behalf of the representative of Party A, and has the right to withdraw such assignment at any time. The assignment and the withdrawal shall be notified to Party B five days in advance. 2.1.2 Any letter of instructions or notice of the representative of Party A shall firstly be signed by the representative of Party A, and then be submitted to the representative of Party B. The letter becomes effective after the representative of Party B signs in the return receipt and indicates the time of receiving the letter. In case regarding the instructions in the letter as not reasonable, the representative of Party B shall submit a written appeal within 24 hours. Within 24 hours after receiving the appeal, the representative of Party A shall discuss with the representative of Party B for a solution. 2.1.3 In accordance with the agreement in the contract, Party A shall provide Party B with necessary support, approval, drawings and the fulfillment of other obligations of Party A without delay, otherwise Party B shall notify the representative of Party A of the detailed requirement, the reason of demand and the consequences of delay in writing within 24 hours after the agreed time limit of the fulfillment of Party A. In case the representative of Party A does not reply within 48 hours after receiving the notification, Party A shall bear the expenses arising from the delay and is liable for the relating losses of Party A, and the time limit for the project shall be postponed accordingly. The Chief Supervision Engineer assigned by Party A shall exercise part or whole rights of the representative Party A and fulfill the responsibilities of the representative of Party A as stipulated in the contract in accordance with the agreed clauses in the agreement, but has no right to relieve the rights and obligations of Party B as stipulated in the contract. Party A shall inform Party B of any substitution of the representative of Party A and the General Supervision Engineer within 7 days after the decision. The successors shall bear the responsibilities of the predecessors (the obligations stipulated in the contract and the commitment within their authority). 2.2 The obligations of Party A. Party A shall be responsible for the following work: 2.2.1 Take charge of submitting the initial design scheme to relating authorities for registration and approval. 2.2.2 Complete the formalities of reporting the project to relating authorities and getting the various certificates and approval documents from the relating authorities at least 10 days before the start of the construction, which allow the construction, the temporary usage of the construction site, the usage of occupied roads and buildings, and the relating installation. 2.2.3 Connect the water supply for living and the electricity for lighting before the construction team enters the construction site, and connect the water supply and electricity for construction 10 days before the start of the construction; Take charge of completing the fitting project of the electricity network required by operation of the sewage treatment plant one month before the completing of the sewage plant. 2.2.4 Notify Party B of the names of the stationed representatives (including the supervision engineer) designated by Party A and send the notification of approving the start of construction to Party B before the start of the construction. 2.2.5 Provide the information of the geology and the underground pipelines and electrical lines on the construction site to Party B and such data shall be authentic and accurate; Any consequences arising from the deviation of such information or data shall be borne by Party A. 2.2.6 Offer the information of benchmark and the coordinates control points to Party B in writing and carry out the site verification. 2.2.7 Coordinate and carry out the protection of the nearby underground pipelines and lines on the construction site and the protection of adjacent buildings and constructions, and bear the relating expenses. 2.2.8 The site-stationed representative of Party A shall supervise the progress and quality of the construction project, urge Party B to test the test pieces and pressure of materials and sort out the technical information and data, and take charge of the licenses and other related matters within the authority as stipulated in the contract. CLAUSE 3 GENERAL RESPONSIBILITIES OF PARTY B DURING THE PROCESS OF CONSTRUCTION 3.1 The site-stationed representative of Party B: Party B shall designate a site-stationed principal, who shall exercise the rights and fulfill the responsibilities agreed in the contract. 3.1.1 Any requirement, request or notification of Party B shall be in written form, which shall be signed by the representative of Party B before sending to the representative of Party A, and shall become effective after the representative of Party A signs and indicates the time of receiving in the return receipt. 3.1.2 The representative of Party B shall organize the construction in accordance with the design drawings and construction organization design (or construction scheme) checked and confirmed by Party A, and the orders of Party A sent on the basis of the contract. Party B shall notify Party A of any substitution of the representative of Party B at least 7 days in advance. The successor shall bear the responsibilities of the predecessor (the agreed obligations in the contract document and the commitment within the authority). 3.1.3 Responsibilities of Party B. Party B shall take charge of completing the following work: 3.1.4 Complete the initial design scheme, design of construction drawings within the agreed time limit and provide Party B with 5 copies of the initial design scheme, design of construction drawings. 3.1.5 Within 5 days after Party A approves the initial design scheme, Party B shall submit the water and electricity usage plan to Party A within 5 days after Party A approves the initial design scheme. Party B shall complete the co-examination of the construction drawings, and draw up the construction organization design and the construction progress schedule to Party A as the basis of checking and supervising the implementation of the construction schedule. Party B shall submit the electricity and water consumption estimation of the whole sewage treatment plant to Party A within 1 month after the start of the construction. 3.1.6 At least 5 days before the state of the construction, Party B shall submit the names of the site-stationed representative of Party B and the contact persons (including those of the sub-contractors) to Party A, so that Party A can urge and inspect the construction work. 3.1.7 Submit the annual, quarterly and monthly project progress schedules and the relating statistics of progress and the special report for any engineering accident to the representative of Party A. 3.1.8 Abide by the regulations of the local government and authorities on the transportation at the construction site or any other regulations. Party A is responsible for going through relating formalities. 3.1.9 Party B shall carry out the construction in strict conformity with the operating procedures specified in the construction drawings and the construction instructions examined and approved by Party A, and the technical criteria of construction, and shall test the material of the test pieces in accordance with relating regulations. The quality of construction project shall be supervised by the quality supervision authorities and Party A; In case finding any problem in the key construction section, Party A shall notify Party B of such problem in writing and Party B must take corrective actions according to the requirements of the representative of Party A. 3.1.10 Party B must organize the construction of the project according to the schedule approved by Party A, and receives the check and supervision carried out by the representative of Party A. In case the actual progress of the construction in not in conformity with the progress schedule, Party B shall propose the corrective measures according to the requirements of the representative of Party A, which shall be implemented after they are approved by the representative of Party A. 3.1.11 Party B bears responsibilities for protecting the underground pipelines at the construction site and the adjacent building and constructions, and ensure the cleanness of the site complies with the relating regulations. EX-10.5 6 china_10ksba-ex1005.txt Exhibit 10.5 AGREEMENT Party A: Pu Chong Liang Address: Suite 402, S20 Street, Donghui Garden, Tianfu Road Guangzhou, Guangdong Province, China ID No. 441324590410533 Party B: Guang Dong Xin Xing Mei Biology Company Limited Address: 6th Floor, No. 73, Guowei Building Guangzhou, Guangdong Province, China Registration No. 4400001900493 After amicable negotiation with respect to the technologies owned by Party A concerning certain MHA biological treatment processes technology and GM bio-carriers, for consideration received and the sufficiency thereof is hereby acknowledged, the Parties have agreed as follows: Section 1: Scope of Assignment Party A hereby agrees to assign to Party B the right to use the patents owned by Party A concerning certain MHA biological treatment processes technology and CM bio-carriers (PRC Patent No. ZL 01-1-07624.0) (the "Patents"). Section 2: Method of Assignment Effective as of the date hereof, Party B shall have the perpetual right to use the Patents. Section 3: Undertakings Party A agrees that he will not assign the Patents or the right to use the Patents to any third party and Party B will be the exclusive user of the Patents with the right to sub-license. Section 4: License Fee Party A agrees that the Party B will have the right to use the Patents free-of-charge. Section 5: Dispute Resolution In the event that there is any dispute arising from any default or termination of this Agreement, the Parties shall negotiate to resolve the dispute amicably; failing which either Party may submit such dispute to the court in China for resolution. Section 6: Effective Conditions and Date This Agreement shall become effective upon the signing by the Parties and supersede all agreements reached by the Parties previously on the subject matter of this Agreement. Section 7: Number of Copies This Agreement shall be executed in four counterparts which shall have the same legal effects. Party A: Pu Chong Liang /S/ PU CHONG LIANG - ----------------------------------------------- Party B: Guang Dong Xin Xing Mei Biology Company Limited /S/ [SIGNATURE ILLEGIBLE] - ----------------------------------------------- By: Title: Dated as of: October 20, 2004 EX-21.1 7 china_10ksba-ex2101.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES China Evergreen Environmental Corporation has the following subsidiaries: Attributable equity interest % Name ------------------------------ ---- Direct Indirect Evergreen Asset Group Limited 100% - Evermater Group Limited 100% - Guangdong Xinsheng Environmental Co., Ltd. 90% - Beijing Haotai Shiyuan Water Purification 90% - Co., Ltd. Haiyang Shengshi Environmental Protection 90% - Co., Ltd. Tian Jin Shi Sheng Water Treatment Company Limited - 81% Handan Chengsheng Water Service Co., Ltd. 90% EX-31.1 8 china_10ksba-ex3101.txt EXHIBIT 31.1 CERTIFICATIONS I, Chong Liang Pu, certify that: 1. I have reviewed this annual report on Form 10-KSB/A of China Evergreen Environmental Corporation. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this annual report; 4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to me us others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the company's disclosure controls and procedures and presented in this reported our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and (c) disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. July 13, 2005 /s/ Chong Liang Pu ------------------------------------- Chong Liang Pu President and Chief Executive Officer EX-31.2 9 china_10ksba-ex3102.txt EXHIBIT 31.2 CERTIFICATIONS I, Ren Cai Ding, certify that: 1. I have reviewed this annual report on Form 10-KSB/A of China Evergreen Environmental Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this annual report; 4. The company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the company's disclosure controls and procedures and presented in this reported my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and (c) disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. July 13, 2005 /s/ Ren Cai Ding ------------------------------ Ren Cai Ding Chief Financial Officer EX-32.1 10 china_10ksba-ex3201.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of China Evergreen Environmental Corporation (the "Company") on Form 10-KSB/A for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Chong Liang Pu and Ren Cai Ding, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. July 13, 2005 /s/ Chong Liang Pu ------------------------------------- Chong Liang Pu, President and Chief Executive Officer /s/ Ren Cai Ding ------------------------------------- Ren Cai Ding, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----