-----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, MYf/7Gc8kIi5JOKEsUo6G3lB26Icj29ctu2atZNKda+pRKRDLJKfDAPiGTGB6Vy6 uLg2ReT+kPHWGmRS0n5Yvw== 0001144204-06-024949.txt : 20060615 0001144204-06-024949.hdr.sgml : 20060615 20060615152300 ACCESSION NUMBER: 0001144204-06-024949 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20060602 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Completion of Acquisition or Disposition of Assets ITEM INFORMATION: Unregistered Sales of Equity Securities ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060615 DATE AS OF CHANGE: 20060615 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLYN RESOURCES III INC CENTRAL INDEX KEY: 0001107563 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 841491682 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-30017 FILM NUMBER: 06907253 BUSINESS ADDRESS: STREET 1: PO BOX 461029 CITY: GLENDALE STATE: CO ZIP: 80246 BUSINESS PHONE: 3033941187 MAIL ADDRESS: STREET 1: PO BOX 461029 CITY: GLENDALE STATE: CO ZIP: 80246 8-K 1 v045248_8k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): June 2, 2006 Franklyn Resources III, Inc. (Exact name of registrant as specified in its charter) Nevada 0-30017 84-1491682 ------ ------- ---------- (State or other jurisdiction of (Commission File Number) (I.R.S. Employer incorporation) Identification No.) 234-5149 Country Hills Blvd. NW; Suite 429, Calgary, Alberta, Canada T3A 5K8 ---------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (832) 274-3766 Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 1.01. Entry into a Material Definitive Agreement. On June 2, 2006, Franklyn Resources III, Inc. (the "Company") entered into an exchange agreement pursuant to which the Company acquired all of the equity of Sinoenergy Holding Limited, a British West Indies corporation ("Sinoenergy") which owned all of the equity of Qingdau Sinogas General Machinery Corporation, a Chinese corporation which is qualified as a wholly-owned foreign enterprise ("Sinogas"). Pursuant to the Exchange Agreement, the Company issued 14,215,385 shares of common stock to the owners of Sinoenergy. In connection with the acquisition of Sinoenegy, the Company entered into: (a) A securities purchase agreement (the "Purchase Agreement") with Barron Partners LP, JCAR Funds Ltd., Ray Rivers and Steve Mazur pursuant to which the investors purchased 6% convertible notes in the principal amount of $3,500,000, 369,000 shares of common stock (the "Initial Shares"), and warrants to purchase 6,000,000 shares of common stock at $.85 per share, 6,000,000 shares of common stock at $1.20 per share and 6,000,000 shares of common stock at $1.75 per share. The following table sets forth the investment by each of the investors, the principal amount of note received, the number of Initial Shares issued and the number of shares issuable upon exercise of each set of warrants. Initial Note Shares Warrants Barron Partners LP $3,100,000 305,743 4,971,429 JCAR Funds Ltd. 200,000 21,086 342,857 Steven Mazur 100,000 10,543 171,429 Ray Rivers 100,000 10,543 171,429 Total $3,500,000 369,000 6,000,000 The numbers under the column "Warrants" represents the number of shares of common stock issuable upon exercise of each set of warrants. Thus, each investor has the same number of warrants exercisable at $.85, $1.20 and $1.75. (b) A stock redemption agreement with the Company's principal stockholders. The Company purchased a total of 3,305,000 shares of common stock for a purchase price of $213,525, which was paid from the proceeds of the notes, stock and warrants. The following table sets forth the sellers, the number of shares purchased and the purchase price payable to each seller: Name Number of Shares Purchase Price - ---- ---------------- -------------- Frank L. Kramer 1,000,000 $62,600 Deborah Salerno 1,000,000 62,600 John P. O'Shea 1,000,000 62,600 Lynn Suave 150,000 9,690 Mark Lubchenco 100,000 6,465 Gary S. Joiner 35,000 2,270 Marika Xirouhakis 20,000 7,300 --------- -------- 3,305,000 $213,525 ========= ======== 1 The Company agreed to include in a registration statement the shares of common stock held by the Company's remaining stockholders. Purchase Agreement Pursuant to the Purchase Agreement: o The Company sold to the investors for $3,500,000, (i) 6% convertible notes in the aggregate principal amount of $3,500,000, (ii) 369,000 shares of common stock and (iii) warrants to purchase 6,000,000 shares of common stock at an exercise price of $.85 per share, 6,000,000 shares of common stock at an exercise price of $1.20 per share, and warrants to purchase 6,000,000 shares at an exercise price of $1.75 per share. o The Company is required, within 120 days of the closing date, to amend its articles of incorporation to provide for an authorized capitalization of 60,000,000 shares of capital stock, of which 10,000,000 will be shares of preferred stock and 50,000,000 will be shares of common stock and to adopt a certificate of designation which creates the right of the holders of a series of preferred stock to be designated as the series A convertible preferred stock. o Upon the filing of both the restated certificate of incorporation and the certificate of designation, the notes are automatically converted into shares of series A preferred stock, at a conversion price of $.65 per shares, subject to adjustment. Based on the conversion price of $.65, the Company would issue a total of 5,384,615 shares of series A preferred stock which would be convertible into 5,384,615 shares of common stock. If the restated certificate of incorporation and the certificate of designation are not filed at the time that the notes are converted, the notes are convertible into common stock at a conversion price of $.65 per share. o The conversion price of the note and the conversion rate of the series A preferred stock are subject to adjustment in certain instances, including the issuance by the Company of stock at a price which is less than the conversion price, which is initially $.65. o In the event that the Company's consolidated pre-tax income, as defined, for the year ended December 31, 2006 is less than $.212 per share on a fully-diluted basis, then the Conversion Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Fully-diluted pre-tax income is based on the number of shares of common stock which are outstanding or are otherwise issuable, regardless of whether such shares would be included in determining diluted earnings per share under generally accepted accounting principles. o In the event the Company's consolidated pre-tax income for the year ended December 31, 2007 is less than $.353 per share on a fully-diluted basis, then the Conversion Price shall be reduced by the percentage shortfall, up to a maximum of 40%. o The following table sets forth the initial conversion price of the notes, the conversion ratio for the series A preferred stock and the exercise price of the $.85 and $1.20 warrants and the adjusted numbers if (a) the pre-tax income per share for each of the two years was 20% below the respective targets (a "20% shortfall") and (b) the pre-tax income per share for each of the two years was 40% or more below the targets (a "40% shortfall"). No adjustment is given for the $1.75 warrants, since they expire on December 31. 2006. The number of shares reflects the number of shares of common stock issuable upon conversion of the note or the series A preferred stock, and are based on the assumption that no notes or preferred stock are converted into common stock until the adjustment has been made for 2007. There is no adjustment in the number of shares issuable upon exercise of the warrants. 2 Conversion Price/ Conversion Ratio/ $.85 Warrant $1.20 Warrant Number of Shares Number of Shares Exercise Price Exercise Price ---------------- ----------------- -------------- -------------- Unadjusted $.65/ 1:1/ $.85 $1.20 5,384,615 5,384,615 20% $.416/ 1.5625:1/ $544 $.768 shortfall 8,413,462 8,413,461 40% $.234/ 2.77778:1/ $.306 $432 shortfall 14,957,265 14,957,265 o The Company agreed to have appointed such number of independent directors that would result in a majority of its directors being independent directors, that the audit committee would be composed solely of independent directors and the compensation committee would have a majority of independent directors. Failure of the Company to meet these requirements for a period of 60 days for an excused reason, as defined in the Purchase Agreement, or 75 days for a reason which is not an excused reason, would results in the imposition of liquidated damages which are payable in cash or additional shares of series A preferred stock.. The liquidated damages are computed in an amount equal to 12% per annum of the principal amount of notes outstanding, up to a maximum of $420,000, which is payable in cash or stock, at the election of the investors. o The Company and investors entered into a registration rights agreement pursuant to which the Company agreed to file, within 60 days after the closing, a registration statement covering the common stock issuable upon conversion of notes and the series A preferred stock and exercise of the warrants. The failure of the Company to meet this schedule and other timetables provided in the registration rights agreement would result in the imposition of liquidated damages, which are payable through the issuance of additional shares of series A preferred stock. at the rate of 1770 shares of series A preferred stock for each day, based on the proposed registration of all of the underlying shares of common stock, with a maximum of 950,000 shares. o The warrants issued to the investors have a term of five years, except that the $1.75 warrants expire on December 31, 2006. The warrants provide for adjustments if the Company does the meet certain financial targets described above. o The warrants also provide that, with certain exceptions, if the Company issues common stock at a price, or warrants or other convertible securities with an exercise or conversion price which is less than the exercise price of the warrants, the exercise price of the warrants will be reduced to the sales price, exercise price or conversion price, as the case may be, of such other securities. o The Company also reimbursed Barron Partners for its due diligence and other expenses in the amount of $50,000. 3 Exchange Agreement Pursuant to the Exchange Agreement, the Company issued 12,793,847 shares of common stock to Skywide Capital Management Limited, a British Virgin Islands corporation owned by Bo Huang, the Company's chief executive officer, and Tianzhou Deng, the Company's chairman, and 1,421,538 shares to Eastpride Capital Limited, a British Virgin Islands corporation owned by Wentao Yang. The shares issued pursuant to the Exchange Agreement are subject to an 18 months lock-up, except that Eastpride can sell up to 50% of its shares commencing one year after the closing and the remaining shares two years after the closing. Skywide and Eastpride have demand and piggyback registration rights commencing December 1, 2007; however, the registration rights provisions do not include any provisions for liquidated damages. Item 2.01. Completion of Acquisition or Disposition of Assets. Information in response to this Item 2.01 is keyed to the Item numbers of Form 10SB. Part I Item 1. Description of Business SUMMARY On June 2, 2006, the Company acquired the stock of Sinoenergy pursuant to the Exchange Agreement, which is described under "Item 1.01. Entry into a Material Definitive Agreement." References to "we," "us," "our" and similar words refer to the Company and, where applicable, Sinoenergy, which became a wholly-owned subsidiary of the Company, and Sinogas, which is wholly-owned by Sinoenergy, unless the context indicates otherwise. Prior to the effectiveness of the reverse acquisition these terms refer to Sinogas. We design, manufacture and market a range of pressurized containers for compressed natural gas, known as CNG. Compressed natural gas is natural gas, principally methane, in its gaseous state that has been compressed. Natural gas is compressed during transportation and storage and, thus, requires pressurized containers. Our license permits us to operate CNG stations, CNS equipments and services, as well as non-standard chemical and refinery equipment. Although our initial business involved the manufacture of non-standard equipment and pressure containers, our business has evolved as an increasing market is developing in the People's Republic of China ("PRC") for the use of CNG as a method of combating air pollution, which is increasing viewed as a major problem throughout the PRC. We believe that this need will create a market for CNG powered vehicles. We use our capabilities in this industry to manufacture equipment for use in CNG gas stations and gas transportation vehicles. Our CNG vehicle and gas station equipment business consists of two divisions, the manufacture of CNG vehicle and gas station equipment, and the design of construction plans for CNG gas stations, the construction of the CNG stations, and the installation of CNG station equipment and related systems at the gas station. In addition to our CNG related products, we continue to manufacture a wide variety of pressure containers for use in different industries, including the design and manufacture of various types of pressure containers in the petroleum and chemical industries, the metallurgy and electricity generation industries and the food and brewery industries. In addition, we can design and manufacture various types of non-standard equipment. 4 We plan to develop a CNG station business in Wuhan City, Hubei province in the PRC, commencing late 2006, and we expect to have our first project completed within twelve months thereafter. The first project involve the construction and operation of 20 CNG stations which will be supplied by two larger supply stations which provide CNG to the stations. Organization Sinogas is an entity known as a wholly-owned foreign enterprise, commonly referred to as a WOFE, under the laws of the PRC. Its organization is similar to that of a limited liability company under United States law. Sinogas' term of existence is for a period of 15 years, ending on October 29. 2019. Prior to September 2004, Sinogas' business was conducted as a state-owned equipment manufacturer under the name Qingdao General Machinery Plant. On July 25, 2000, we were privatized, and our equity was owned by three Chinese companies. In November 2005, Sinoenergy Holding Limited, a British Virgin Islands corporation which was then owned by Wentao Yang, acquired,subject to government approval, the equity in Sinogas from the Chinese owners. On November 29, 2005, the local government agency approved the purchase by Sinoenergy of all the shares of Sinogas, and Sinogas became WOFE. On February 21, 2006, Sinoenergy entered into a share transfer agreement with Skywide Capital Management Limited, a British Virgin Islands corporation which is owned by Tianzhou Deng and Bo Huang, and Eastpride Capital Limited, a British Virgin Islands corporation owned by Wentao Yang, with the result that 90% of the shares of the Sinogas were held by Skywide and 10% of the shares were held by Eastpride. On June 2, 2006, pursuant to the Exchange Agreement, Sinoenergy, which is the parent of Sinogas, became our wholly-owned subsidiary and the former owners of Sinoenergy received 14,215,385 shares of common stock, as described under "Item 1.01 Entry into Definitive Material Agreement." As a result, our business is the business of Sinoenergy and Sinogas. The acquisition will be accounted for as a reverse acquisition. The accounting rules for reverse acquisitions require that beginning with the date of the acquisition, June 2, 2006, our balance sheet includes the assets and liabilities of Sinogas and its equity accounts were recapitalized to reflect the net equity of Sinoenergy. In the future, our historical operating results will be the operating results of Sinogas. Sinogas's executive offices are located at 45 Jinghua Road, Qingdao, Shandong, China, telephone 011 86 532 84888827. Franklyn Resources III, Inc. is a Nevada corporation, organized in 1999. Its executive offices are located at 234-5149 Country Hills Blvd. NW; Suite 429, Calgary, Alberta, Canada T3A 5K8, telephone (832) 274-3766. 5 RISK FACTORS An investment in our securities involves a high degree of risk. In determining whether to purchase our securities, you should carefully consider all of the material risks described below, together with the other information contained in this prospectus before making a decision to purchase our securities. You should only purchase our securities if you can afford to suffer the loss of your entire investment. RISKS ASSOCIATED WITH COMPANIES CONDUCTING BUSINESS IN THE PRC Because the scope of our business license is limited, we may need government approval to expand our business. We are a wholly-owned foreign enterprise, commonly known as a WOFE. The scope of our business is narrowly defined for all businesses in China and the WOFE can only conduct business within its approved business scope, which appears on the business license. Our license permits us to operate CNG stations, CNS equipments and services, as well as non-standard chemical and refinery equipment. Any amendment to the scope of our business requires further application and government approval. Inevitably, there is a negotiation with the authorities to approve as broad a business scope as is permitted, and we cannot assure you that we will be able to obtain the necessary government approval for any change or expansion of our business. If we are not be able to protect our intellectual property rights, our business may be impaired. Our intellectual property relates to our know-how in developing our products. The protection of intellectual property rights in the PRC is weak, and we cannot give any assurance that we will be able to protect our intellectual property rights. To the extent that our business is dependent upon intellectual property, our ability to generate revenue from these products, would be severely impaired if we are not able to protect our rights in these products. If the PRC enacts regulations which forbid or restrict foreign investment, our ability to grow may be severely impaired. We intend to expand our business both by increasing our product range, operating CNG stations and making acquisitions of companies in related industries. Many of the rules and regulations that we would face are not explicitly communicated, and we may be subject to rules that would affect our ability to grow, either internally or through acquisition of other Chinese or foreign companies. There are also substantial uncertainties regarding the proper interpretation of current laws and regulations of the PRC. New laws or regulations that forbid foreign investment could severely impair our businesses and prospects. Additionally, if the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation: o levying fines; o revoking our business and other licenses; o requiring that we restructure our ownership or operations; and o requiring that we discontinue any portion or all of our Internet related business. 6 Any deterioration of political relations between the United States and the PRC could impair our operations. The relationship between the United States and the PRC is subject to sudden fluctuation and periodic tension. Changes in political conditions in the PRC and changes in the state of Sino-U.S. relations are difficult to predict and could adversely affect our operations or cause potential acquisition candidates or their goods and services to become less attractive. Such a change could lead to a decline in our profitability. Any weakening of relations between the United States and the PRC could have a material adverse effect on our operations, particularly in our efforts to raise capital to expand our CNG station and other business activities. Our operations and assets in the PRC are subject to significant political and economic uncertainties. Although the government of the PRC has been pursuing economic reform policies, government policies are subject to rapid change and the government may adopt policies which have the effect of hindering private economic activity and greater economic decentralization. There is no assurance that the government of the PRC will not significantly alter its policies from time to time without notice in a manner with reduces or eliminates any benefits from its present policies of economic reform. In addition, a substantial portion of productive assets in the PRC remains government-owned. For instance, all lands are state owned and leased to business entities or individuals through governmental granting of State-owned Land Use Rights. The granting process is typically based on government policies at the time of granting, which could be lengthy and complex. This process may adversely affect our future expansion, especially if we seek to expand manufacturing operations and to develop our CNG station business. The government of the PRC also exercises significant control over China's economic growth through the allocation of resources, controlling payment of foreign currency and providing preferential treatment to particular industries or companies. Uncertainties may arise with changing of governmental policies and measures. In addition, changes in laws and regulations, or their interpretation, or the imposition of confiscatory taxation, restrictions on currency conversion, imports and sources of supply, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on our business, results of operations and financial condition. Our operations may not develop in the same way or at the same rate as might be expected if the PRC economy were similar to the market-oriented economies of OECD member countries. The economy of the PRC has historically been a nationalistic, "planned economy," meaning it functions and produces according to governmental plans and pre-set targets or quotas. In certain aspects, the PRC's economy has been making a transition to a more market-oriented economy, although the government may impose price controls. However, we cannot predict the future direction of these economic reforms or the effects these measures may have. The economy of the PRC also differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, an international group of member countries sharing a commitment to democratic government and market economy. For instance: o the level of state-owned enterprises in the PRC, as well as the level of governmental control over the allocation of resources is greater than in most of the countries belonging to the OECD; o the level of capital reinvestment is lower in the PRC than in other countries that are members of the OECD; 7 o the government of the PRC has a greater involvement in general in the economy and the economic structure of industries within the PRC than other countries belonging to the OECK; and o the PRC has various impediments in place that make it difficult for foreign firms to obtain local currency, as opposed to other countries belonging to the OECD where exchange of currencies is generally free from restriction. As a result of these differences, our business may not develop in the same way or at the same rate as might be expected if the economy of the PRC were similar to those of the OECD member countries. Because our directors and some of our officers reside outside of the United States, it may be difficult for you to enforce your rights against them or enforce United States court judgments against them in the PRC. Our directors and our senior executive officers, including our chief executive officer and chief financial officer, reside in the PRC and substantially all of our assets are located in the PRC. It may therefore be difficult for United States investors to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers under federal securities laws. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement of criminal penalties of the federal securities laws. We may have limited legal recourse under Chinese law if disputes arise under contracts with third parties. Almost all of our agreements with our employees and third parties, including our supplier and customers, are governed by the laws of the PRC. The legal system in the PRC is a civil law system based on written statutes. Unlike common law systems, such as we have in the United States, it is a system in which decided legal cases have little precedential value. The government of the PRC has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. The resolution of these matters may be subject to the exercise of considerable discretion by agencies of the PRC, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance or to seek an injunction under Chinese law are severely limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events could have a material adverse effect on our business, financial condition and results of operations. Because we may not be able to obtain business insurance in the PRC, we may not be protected from risks that are customarily covered by insurance in the United States. Business insurance is not readily available in the PRC. To the extent that we suffer a loss of a type which would normally be covered by insurance in the United States, such as product liability and general liability insurance, we would incur significant expenses in both defending any action and in paying any claims that result from a settlement or judgment. Since our products are used for the transportation and storage of CNG and chemicals, any damage caused by the failure or alleged failure of our products could result in substantial damages, and if the nature or amount of any uninsured loss is significant, we may be unable to continue in business. 8 Because our funds are held in banks which do not provide insurance, the failure of any bank in which we deposit our funds could affect our ability to continue in business. Banks and other financial institutions in the PRC do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business. Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences. We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations. If the United States imposes trade sanctions on the PRC due to its current currency, export or other policies, our ability to succeed in the international markets may be diminished. The PRC currently "pegs" its currency to a basket of currencies, including United States dollar. This means that each unit of Chinese currency has a set ratio for which it may be exchanged for United States currency, as opposed to having a floating value like other countries' currencies. This policy is currently under review by policy makers in the United States. Trade groups in the United States have blamed the cheap value of the Chinese currency for causing job losses in American factories, giving exporters an unfair advantage and making its imports expensive. There is increasing pressure for the PRC to change its currency policies to provide for its currency to float freely on international markets. As a result, Congress is considering the enacting legislation which could result in the imposition of quotas and tariffs. If the PRC changes its existing currency policies or if the United States or other countries enact laws to penalize the PRC for its existing currency policies, our business may be adversely affected, even though we do not sell outside of the PRC. Further, we cannot predict what action the PRC may take in the event that the United States imposes tariffs, quotas or other sanctions on Chinese products. Even though we do not sell products into the United States market, it is possible that such action by the PRC may nonetheless affect our business since we are a United States company, although we cannot predict the nature or extent thereof. Any government action which has the effect of inhibiting foreign investment could hurt our ability to raise cash that we need for our operations. 9 Exchange controls that exist in the PRC may limit our ability to utilize our cash flow effectively. We are subject to the PRC's rules and regulations on currency conversion. Although, as a WOFE, we are permitted to convert Chinese currency, the Renminbi (People's currency) into United States dollars for remittance to our United States parent, we cannot assure you that we will continue to have government approval to remit United States dollars to our United States parent. Any restrictions on currency exchanges may limit our ability to use our cash flow for the distribution of dividends to our stockholders or to fund operations we may have outside of the PRC. Conversion of Renminbi for capital account items, including direct investment and loans, is subject to governmental approval in the PRC, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the regulatory authorities of the PRC will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect to foreign exchange transactions. Because a significant component for many of our products, the steel vessels, is manufactured in Italy, our inability to pay our foreign manufacturer may impair our ability to manufacture our products. Fluctuations in the exchange rate could have a material adverse effect upon our business. We conduct our business in the Renminbi. To the extent our future revenue are denominated in currencies other the United States dollars, we would be subject to increased risks relating to foreign currency exchange rate fluctuations which could have a material adverse affect on our financial condition and operating results since our operating results are reported in United States dollars and significant changes in the exchange rate could materially impact our reported earnings. A downturn in the economy of the PRC may slow our growth and profitability. The growth of the Chinese economy has been uneven across geographic regions and economic sectors. There can be no assurance that growth of the Chinese economy will be steady or that any downturn will not have a negative effect on our business especially if it results in either a decreased use of products such as ours or in pressure on us to lower our prices. Since our CNG station business is dependent upon the development of a market for cars and truck that run on CNG rather than gasoline, any economic trends which have the effect of dampening the market for CNG vehicles could affect our ability both to sell our CNG products and to sell CNG at our proposed CNG stations. Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, such as bird flu, could adversely affect our business. A renewed outbreak of SARS or another widespread public health problem, including bird flu, in China, where all of our revenues are derived, could have a negative effect on our operations. Our operations may be impacted by a number of health-related factors, including the following: o quarantines or closures of some of our offices which would severely disrupt our operations, o the sickness or death of our key officers and employees, and o a general slowdown in the economy of the PRC. Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our business and results of operations. 10 If certain tax exemptions within the PRC regarding withholding taxes are removed, we may be required to deduct corporate withholding taxes from any dividends we may pay in the future. Under the PRC's current tax laws, regulations and rulings, companies are exempt from paying withholding taxes with respect dividends paid to stockholders outside of the PRC. However, if the foregoing exemption is removed, we may be required to deduct certain amounts from any dividends we pay to our stockholders. RISKS ASSOCIATED WITH OUR BUSINESS Because we are dependent upon a small number of customers, the loss of a major supplier or customer could impair our ability to operate profitably. We do not have long-term contracts with almost all of our customers, and major contracts with a small number of customers accounts for a significant percentage of our revenue. Our contracts relate to specific projects. As a result, a customer can account for significant revenue in one year and little if any in the next. Our largest customer for the year ended December 31, 2006, Millennium Group Limited (Hong Kong), which accounted for revenue of approximately $3.8 million, or 46% of our revenue for the year, and is not a significant customer in the first quarter of 2006. Because we intend to enter into a new business with our proposed operation of CNG stations, we will require significant additional funds. We intend to develop the business of owning and operating CNG stations, which is a new business for us. To date, our business has been limited to the manufacture of equipment, including equipment used for CNG stations. The operation of this business is subject to significant additional risks which are not related to our equipment manufacturing business. In addition to the normal risks associated with our business, there are additional risks that relate to the CNG station business. These risks include, but are not limited to: We lack experience in operating CNG stations. Although we have manufactured equipment for use by CNG stations, we have never operated stations, and we cannot assure you that we will be successful in operating CNG stations. We require significant additional funds to enable us to develop and expand the CNG station business. The construction of CNG stations is very capital intensive, and we will require significant additional funds for this purpose. We have no agreements to obtain funding, and our agreement with the purchasers of our securities in our June private placement give them a right of first refusal on future financings. In addition, if we raise funds at a price which is less than the conversion price of the note or the exercise price of the warrants, the conversion or exercise price would be reduced. We cannot assure you that we will be able to obtain any financing which we may require, either for our CNS station business or our equipment manufacture and supply business. The CNG station business is highly regulated. The storage, transportation and distribution of CNG is subject to PRC regulations, including the price at which we both buy and sell CNG. The price controls over the purchase and sale of CNS limits our potential profit from the sale of CNG. Other regulations may result in increased costs in order to comply with these regulations. 11 Because of the nature of CNG, we could be exposed to liability from gas leaks or explosions. Any leaks or explosions from our CNG stations could cause severe property damage as well as loss of life, which may not be covered by insurance. Any such loss could result in a termination of our business or could subject us to regulatory actions. The market for CNS stations is dependent upon the increased use of CNG powered vehicles. CNG-powered vehicles represent only a small fraction of motor vehicles in the PRC, and most vehicles are powered by gasoline or diesel fuel. For us to be successful in the CNG gas station business, a market for CNG must be developed in the area which we propose to enter. Car and truck owners must either buy a CNG powered vehicle or pay to have a gasoline or diesel powered vehicle converted for CNG use. Any economic downturn could materially decrease the market for CNG vehicles. Further, in order for a market to develop for CNG vehicles, there must be a network of CNG stations on major highways throughout the PRC. The failure of such a network to develop could hinder the development of a market for CNG vehicles which would in turn limit the market for our CNG stations. We may face liability claims from users of our products. As the manufacturer of equipment that is used to store and transport CNG and other products, including petroleum, chemicals and food products. We may be subject both to liability in the event that any property damages or loss of life results from our products. Any liability which results could hurt our reputation and result in the payment of damages which may not be covered by insurance. As a result of the reverse acquisition, our expenses will increase significantly. As a result of the reverse acquisition, our ongoing expenses have increased significantly, including expenses in compensation to our officers, additional expenses relating to the anticipated hiring of a chief financial officer, ongoing public company expenses, and obligations incurred in connection with the reverse acquisition. Our failure to generate sufficient revenue and gross profit could result in reduced profits of losses as a result of the additional expenses. Because we are dependent on our management, the loss of key executive officers or a key consultant and the failure to hire additional qualified key personnel could harm our business. Our business is largely dependent upon the continued efforts of our Chairman, Tianzhou Deng, who are also directors. We do not have a long-term contract with Mr. Deng. The loss Mr. Deng or any of our other key employees could have a material adverse effect upon our ability to operate profitably. We may not be able to continue to grow through acquisitions. In addition to our planned growth through the development of our CNG station business, an important part of our growth strategy is to expand our business and to acquire other businesses. Such acquisitions may be made with cash or our securities or a combination of cash and securities. If our stock price is less than the exercise price of the outstanding warrants, it is not likely that that warrants will be exercised at their present exercise price. To the extent that we require cash, we may have to borrow the funds or sell equity securities. The issuance of equity, if available, would result in dilution to our stockholders. We have no commitments from any financing source and we may not be able to raise any cash necessary to complete an acquisition. If we fail to make any acquisitions, our future growth may be limited. As of the date of this report, we do not have any agreement or understanding, either formal or informal, as to any acquisition. Further, any acquisition may be subject to government regulations and approval in the PRC. 12 If we make any acquisitions, they may disrupt or have a negative impact on our business. If we make acquisitions, we could have difficulty integrating the acquired companies' personnel and operations with our own. In addition, the key personnel of the acquired business may not be willing to work for us. We cannot predict the affect expansion may have on our core business. Regardless of whether we are successful in making an acquisition, the negotiations could disrupt our ongoing business, distract our management and employees and increase our expenses. In addition to the risks described above, acquisitions are accompanied by a number of inherent risks, including, without limitation, the following: o the difficulty of integrating acquired products, services or operations; o the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies; o the difficulty of incorporating acquired rights or products into our existing business; o difficulties in disposing of the excess or idle facilities of an acquired company or business and expenses in maintaining such facilities; o difficulties in maintaining uniform standards, controls, procedures and policies; o the potential impairment of relationships with employees and customers as a result of any integration of new management personnel; o the potential inability or failure to achieve additional sales and enhance our customer base through cross-marketing of the products to new and existing customers; o the effect of any government regulations which relate to the business acquired; o potential unknown liabilities associated with acquired businesses or product lines, or the need to spend significant amounts to retool, reposition or modify the marketing and sales of acquired products or the defense of any litigation, whether of not successful, resulting from actions of the acquired company prior to our acquisition. Our business could be severely impaired if and to the extent that we are unable to succeed in addressing any of these risks or other problems encountered in connection with these acquisitions, many of which cannot be presently identified, these risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Our operating results in future periods may vary from quarter to quarter, and, as a result, we may fail to meet the expectations of our investors and analysts, which may cause our stock price to fluctuate or decline. As a manufacturer of specialized equipment, we do not manufacture for inventory, but pursuant to a specific contract, and our contract flow is not predictable. To the extent that we do not generate new business upon completion of existing contracts, our revenue will decline. To the extent that we expand our facilities to meet present or anticipated increases in sales, our failure to generate business could have the effect of significantly reducing the profitability of our business. Because of these factors, our revenue and operating results have fluctuated from quarter to quarter. We expect that fluctuations in both revenue and net income will continue due to a variety of factors, many of which are outside of our control. Due to the risks discussed in this report, you should not rely on period-to-period comparisons of our results of operations as an indication of future performance. 13 Certain of our stockholders control a significant amount of our common stock. Approximately 87.5% of our outstanding common stock is owned by Skywide Capital Management Limited, which is owned by our chief executive officer and our chairman, and 9.7% of our outstanding common stock is owned by Eastpride Capital Limited. Skywide presently has the voting power to elect all of the directors and approve any transaction requiring stockholder approval. Efforts to comply with recently enacted changes in securities laws and regulations will increase our costs and require additional management resources, and we still may fail to comply. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the company's internal controls over financial reporting in their annual reports on Form 10-KSB. In addition, the public accounting firm auditing the company's financial statements must attest to and report on management's assessment of the effectiveness of the company's internal controls over financial reporting. These requirements are not presently applicable to us. If and when these regulations become applicable to us, and if we are unable to conclude that we have effective internal controls over financial reporting or if our independent auditors are unable to provide us with an unqualified report as to the effectiveness of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities. We have not yet begun a formal process to evaluate our internal controls over financial reporting. Given the status of our efforts, coupled with the fact that guidance from regulatory authorities in the area of internal controls continues to evolve, substantial uncertainty exists regarding our ability to comply by applicable deadlines. The terms on which we may raise additional capital may result in significant dilution and may impair our stock price. Because of both the absence of a public market for our common stock, the terms of our recent private placement and the number of outstanding warrants and the exercise price and other terms on which we may issued common stock upon exercise of the warrants, it may be difficult for us to raise additional capital if required for our present business and for any planned expansion. We cannot assure you that we will be able to get additional financing on any terms, and, if we are able to raise funds, it may be necessary for us to sell our securities at a price which is at a significant discount from the market price and on other terms which may be disadvantageous to us. In connection with any such financing, we may be required to provide registration rights to the investors and pay damages to the investor in the event that the registration statement is not filed or declared effective by specified dates. The price and terms of any financing which would be available to us could result in both the issuance of a significant number of shares and significant downward pressure on our stock price and could result in a reduction of the conversion price of the series A preferred stock and exercise price of the warrants held by the investors in our June 2006 private placement. 14 If we fail to achieve certain financial results, we will be required to issue more shares of common stock upon conversion of the series A preferred stock or exercise of the warrants. The notes, the series A preferred stock and the warrants issued in the June 2006 private placement have antidilution provisions which increase the number of shares issuable upon conversion of the note or the series A preferred stock and reduce the exercise price of the warrants if we issue common stock at a price which is less than the conversion price of the notes or the series A preferred stock or the exercise price of the warrants or if we fail to meet full-diluted net income per share targets set forth in the purchase agreement. If either or both of these adjustments are triggered, the investors in the June 2006 private placement will receive, on such exercise or conversion, a larger number of shares of common stock, which will increase their percentage interest in our stock. We cannot assure you that there will not be such an adjustment. If the maximum downward adjustment based on our pre-tax earnings were made in the conversion price of the note, the number of shares issuable upon such conversion would increase from 5,384,615 shares to 15,957,265 shares. Because the purchasers of our notes have a right of first refusal for future offering of our securities, we may have difficulty in raising additional funds if required for our business. The investor in the June 2006 private placement, have the right to participate in any future funding. These provisions may prevent us from raising additional funds. We may be required to pay liquidated damages if our board does not consist of a majority of independent directors. The purchase agreement relating to the June 2006 private placement requires us to appoint and maintain such number of independent directors that would result in a majority of our directors being independent directors, that the audit committee would be composed solely of independent directors and the compensation committee would have a majority of independent directors. Our failure to maintain these requirements would results in our payment of liquidated damages that payable by the issuance of additional shares of series A preferred stock. RISKS ASSOCIATED WITH INVESTING IN OUR COMMON STOCK There is no trading market for our common stock. Although our common stock is registered pursuant to the Securities Exchange Act of 1934, there is no market for our common stock and we cannot give any assurance that there will ever be a market for our common stock. We do not anticipate that a market for our common stock will develop, if at all, until after the registration statement of which this prospectus is a part has been declared effective by the SEC. If a market for our common stock develops, there is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control: o variations in our quarterly operating results; o announcements that our revenue or income are below analysts' expectations; o general economic slowdowns; 15 o matters affecting the economy of the PRC and the relationship between the United States and the PRC; o changes in market valuations of both similar companies and companies whose business is primarily or exclusively in the PRC; o sales of large blocks of our common stock; o announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; o fluctuations in stock market prices and volumes, which are particularly common among highly volatile securities of internationally-based companies. o concern by potential investors that the large number of shares of common stock which may be sold pursuant to this prospectus may have a downward effect upon the market price of the stock. o the effect of sales pursuant to this prospectus on the trading volume of our common stock. The rights of the holders of common stock may be impaired by the potential issuance of preferred stock. Although our articles of incorporation do not provide for the issuance of preferred stock, our agreement with the investors in the June 2006 private placement requires us to amend and restate our articles of incorporation to provide for the issuance of preferred stock. As a result, the board of directors will have the right, without stockholder approval, to issue preferred stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of common stock., which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any additional shares of preferred stock or to create any new series of preferred stock, other than the proposed issuance of a series of preferred stock to be designated the series A preferred stock, for issuance upon conversion of the notes. Shares may be issued pursuant to our stock plans which may affect the market price of our common stock. We may issue stock upon the exercise of options or pursuant to stock grants covering a total of 2,000,000 shares of common stock pursuant to our 2006 long-term incentive plan. The exercise of any options we may grant under this plan and the sale of the underlying shares of common stock and the sale of stock issued pursuant to stock grants may have an adverse effect upon the price of our stock. Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protections against interested director transactions, conflicts of interest and similar matters. The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges and the Nasdaq Stock Market as a result of Sarbanes-Oxley require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities which are listed on those exchanges or the Nasdaq Stock 16 Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than necessary, we have not yet adopted all of these measures. Because none of our present directors are independent directors, we do not have independent audit or compensation committees. We also are not in compliance with requirements relating to the distribution of annual and interim reports, the holding of stockholders meetings and solicitation of proxies for such meeting and requirements for stockholder approval for certain corporate actions. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations. Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results and stockholders could lose confidence in our financial reporting. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. We may be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires increased control over financial reporting requirements, including annual management assessments of the effectiveness of such internal controls and a report by our independent certified public accounting firm addressing these assessments. Failure to achieve and maintain an effective internal control environment, regardless of whether we are required to maintain such controls, could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price. Because we have significant related party transactions, institutional and other investors may be reluctant to purchase our stock which could affect both the price and the market for our stock. During 2005, we purchase real property rights from a related party for approximately $11.9 million of which $5.0 million was paid. In addition, we have significant aged receivables from a related party and we subcontract services to, and purchase equipment from, a related party. As a result, investors may be reluctant to invest in our common stock, which would affect both the stock price and the trading volume in our stock. We do not anticipate paying dividends on our common stock. We are prohibited from paying dividends on our common stock while the notes or the series A preferred stock issuable upon conversion of the notes is outstanding. Because we may be subject to the "penny stock" rules, you may have difficulty in selling our common stock. If a public market develops for our common stock and if our stock price is less than $5.00 per share, our stock may be subject to the SEC's penny stock rules, which impose additional sales practice requirements and restrictions on broker-dealers that sell our stock to persons other than established customers and institutional accredited investors. The application of these rules may affect the ability of broker-dealers to sell our common stock and may affect your ability to sell any common stock you may own. 17 According to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include: o Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; o Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; o "Boiler room" practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons; o Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and o The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses. As an issuer of "penny stock" the protection provided by the federal securities laws relating to forward looking statements does not apply to us. Although the federal securities law provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, if we are a penny stock we will not have the benefit of this safe harbor protection in the event of any based upon an claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Fluctuations in our operating results and announcements and developments concerning our business affect our stock price. Historically, there has been volatility in the market price for common stock of companies such as us. Our quarterly operating results, the number of stockholders desiring to sell their shares, changes in general economic conditions and the financial markets, changes relating to the PRC, the execution of new contracts and the termination or expiration of existing contracts and the success if constructing and developing a CNG station business and other developments affecting us, could cause the market price of our common stock to fluctuate substantially. We cannot predict when or whether an active market for our common stock will develop. In the absence of an active trading market, you may have difficulty buying and selling or obtaining market quotations; the market visibility for our stock may be limited, and the lack of visibility for our common stock may have a depressive effect on the market price for our common stock. 18 Our stock price may be affected by our failure to meet projections and estimates of earnings developed either by us or by independent securities analysts. Although we do not make projections relating to our future operating results, our operating results may fall below the expectations of securities analysts and investors. In this event, the market price of our common stock would likely be materially adversely affected. The registration and potential sale by our stockholders of a significant number of shares could encourage short sales by third parties. Because there is no public market for our stock, there may be significant downward pressure on our stock price caused by the sale or potential sale of a significant number of shares pursuant to this prospectus, which could allow short sellers of our stock an opportunity to take advantage of any decrease in the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock. If the investor in the June 2006 private placement sells a significant number of shares of common stock, the market price of our common stock may decline. Furthermore, the sale or potential sale the offered shares pursuant to a registration statement and the depressive effect of such sales or potential sales could make it difficult for us to raise funds from other sources. FORWARD-LOOKING STATEMENTS Statements in this current report on Form 8-K may be "forward-looking statements." Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this prospectus, including the risks described under "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this current report and in other documents which we file with the Securities and Exchange Commission. In addition, such statements could be affected by risks and uncertainties related to the ability to conduct business in the PRC, product demand, including the demand for CNG, our ability to develop, construct and operate a CNG station business, our ability to raise any financing which we may require for our operations, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, as well as general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this current report. BUSINESS We design, manufacture and market a range of pressurized containers for compressed natural gas, known as CNG. Compressed natural gas is natural gas, principally methane, in its gaseous state that has been compressed. Natural gas is compressed during transportation and storage and, thus, requires pressurized containers. Our license permits us to operate CNG stations, CNS equipments and services, as well as non-standard chemical and refinery equipment. 19 Although our initial business involved the manufacture of non-standard equipment and pressure containers, our business has evolved as an increasing market is developing in the People's Republic of China ("PRC") for the use of CNG as a method of combating air pollution, which is increasing viewed as a major problem throughout the PRC. We believe that this need will create a market for CNG powered vehicles. We use our capabilities in this industry to manufacture equipment for use in CNG gas stations and gas transportation vehicles. Our CNG vehicle and gas station equipment business consists of two divisions. The manufacture of CNG vehicle and gas station equipment, including following products: o CNG trailer, which is a truck which includes a steel vessel storage system to transport CNG among CNG stations. This system consists of several steel pressure containers on a steel frame which have an input/output for the delivery of CNG. o CNG deposited system for gas station usage, which is a similar storage system that is installed at the CNG station, which consists of electronic parts that are installed on gasoline powered vehicles to transform gasoline burning engines into CNG burning engines. o Conversion kits for various types of vehicle to enable them to use CNG rather than gasoline. o CNG compressor skid, which is a natural gas compression system used to compress and store as CNG under pressure. o CNG dispenser which is a CNG release system used to transform CNG into natural gas at a specified pressure level in a manner to enable the station to measure the amount of CNG used. Our CNG gas station system business includes the design of construction plans for CNG gas stations, the construction of the CNG stations, and the installation of CNG station equipment and related systems at the gas station. In addition to our CNG related products, we continue to manufacture a wide variety of pressure containers for use in different industries, including the design and manufacture of various types of pressure containers in the petroleum and chemical industries, the metallurgy and electricity generation industries and the food and brewery industries. In addition, we can design and manufacture other types of non-standard equipment. Our Proposed CNG Station Business Our business plan contemplates the establishment of a network of CNG stations at various locations in the PRC. We intend to develop our first CNG station project in Wuhan city, Hubei province in the PRC. We chose that location because of its proximity to a natural gas pipeline. At this project we intend to build and operate two supply stations and twenty CNG stations at which we will sell CNG at retail. As an industry standard, one supply station usually supplies ten CNG stations. Each CNG supply station will have designed capacity to process and supply natural gas at 100,000 cubic meters/per day, while one CNG station will have designed capacity to supply natural gas at 10,000 cubic meters/per day. 20 Marketing and Sales We rely primarily on "in-house" salesmen, who directly contact and build relationship with end user customers, and we sell to the end users. We market our products through business connections, trade shows and conferences. When we develop of CNG station business, we intend to market our services to taxi and bus companies, who are the largest segment of end-users of the company's CNG product. We will seek to market not only the CNG from our stations, but the conversion of their gasoline engines to CNG engines. Principal Customers Since our products are, in general, specially designed to meet the requirements of a specific customer and we do not sell products from inventory, our revenue is dependent upon our developing a continuing stream of business so that we will not incur a significant lag between the time we complete one contract and start another. Further, because are products are durable products with a relatively long useful life, not consumables, once we deliver the product to the customer, there is little ongoing business from one period to the next. Our major customers vary from period to period. For example, our largest customer for the year ended December 31, 2006, Millennium Group Limited (Hong Kong), accounted for revenue of approximately $3.8 million, or 46% of our revenue for the year, and is not a significant customer in the first quarter of 2006. Our contract with Millenium Group related to the construction of CNG stations for Millenium, and that contract was completed in 2005, and does not require any significant products or services after the completion of the station. Our principal customers are China National Petroleum Corporation, China Petroleum and Chemical Corporation and their affiliates to whom we sell CNG station equipment and pressure containers. For the retail filling station segment of the business, the company will target taxi and bus companies in various cities in the area where our CNG stations are located. Source of Supply The principal components of our products are compressors, steel vessels and raw steel, as well as electronic parts for the conversion kits used to convert a gasoline engine to a CNG engine. We can obtain most of these products from a number of suppliers in the PRC. We are not dependent upon any supplier for these products. Our steel vessels, which were manufactured in Italy by Dalmine Spa, an Italian corporation, through Dalmine's distributors in the PRC. Because of the nature of these products, Dalmine requires six months advance notice for delivery. We have not experienced any difficulty in obtaining raw materials for our products. Competition The two largest state owned energy companies, CNPC (China National Petroleum Corporation) Group, and SINOPEC (China Petroleum and Chemical Corporation), engaged in the upstream supply of energy and are major companies in exploration and transportation of oil and gas. They build much of the PRC's high pressure pipeline infrastructure. Natural gas is distributed to smaller regional firms that redistribute the gas to the end user. 21 The company is aware of three privately owned companies which may be considered to be direct competitors of the company: Xinjiang Guanghui LNG Development Corporation Ltd, which is primarily involved in the transportation of LNG in China; Dalmine SPA, Italy, which is primarily involved in CNG storage equipments; and Lovato Spa, Italy, which is a gas vehicle kits producer. When we operate CNG stations, we will have to compete based on our locations and service, since both the price we pay and the amount we charge are subject to price control. Government Regulations Any company that conducts business in the PRC must have a business license that covers a particular type of work. Our business license covers our present manufacturing business and the operation of CNG stations. If we propose to engage in other businesses, The operation of any business in the PRC, including the manufacture or distribution of pressure containers and CNG stations is subject to government regulations. These regulations cover a wide range of matters including the transportation, storage and delivery of CNG and other materials for which special protection is sought. In addition, we sell pressure containers for the storage and transportation of products such as chemicals, petroleum and food, and our products must comply with the applicable regulations before the customer will accept the products. Research and Development We do not engage in research and development. We do, however, work with our customers to design a product, typically a pressure container for the customer's product. However, those services are included in the services for the customer's product. Employees On May 31, 2006, we had 107 employees, of whom ten are executive and administrative, twelve are marketing and sales, 85 are technical and manufacturing personnel. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion of the results of our operations and financial condition should be read in conjunction with the financial statements of Sinogas and the related notes, which appear elsewhere in this Form 8-K. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ from results discussed in the forward-looking statements, see "Forward Looking Statements." Overview Neither Franklyn Resources nor Sinoenergy conducted any operations during 2004, 2005 or the first three months of 2006. Because of the reverse acquisition, the following discussion relates to the separate financial statements of Sinogas, and reference to "we," "our" and words of similar import refer to Sinogas. We design, manufacture and market a range of pressurized containers for CNG. Although our initial business involved the manufacture of non-standard equipment and pressure containers, our business has evolved as an increasing market is developing in the PRC for the use of CNG. Our CNG vehicle and gas station equipment business consists of two divisions, the manufacture of CNG vehicle and gas station equipment, and the design of construction plans for CNG gas stations, the construction of the CNG stations, and the installation of CNG station equipment and related systems at the gas station. 22 In addition to our CNG related products, we continue to manufacture a wide variety of pressure containers for use in different industries, including the design and manufacture of various types of pressure containers in the petroleum and chemical industries, the metallurgy and electricity generation industries and the food and brewery industries. In addition, we can design and manufacture various types of non-standard equipment. All of our products and services are performed pursuant to agreements with our customers, which provide the specifications for the products and services. We do not sell our products from inventory. As a result, our revenue is dependent upon the flow of contracts. In any fiscal period, a small number of customers may represent a disproportionately large percentage of our business in one period and a significantly lower percentage, if any, in a subsequent period. For example, our largest customer for the year ended December 31, 2006, Millennium Group Limited (Hong Kong), which accounted for revenue of approximately $3.8 million, or 46% of our revenue for the year, and is not a significant customer in the first quarter of 2006. Our contract with Millenium Group related to the construction of CNG stations for Millenium, and that contract was completed in 2005, and does not require any significant products or services after the completion of the station. We commenced operations on October 29, 2004, did not have any business activity until the first quarter of 2005, and during the first quarter of 2005 we were in a start-up phase. As a result, there is no meaningful comparison between the period October 29, 2004 to December 31, 2004 and the year ended December 31, 2005. Also, since the first quarter of 2005 does not reflect fully developed operations, the comparisons between the first quarters of 2005 and 2006 reflects our ability to scale up our operations and not any indication of a quarter to quarter growth rate. We intend to construct and operate CNG stations during 2006. This aspect of our business is different from our present business whereby we will be operating CNG stations. Since 2005 our business included the planning, construction and equipping of CNG stations. The business of operating CNG stations will require a substantial capital investment, and we anticipate that we will seek debt funding for a portion of the costs. Further, the nature of the operation of the business and the risks associated with that business are significantly different from the manufacture of equipment or the construction of CNG stations. One aspect of the operation of CNG stations is the price controls, whereby both the price at which we purchase CNG and the price at which we sell CNG are subject to by price controls. The operation of CNG stations will be reported as a separate segment. We have a 55% interest in our subsidiary, Qingdao Sinogas Yuhen Chemical Equipment Co., Ltd. ("Yuhen"), with the other 45% being owned by Qingdao Kangtai Machinery Equipment Manufacture Co. Limited ("Kangtai"). We subcontract construction work for CNG stations to Kangtai on terms that are commercially reasonable. We paid Kangtai $427,160 for these services during the three months ended March 31, 2006 and $658,025 for the year ended December 31, 2006. Yuhen was set up by Sinogas and Kangtai on May 25, 2005. In connection with Yuhen's organization, Kangtai transferred equipment to Yuhen as part of its investment in Yuhen. Prior to Yuhen's organization, Kangtai had contracts with third parties that were to have been performed by Yuhen. In order for Kangtai to complete these contracts, Kangtai transferred those contracts to Yuhen, and Yuhen assumed the manufacturing obligations under these contract and purchased the related inventories from Kangtai at fair market value. Kangtai purchased the manufactured products from Yuhen at fair market value and sold the products to the end user. The sales of these products to Kangtai amounted to $673,000 for the three months ended March 31, 2006 and $979,000 for the year ended December 31, 2005. Because a portion of these transactions relate to sales to third parties through Kangtai, we treat that portion as a third-party receivable. 23 Critical Accounting Policies and Estimates The discussion and analysis of Sinogas' financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believes to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In estimating the collectability of accounts receivable we analyze historical write-offs, changes in our internal credit policies and customer concentrations when evaluating the adequacy of our allowance for doubtful accounts. Differences may result in the amount and timing of expenses for any period if we make different judgments or uses difference estimates. Inventories comprise raw materials work on process, finished goods and low value consumable articles are stated at the lower of cost or market. Substantially all inventory costs are determined using the weighted average basis. Costs of finished goods include direct labor, direct materials, and production overhead before the goods are ready for sale. Inventory costs do not exceed net realizable value. Property, plant and equipment are stated at cost. Depreciation is provided principally by use of the straight-line method over the useful lives of the related assets. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized. The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets, and, if any, is recognized in the statements of operations. Intangible assets are reviewed at least annually for impairment, or more frequently if we have reason to believe that there is an impairment. Intangible assets are tested by comparing net book value of the to fair value. Our assumptions about fair values require significant judgment because broad economic factors, industry factors and technology considerations can result in variable and volatile fair values. We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary. We recognizes product sales generally at the time the product is shipped. Shipping and handling costs are included in cost of goods sold. Revenue is presented net of any sales tax and value added tax. 24 Our functional currency is Renminbi ("RMB"), which is the currency of the PRC, and our reporting currency is United States dollars. Our balance sheet accounts are translated into United States dollars at the year-end exchange rates prevailing during the periods in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in owners' equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred. The translation and transaction gains and losses were immaterial in the statement of operations as incurred. The translation and transaction gains and losses were immaterial for the years ended December 31, 2005 and 2004 and the three months ended March 31, 2006 and 2005. The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on our operations because we have not previously engaged in any significant transactions that are subject to the restrictions. New Accounting Pronouncements In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued Staff Position EITF 03-1-1, which delays the effective date until additional guidance is issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that are impaired; however, the disclosure requirements are effective for annual periods ending after June 15, 2004. Management does not currently believe adoption will have a material impact on our financial position or results of operations. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges..." SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 shall be applied prospectively and are effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for inventory costs incurred during fiscal years beginning after the date this Statement was issued. Our adoption of SFAS No. 151 is not currently expected to have a material impact on our financial position or results of operations. In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), "Share-Based Payment," which amends FASB Statement No. 123 and will be effective for us for the year ending December 31, 2006. The revised standard requires, among other things, that compensation cost for employee stock options be measured at fair value on the grant date and charged to expense over the employee's requisite service period for the option. Due to the absence of observable market prices for employee stock options, the standard indicates that the fair value of most stock options will be determined using an option-pricing model. As a result of the reverse acquisition, our adoption of SFAS No. 123(R) will result is compensation expense upon the grant of options or other equity-based incentives. Prior to the reverse acquisition we did not grant any options or other equity-based incentives. 25 In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. Our adoption of SFAS No. 153 is not expected to have a material impact on our financial position or results of operations. In March 2005, the FASB published FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations," which clarifies that the term, conditional asset retirement obligations, as used in SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. The interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective no later than the end of 2006. The adoption of this Interpretation is not expected to have a material effect on our financial position or results of operations. In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB No. 20 ("APB 20") and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. APB 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of change a cumulative effect of changing to the new accounting principle whereas SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle, unless it is impracticable. SFAS No. 154 enhances the consistency of financial information between periods. SFAS No. 154 will be effective beginning with the Company's first quarter of fiscal year 2006. We do not expect that the adoption of SFAS No. 154 will have a material impact on our results of operations, financial position or cash flows. In June 2005, the EITF reached a consensus on Issue No. 05-06, "Determining the Amortization Period for Leasehold Improvements" (EITF 05-06). EITF 05-06 provides guidance for determining the amortization period used for leasehold improvements acquired in a business combination or purchased after the inception of a lease, collectively referred to as subsequently acquired leasehold improvements). EITF 05-06 provides that the amortization period used for the subsequently acquired leasehold improvements to be the lesser of (a) the subsequently acquired leasehold improvements' useful lives, or (b) a period that reflects renewals that are reasonably assured upon the acquisition or the purchase. EITF 05-06 is effective on a prospective basis for subsequently acquired leasehold improvements purchased or acquired in periods beginning after the date of the FASB's ratification, which was on June 29, 2005. The Company does not anticipate that EITF 05-06 will have a material impact on its consolidated results of operations. 26 In July 2005, the Financial Accounting Standards Board (FASB) issued an Exposure Draft of a proposed Interpretation "Accounting for Uncertain Tax Positions--an interpretation of FASB Statement No. 109." Under the proposed Interpretation, a company would recognize in its financial statements its best estimate of the benefit of a tax position, only if the tax position is considered probable of being sustained on audit based solely on the technical merits of the tax position. In evaluating whether the probable recognition threshold has been met, the proposed Interpretation would require the presumption that the tax position will be evaluated during an audit by taxing authorities. The proposed Interpretation would be effective as of the end of the first fiscal year ending after December 15, 2005, with a cumulative effect of a change in accounting principle to be recorded upon the initial adoption. The proposed Interpretation would apply to all tax positions and only benefits from tax positions that meet the probable recognition threshold at or after the effective date would be recognized. We are currently analyzing the proposed Interpretation and have not determined its potential impact on our Consolidated Financial Statements. While we cannot predict with certainty the rules in the final Interpretation, there is risk that the final Interpretation could result in a cumulative effect charge to earnings upon adoption, increases in future effective tax rates, and/or increases in future interperiod effective tax rate volatility. Results of Operations Three Months Ended March 31, 2006 and 2005 Net revenue- Our operations commenced in October 29, 2004. As a result, during the first three months of 2006, we were in the start-up phase of our operations and did not generate significant revenue. Thus, net revenue for the first quarter of 2006 increased $1.93 million, or 335%, from $574,000 in the comparable period of 2005 to $2.5 million in the first quarter of 2006. Cost of revenue; gross margin - Our cost of revenue for the March 31, 2006 quarter increased $1.14 million, from $104,000 in 2005 to $1.245 million in 2006, reflecting the same factors that affected our revenue during those period. Our gross margin for the first quarter of 2005 was 81.9% as compared with 50.2% in the first quarter 2006. Since the first quarter of 2005 does not reflect fully developed operations, the comparisons between the first quarters of 2005 and 2006 reflects our ability to scale up our operations and not any indication of a quarter to quarter gross margin. Operating Expenses- Operating expenses were $329,000 for the quarter ended March 31, 2006, compared to $115,000 for the comparable quarter of 2005. This represents an increase of $214,000, or 186%, primarily due to an increase in our market development and activities. Income from Operations- Our operating profit for the first quarter March 31, 2006 increased $571,000, or 161%, from $355,000 in 2005 to $926,000 in 2006. The increase was primarily the result of production operation started in second half of 2005. Income Taxes- Income taxes for the first quarter March 31, 2006 increased $204,000, from $109,000 in 2005 to $313,000 in 2006. Since the first quarter of 2005 does not reflect fully developed operations, the comparisons between the first quarters of 2005 and 2006 reflects our ability to scale up our operations and not any indication of a quarter to quarter income taxes difference. Net Income- Net income was $548,000 for the first quarter of 2006, compared to $246,000 in the first quarter of 2005, an increase of $302,000, or 122%, reflecting the factors described above. Years Ended December 31, 2005 and period from October 29, 2004 to December 31, 2004 27 Net Revenue- Net revenue for the year ended December 31, 2005 was $8.2 million. Since we were incorporated on October 29, 2004 and did not commence business activity until 2006, we did not generate any revenue in the 2004 period. Cost of Revenues; gross margin - Our cost of revenue for 2005 was $3.8 million, generating a gross margin of 53.6%. Operating Expenses- Operating expenses were $695,000 for the year ended December 31, 2005, compared to $64,000 for the 2004. The operation expenses in the 2004 period were incidental to the commencement of our operations. Income from Operations- Operating profit was $3.7 million in 2005, from a loss of $112,000 in the 2004 period, reflecting the fact that our business did not commence until 2005, with our production operation starting in second half of 2005. Income Taxes- Income taxes were $1.2 million for the year ended December 31, 2005. Net Income- Net income was $2.46 million for the year ended December 31, 2005, compared to loss of $112,000 in the 2004 period. Liquidity and Capital Resources Net cash provided by operating activities was $2.60 million for the year ended December 31, 2005, compared to negative $1.25 million in 2004, an increase of $3.85 million from the prior year. The improvement was primarily due to improved working capital cash flows in 2005 compared to 2004 resulting from the commencement of our business operation in 2005. We used $157,000 for our operations in the quarter ended March 31, 2006. One factor which accounted for the use of cash was the increase in accounts receivable $1.7 million from December 31, 2005 to March 31, 2006. At March 31, 2006, there was an $1.3 million account receivable from Kangtai, which is a related party, that was also outstanding on December 31, 2005 and remains outstanding as of June 8, 2006. We lease a portion of our facilities to Kangtai, and the receivable include amounts due from Kangtai's for rental fees, water, power payment. We have obligations to Kangtai for construction work which we subcontracted to Kangtai, and our obligations to Kangtai are almost as great as Kangtai's obligations to us. During 2005, we purchased from an affiliated company the a certificate of property right for the property on which our offices and manufacturing facilities are located. Since the government of the PRC owns title to the land, it issues a certificate of land use which is a transferable right to use the land. The purchase price was $11.9 million of which $5.0 million was paid during 2005. The balance is due at such time as the use of the land is changed from industrial to commercial. The nature of the zoning does not affect our right to use the land, but we believe that it has a higher value if it is zoned commercial. In our agreement with the investors in the June 2006 private placement, we agreed that we would not pay approximately $3.2 million until the rights are sold and we would not pay the balance except that we may apply up to 50% of net income to make such payments. This restriction terminates after the investors have sold all of the shares of common stock issued in the private placement, including the shares of common stock issuable upon conversion of the note or the series A preferred stock or the notes or exercise of the warrants. 28 In June 2006, Franklyn completed the private placement of securities pursuant to which we raised net proceeds of approximately $3.1 million. We expect that these funds, together with anticipated cash flow from our operations, should enable us to continue our current operations without additional financing for the next year. However, we intend to construct CNG stations during 2006. This activity will require additional funding. Although we anticipate that we will be able to obtain bank financing from a Chinese bank for approximately 50% of the cost, we do not have any agreement with respect to this funding. If we are unable to raise the necessary funding we may not be able to develop our CNG station business. Item 3. Description of Property. In China, there in no private ownership of land. Rather, all real property is owned by the government. Instead the government issues a certificate of property right, which is transferable, has a term of 50 years and permits the holder to use the property. We have certificates of property rights covering parcels of approximately 265,000 square feet and 394,000 square feet where we maintain our offices and manufacturing facilities. Both parcels are located on Jinhua Road in the Si'fang District of Qingdao province in the PRC. Our certificate of property right for both parcels expires in 2055. During 2005, we purchased from an affiliated company the a certificate of property right for the property described in the preceding paragraph. The purchase price was $11.9 million of which $5.0 million was paid during 2005. The balance is due at such time as the use of the land is changed from industrial to commercial. The nature of the zoning does not affect our right to use the land. In our agreement with the investors in the June 2006 private placement, we agreed that we would not pay approximately $3.2 million until the rights are sold and we would not pay the balance except that we may apply up to 50% of net income to make such payments. This restriction terminates after the investors have sold all of the shares of common stock issued in the private placement, including the shares of common stock issuable upon conversion of the note or the series A preferred stock or the notes or exercise of the warrants. Item 4. Security Ownership of Certain Beneficial Owners and Management. The following table provides information at to shares of common stock beneficially owned as of June 5, 2006 by: o each director; o each officer named in the summary compensation table; o each person owning of record or known by us, based on information provided to us by the persons named below, to own beneficially at least 5% of our common stock; and o all directors and executive officers as a group. Shares of Common Stock Name Beneficially Owned Percentage - ---- ------------------ ---------- TianZhou Deng 6,396,923.5 43.8% 45 Jinghua Road Qingdao, Shandong, China Bo Huang 6,396,923.5 43.8% 45 Jinghua Road Qingdao, Shandong, China Eastpride Capital Limited 1,421,538.0 9.8% 234-5149 Country Hills Blvd. NW; Suite 429 Calgary, Alberta, Canada T3A 5K8 All officers and directors as a group (two individuals beneficially owning stock) 12,793,847.0 87.5% * Less than 1%. 29 Except as otherwise indicated each person has the sole power to vote and dispose of all shares of common stock listed opposite his name. Each person is deemed to own beneficially shares of common stock which are issuable upon exercise or warrants or options or upon conversion of convertible securities if they are exercisable or convertible within 60 days of June 5, 2006. Mr. Deng and Mr. Huang each own a 50% interest in Skywide, which owned 12,793,847 shares of commons stock. Since Mr. Deng and Mr. Huang are deemed to beneficially own 50% of the shares owned by Skywide. Wentao Yang beneficially owns the shares held of record by Eastpride. Barron Partners owns notes and warrants which, if fully converted and exercised, would result in the ownership of more than 5% of our outstanding common stock. However, the note, by their terms, may not be converted and the warrants may not be exercised if such conversion or exercise would result in Barron Partners owning more than 4.9% of our outstanding common stock. This limitation may not be waived. Item 5. Directors and Executive Officers, Promoters and Control Persons. Directors and Executive Officers The following table sets forth certain information with respect to our directors and executive officers. Name Age Position Bo Huang 36 Chief executive officer and director Tianzhou Deng 50 Chairman and director Qiong (Laby) Wu 31 Chief financial officer Yanying Liu 41 Secretary Bo Huang has been our chief executive officer and a director since the completion of the reverser acquisition in June 2006. He has been chief executive officer and chairman of Sinogas since its organization in 2005. He and Mr. Deng are the founders of Sinogas. He was president of Beijing Tricycle Technology Development Co., Ltd , a company engaged in the development of natural gas conversion kits from 2003 to 2005, and vice president of Chengchen Group, an investment and trading company from 1997 to 2003. Mr. Huang graduated from Renmin University of China in Beijing in 1993 with a bachelor's degree in international finance. 30 Tianzhou Deng has been our chief executive officer and a director since the completion of the reverser acquisition in June 2006. He is also a founder of Sinogas. He was been the chief executive officer and chairman of Beijing Sinogas Co., Ltd ., a company engaged in research and development with respect to CNG stations from 2001 to 2005, chairman of Shanghai CNPC Group Co., Ltd. , an investment and trading company from 2003 to 2005, president and director of Beijing Tricycle Technology Development Co., Ltd. , a company engaged in the development of natural gas conversion kits from 1999 to 2001, president and director of Natural Gas Vehicle Development Center, from 1997 to 1999. Mr. Deng graduated from University of Petroleum, China in 1982 with a chemical bachelor degree, and we received a master of management degree from China Science & Technology University. Mr. Deng holds a senior engineer with professor rank in China. Mr. Deng is recognized a a leader in the CNG/LPG industry in China. Luby Wu has been our chief financial officer since June 2006. Ms. Wu was a senior auditor with the accounting firm of Ernst & Young Hua Ming Accounting Firm from February 2002 until June 2006. From May 2003 until January 2004, Ms. Wu was a consultant in the accounting and tax planning department of the accounting and tax consulting firm of HLB-Beijing Yongtuo CPAs. From November 2001 until May 2003, Ms. Wu was an auditor with HLB - Yongtuo Certified Public Accountants Co., Ltd., and from May 1998 until March 2003, Ms. Wu was an administrative manager and office manager for the manufacturing firm of Trend Ceramic Group Co., Ltd. Ms. Wu, a certified public accountant, received her bachelor's degree in material science and engineering from Ji Nan University in China, her bachelor's degree in accounting and economics from Deaken University in Australia, and her master's of professional accounting from Deaken University. Yanging Liu has been our secretary since June 2006, and she held a similar position with Sinogas since 2004. In addition, Ms. Liu serves as a business development manager.. From 1999 until 2004, Ms. Liu was manager of business development and finance for Beijing Sanhuan Technology Development Co., Ltd. Ms. Liu received her bachelor's degree in management from the University of Jianghan. Committees Our board of directors has no separate committees and it acts as the audit committee at this time. We have no qualified financial expert at this time. We intend to search for qualified individuals to serve as independent directors and members of an audit and compensation committee. Item 6. Executive Compensation. SUMMARY COMPENSATION TABLE Prior to the reverse acquisition, we did not pay any compensation to any executive officers. Set forth below is information for Sinogas's chief executive officer. No other officer received compensation in excess of $100,000 for 2005. Other Name and Position Year Salary Compensation - ----------------- ---- ------ ------------ Bo Huang, chief executive officer 2005 $1,000 -0- We did not make any payments or distributions of any kind to Mr. Huang from our organization in October 2004 through 2005. 31 Employment Agreements We have no employment agreements with any of our officers. 2006 Long-Term Incentive Plan In June 2006, we adopted, subject to stockholder approval, the 2006 long-term incentive plan covering 2,000,000 shares of common stock. The plan provides for the grant of incentive and non-qualified options, stock grants, stock appreciation rights and other equity-based incentives to employees, including officers, and consultants. The 2006 Plan is to be administered by a committee of not less than two directors each of which is to be an independent directors. In the absence of a committee, the plan is administered by the board of directors. Independent directors are not eligible for discretionary options. However, each newly elected independent director receives at the time of his election, a five-year option to purchase 30,000 shares of common stock at the market price on the date of his or her election. In addition, the plan provides for the annual grant of an option to purchase 5,000 shares of common stock on April 1st of each year, commencing April 1, 2007. Item 7. Certain Relationships and Related Transactions. From the time of our organization until Sinoenergy acquired our stock in November 2005, our principal stockholder was Beijing Sanhuan Technology Development Co., Ltd., which was owned by Bo Huang and Tianzhou Deng. During 2005, we purchased the a certificate of property right for the property on which are facilities are located from Beijing Sanhuan for $11.9 million, of which $5.0 million was paid during 2005. The balance is due at such time as the use of the land is changed from industrial to commercial. In our agreement with the investors in the June 2006 private placement, we agreed that we would not pay approximately $3.2 million until the rights are sold and we would not pay the balance except that we may apply up to 50% of net income to make such payments. This restriction terminates after the investors have sold all of the shares of common stock issued in the private placement, including the shares of common stock issuable upon conversion of the note or the series A preferred stock or the notes or exercise of the warrants. We own 55% of our subsidiary, Yuhan, and the other 45% is owned by Kangtai. Yuhen was set up by Sinogas and Kangtai on May 25, 2005. In connection with Yuhen's organization, Kangtai transferred equipment to Yuhen as part of its investment in Yuhen. Prior to Yuhen's organization, Kangtai had contracts with third parties that were to have been performed by Yuhen. In order for Kangtai to complete these contracts, Kangtai transferred those contracts to Yuhen, and Yuhen assumed the manufacturing obligations under these contract and purchased the related inventories from Kangtai at fair market value. Kangtai purchased the manufactured products from Yuhen at fair market value and sold the products to the end user. The sales of these products to Kangtai amounted to $673,000 for the three months ended March 31, 2006 and $979,000 for the year ended December 31, 2005. Because a portion of these transactions relate to sales to third parties through Kangtai, we treat that portion as a third-party receivable. In addition, during 2005, we engaged Kangtai as a subcontractor on a project for which we paid Kangtai $447,000, and we rented Kangtai space at our facilities for which we billed Kangtai $1.1 million. At both December 31, 2005 and March 31, 2006 we had an outstanding account receivable from Kangtai in the amount of $1.3 million which was still outstanding on June 8, 2006. At March 31, 2006, we had an outstanding payable to Kangtai in the amount of $621,514. 32 During 2005, we also made purchases from Beijing Sanhuan in the amount of $31,000. We believe that all transactions with Beijing Sanhuan and Kangtai were at prices and on terms no less favorable to us that would be available from non-affiliated third parties. On June 2, 2006, We entered into an exchange agreement pursuant to which we acquired all of the equity of Sinoenergy which owned all of the equity of Sinogas. Pursuant to the exchange agreement, we issued 14,215,385 shares of common stock to the owners of Sinoenergy - Skywide, to which we issued 12,793,847 shares of common stock, and.Eastpride, to which we issued 1,421,538 shrares of common stock. On June 2, 2006, A stock redemption agreement with the Company's principal stockholders. The Company purchased a total of 3,305,000 shares of common stock for a purchase price of $213,525, which was paid from the proceeds of the notes, stock and warrants. The following table sets forth the sellers, the number of shares purchased and the purchase price payable to each seller: Name Number of Shares Purchase Price - ---- ---------------- -------------- Frank L. Kramer 1,000,000 $62,600 Deborah Salerno 1,000,000 62,600 John P. O'Shea 1,000,000 62,600 Lynn Suave 150,000 9,690 Mark Lubchenco 100,000 6,465 Gary S. Joiner 35,000 2,270 Marika Xirouhakis 20,000 7,300 --------- -------- 3,305,000 $213,525 ========= ======== The Company agreed to include in a registration statement the shares of common stock held by the Company's remaining stockholders. Item 8. Description of Securities. We are authorized to issue 25,000,000 shares of common stock, par value $.0001 per share. The following summary of certain provisions of our common stock, preferred stock, certificate of incorporation and by-laws is not intended to be complete. It is qualified by reference to the provisions of applicable law and to our certificate of incorporation and by-laws. Common Stock Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock. Pursuant to the certificate of designation relating to the series A preferred stock, we are prohibited from paying dividends on our common stock while the preferred stock is outstanding. Upon our liquidation, dissolution or winding up, the holders of common stock are entitled to receive proportionately our net assets available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. Our outstanding shares of common stock are fully paid and non-assessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. 33 Proposed Restated Articles of Incorporation Pursuant to the agreement with the investors in the June 2006 private placement, we are required, within 120 days of the closing date, to amend our articles of incorporation to provide for an authorized capitalization of 60,000,000 shares of capital stock, of which 10,000,000 will be shares of preferred stock and 50,000,000 will be shares of common stock and to adopt a certificate of designation which creates the right of the holders of a series of preferred stock to be designated as the series A convertible preferred stock. Upon the filing of both the restated certificate of incorporation and the certificate of designation, the notes are automatically converted into shares of series A preferred stock, at a conversion price of $.65 per shares, subject to adjustment. Based on the conversion price of $.65, the Company would issue a total of 5,384,615 shares of series A preferred stock which would be convertible into 5,384,615 shares of common stock. If the restated certificate of incorporation and the certificate of designation are not filed at the time that the notes are converted, the notes are convertible into common stock at a conversion price of $.65 per share. Our board of directors has approved, subject to stockholder approval, the restated articles of incorporation. The Nevada General Corporation Law We are incorporated in Nevada and are subject to the provisions of the Nevada General Corporation Law. Under certain circumstances, the following selected provisions may delay or make more difficult acquisitions or changes of control. Our articles of incorporation and by-laws do not exclude us from such provisions. These provisions also may have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests. Restrictions on Control Share Acquisitions Sections 78.378 to 78.3793 of the Nevada General Corporation Law relate to acquisitions of control of an issuing corporation, which is defined as a Nevada corporation that has 200 or more stockholders, at least 100 of whom have addresses in Nevada appearing on our stock ledger. These provision will not apply unless we meet the definition of an issuing corporation. Under these provisions, acquiring person who acquires a controlling interest in an issuing corporation and those acting in association with an acquiring person obtain only such voting rights in the control shares as are conferred upon them by a resolution of the stockholders of the corporation, approved by a majority of the voting power at a special or annual meeting of the stockholders, with the votes of interested stockholders not counted. The meeting of stockholders is held upon the request and at the expense of the acquiring person. 34 In the event that the control shares are accorded full voting rights and the acquiring person acquires control shares with a majority or more of all the voting power, any stockholder, other than the acquiring person, who does not vote in favor of authorizing voting rights for the control shares is entitled to demand payment for the fair value of his or her shares, and the corporation must comply with the demand. A controlling interest means the ownership of outstanding voting shares sufficient to enable the acquiring person, individually or in association with others, directly or indirectly, to exercise (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority and/or (iii) a majority or more of the voting power of the issuing corporation in the election of directors. Voting rights must be conferred by a majority of the disinterested stockholders as each threshold is reached and/or exceeded. These provisions do not apply if the articles of incorporation or bylaws in effect on the 10th day following the acquisition of a controlling interest by an acquiring person provide that said provisions do not apply. Restrictions on Certain Business Combinations Sections 78.411 to 78.444 of the Nevada General Corporation Law restrict the ability of a resident domestic corporation to engage in any combination with an interested stockholder for three years after the interested stockholder's acquisition of the shares that cause such stockholder to become an interested stockholder, unless the combination or the purchase of shares by the interested stockholder that cause such stockholder to become an interested stockholder is approved by our the company's board of directors before that date. If the combination was not previously approved, the interested stockholder may effect a combination after the three-year period only if such stockholder receives approval from a majority of the disinterested shares or the offer meets certain fair price criteria. For purposes of the above provisions, a resident domestic corporation is a Nevada public corporation that has 200 or more stockholders and an interested stockholder is any person, other than the company and its subsidiaries, who is (i) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the company or (ii) an affiliate or associate of the company and, at any time within three years immediately before the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the company. These restrictions do not apply to corporations that elect in a charter amendment approved by a majority of the disinterested shares to be excluded from these provisions. Such an amendment would not become effective for 18 months after its passage and would apply only to stock acquisitions occurring after its effective date. Our articles of incorporation and bylaws do not exclude us from the restrictions imposed by such provisions. PART II Item 1. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters. There is no public marker for our common stock, and we have not paid dividends. Our agreement with the investors in the June 2006 private placement and the notes and the proposed certificate of designation relating to the series A preferred stock prohibit our payment of dividends while the note or the shares of series A preferred stock are outstanding. 35 As of June 2, 2006, we had approximately 40 stockholders of record. None of the shares were eligible for sale pursuant to Rule 144. As of June 5, 2006, we had the following shares of common stock reserved for issuance: o 5,384,615 shares issuable upon conversion of the series A preferred stock. o 18,000,000 shares issuable upon exercise of the warrants issued to the investors in the June 2006 private placement. o 2,000,000 shares issuable upon exercise of stock options or other equity-based incentives pursuant to our 2006 long-term incentive plan, which is subject to stockholder approval. Equity Compensation Plan Information The following table summarizes the equity compensation plans under which our securities may be issued as of June 5, 2006.
Number of securities to be Weighted-average Number of securities issued upon exercise of exercise price of remaining available for outstanding options and outstanding options future issuance under Plan Category warrants and warrants equity compensation plans - ------------- -------- ------------ ------------------------- Equity compensation plans approved by -0- -- -- security holders Equity compensation plan not approved by -0- -- 2,000,000 security holders
The 2006 long-term incentive plan was approved by the board of directors, subject to stockholder approval, and the outstanding options are subject to stockholder approval of the plan. The plan has not yet been submitted to the stockholders for their approval. Item 2. Legal Proceedings. We are not a defendant in any material legal proceedings. Item 3. Changes in and Disagreements with Accountants. NA Item 4. Recent Issuances of Unregistered Securities. See Item 3.02 of this Form 8-K for information relating to recent issuances of unregistered securities. 36 Item 5. Indemnification of Officers and Directors. Our Article of Incorporation provides that we will indemnify and hold harmless, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, each person that such section grants us the power to indemnify. Section 78.138 of the Nevada Revised Statutes ("NRS") provides that, with certain specified exceptions, or unless the articles of incorporation or an amendment thereto, in each case filed on or after October 1, 2003, provide for greater individual liability, a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his capacity as a director or officer unless it is proven that his act or failure to act constituted a breach of his fiduciary duties as a director or officer; and his breach of those duties involved intentional misconduct, fraud or a knowing violation of law. NRS Sections 78.7502, 78.751 and 78.752 provide broad indemnification for officers and directors, as follows: Subsection 1 of NRS 78.7502 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (an "Indemnified Party"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the Indemnified Party in connection with such action, suit or proceeding if the Indemnified Party acted in good faith and in a manner the Indemnified Party reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceedings, had no reasonable cause to believe the Indemnified Party's conduct was unlawful. Subsection 2 of NRS 78.7502 of the Nevada Law empowers a corporation to indemnify any Indemnified Party who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in the capacity of an Indemnified Party against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by the Indemnified Party in connection with the defense or settlement of such action or suit if the Indemnified Party acted under standards similar to those set forth above, except that no indemnification may be made in respect of any claim, issue or matter as to which the Indemnified Party shall have been adjudged to be liable to the corporation or for amounts paid in settlement to the corporation unless and only to the extent that the court in which such action or suit was brought determines upon application that in view of all the circumstances the Indemnified Party is fairly and reasonably entitled to indemnity for such expenses as the court deems proper. NRS 78.7502 further provides that to the extent an Indemnified Party has been successful on the merits or otherwise in the defense of any action, suit or proceeding referred to in subsection (1) or (2) described above or in the defense of any claim, issue or matter therein, the corporation shall indemnify the Indemnified Party against expenses (including attorneys' fees) actually and reasonably incurred by the Indemnified Party in connection therewith. 37 Subsection 1 of NRS 78.751 provides that any discretionary indemnification under NRS 78.7502, unless ordered by a court or advanced pursuant to Subsection 2 of NRS 78.751, may be made by a corporation only as authorized in the specific case upon a determination that indemnification of the Indemnified Person is proper in the circumstances. Such determination must be made (a) by the stockholders, (b) by the board of directors of the corporation by majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding, (c) if a majority vote of a quorum of such disinterested directors so orders, by independent legal counsel in a written opinion, or (d) by independent legal counsel in a written opinion if a quorum of such disinterested directors cannot be obtained. Subsection 2 of NRS 78.751 provides that a corporation's articles of incorporation or bylaws or an agreement made by the corporation may require the corporation to pay as incurred and in advance of the final disposition of a criminal or civil action, suit or proceeding, the expenses of officers and directors in defending such action, suit or proceeding upon receipt by the corporation of an undertaking by or on behalf of the officer or director to repay the amount if it is ultimately determined by a court that he is not entitled to be indemnified by the corporation. Said Subsection 2 further provides that the provisions of that Subsection 2 do not affect any rights to advancement of expenses to which corporate personnel other than officers and directors may be entitled under contract or otherwise by law. Subsection 3 of NRS 78.751 provides that indemnification and advancement of expenses authorized in or ordered by a court pursuant to NRS 78.751 does not exclude any other rights to which the Indemnified Party may be entitled under the articles of incorporation or any by-law, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his official capacity or in another capacity while holding his office. However, indemnification, unless ordered by a court pursuant to NRS 78.7502 or for the advancement of expenses under Subsection 2 of NRS 78.751, may not be made to or on behalf of any director or officer of the corporation if a final adjudication establishes that his or her acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action. Additionally, the scope of such indemnification and advancement of expenses shall continue as to an Indemnified Party who has ceased to hold one of the positions specified above, and shall inure to the benefit of his or her heirs, executors and administrators. NRS 78.752 empowers a corporation to purchase and maintain insurance or make other financial arrangements on behalf of an Indemnified Party for any liability asserted against such person and liabilities and expenses incurred by such person in his or her capacity as an Indemnified Party or arising out of such person's status as an Indemnified Party whether or not the corporation has the authority to indemnify such person against such liability and expenses. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. PART F/S Reference is made to the filings by Franklyn on Form 10SB and 10-QSB for Franklyn's financial statements. The financial statements of Sinogas begin on Page F-1. 38 The pro forma financial information is filed as Exhibit 99.6 to this Form 8-K. PART III The exhibits are listed and described in Item 9.01 of this Form 8-K. Item 3.02. Unregistered Sale of Equity Securities. On June 2, 2006: (a) We entered into an exchange agreement pursuant to which we acquired all of the equity of Sinoenergy which owned all of the equity of Sinogas. Pursuant to the exchange agreement, we issued 14,215,385 shares of common stock to the owners of Sinoenergy - Skywide, to which we issued 12,793,847 shares of common stock, and.Eastpride, to which we issued 1,421,538 shrares of common stock. (c) A securities purchase agreement (the "Purchase Agreement") with Barron Partners LP, JCAR Funds Ltd., Ray Rivers and Steve Mazur pursuant to which the investors purchased 6% convertible notes in the principal amount of $3,500,000, 369,000 shares of common stock (the "Initial Shares"), and warrants to purchase 6,000,000 shares of common stock at $.85 per share, 6,000,000 shares of common stock at $1.20 per share and 6,000,000 shares of common stock at $1.75 per share. The following table sets forth the investment by each of the investors, the principal amount of note received, the number of Initial Shares issued and the number of shares issuable upon exercise of each set of warrants. Initial Note Shares Warrants Barron Partners LP $3,100,000 305,743 4,971,429 JCAR Funds Ltd. 200,000 21,086 342,857 Steven Mazur 100,000 10,543 171,429 Ray Rivers 100,000 10,543 171,429 Total $3,500,000 369,000 6,000,000 The numbers under the column "Warrants" represents the number of shares of common stock issuable upon exercise of each set of warrants. Thus, each investor has the same number of warrants exercisable at $.85, $1.20 and $1.75. Section 5.06 Change in Shell Company Status. As a result of the reverse acquisition with Sinoenergy, we are no longer a shell company. See "Item 1.01 Entry into a Material Definitive Agreement" for information relating to the agreements pursuant to which the reverse merger was consummated and financed and "Item 2.01 Completion of Acquisition or Disposition of Assets" for a description of our business following the completion of the reverse merger. 39 Item 9.01 Financial Statements and Exhibits. (a) Financial statements of Sinogas. See Page F-1. (b) Pro forma financial information. See Exhibit 99.6. (c) See (a) and (b) of this Item 9.01. (d) Exhibits 2.1 Exchange Agreement dated as of June 2, 2006, among the Registrant and the former stockholders of Sinoenergy 4.1 Form of note 4.2 Form of "A" warrants issued to investors in the June 2006 private placement 4.3 Form of "B" warrants issued to investors in the June 2006 private placement 4.4 Form of "C" warrants issued to investors in the June 2006 private placement 99.1 Securities purchase agreement dated June 2, 2006, between the Company and the investors in the June 2006 private placement 99.2 Registration rights agreement dated June 2, 2006, between the Registrant and the investors in the June 2006 private placement 99.3 Registration rights provisions pursuant to the stock exchange agreement 99.4 Agreement for former holders of the Registrant's common stock 99.5 2006 Long-term incentive plan 99.6 Pro forma financial information 40 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets at December 31, 2005 and 2004 and March 31, 2006 and 2005 F-3 Consolidated Statements of Operations for the Years F-4 Ended December 31, 2005 and 2004 And Quarters Ended March 31, 2006 and 2005 Consolidated Statements of Changes in Stockholders' F-5 Equity for the Years Ended December 31, 2005 and 2004 and Quarters Ended March 31, 2006 and 2005 Consolidated Statements of Cash Flows for the Years F-6 Ended December 31, 2005 and 2004 and Quarters Ended March 31, 2006 and 2005 Notes to Consolidated Financial Statements F-7-F-27 F-1 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Qingdao Sinogas General Machinery Limited Corporation and Subsidiary Qingdao City, Shandong Province People's Republic of China We have audited the accompanying consolidated balance sheets of Qingdao Sinogas General Machinery Limited Corporation and Subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in owners' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with The Public Company Accounting Oversight Board Standards. Those standards require that we plan and perform the audits 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 Qingdao Sinogas General Machinery Limited Corporation and Subsidiary as of December 31, 2005 and 2004 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Rotenberg and Co. LLP ROTENBERG AND CO. LLP Rochester, New York March 21, 2006 F-2 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION AND SUBSIDIARY Consolidated Balance Sheets As at December 31, 2005 and 2004 (Audited) and March 31, 2006 and 2005 (Un-audited)
December 31, 2005 December 31, 2004 March 31, 2006 March 31, 2005 ------------------- ------------------- ------------------- ------------------- Note(s) ASSETS CURRENT ASSETS Cash and cash equivalents $ 332 $ 41 $ 112 $ 38 Accounts receivable (net) 3 -Related parties 1,346 -- 1,347 -- - Third parties 1,780 209 3,435 200 Other receivables- 4 -Related party 464 -- 236 -- -Third party 275 119 917 1,040 Deposits and prepayments 5 -Related parties 4,986 988 4,986 598 - Third parties 1,027 258 951 150 Inventories 6 1,825 41 2,060 12 ------------------- ------------------- ------------------- ------------------- TOTAL CURRENT ASSET 12,035 1,573 14,044 2,038 ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- ------------------- LONG TERM ASSETS Property, plant and equipment 7 3,455 3,337 3,470 3,336 (net) Intangible assets 8 268 79 257 75 Long term deferred tax asset 17 -- 17 10 ------------------- ------------------- ------------------- ------------------- TOTAL ASSETS $ 15,775 $ 4,990 $ 17,788 $ 5,459 =================== =================== =================== =================== LIABILITIES AND OWNERS' EQUITY CURRENT LIABILITIES Short term loan 9 $ 2,478 $ -- $ 2,495 $ -- Accounts payable-third party 480 -- 1,213 2 Other payables - Related party 10 396 -- 622 -- - Third parties 830 122 1,057 2 Accrued expenses 23 -- 24 -- Warranty accrual 14 19 Advances from customers 11 2,234 8 1,914 231 Income taxes payable 12 1,162 -- 1,662 119 ------------------- ------------------- ------------------- ------------------- Total current liabilities 7,616 131 9,006 354 ------------------- ------------------- ------------------- ------------------- LONG TERM DEFERRED TAX LIABILITIES 13 28 -- 28 -- MINORITY INTERESTS 14 641 -- 665 -- ------------------- ------------------- ------------------- ------------------- TOTAL LIABILITIES 8,285 131 9,699 354 OWNERS' EQUITY Paid-in capital 4,950 4,950 4,950 4,950 Capital surplus 67 21 67 21 Statutory surplus reserve fund 16 329 -- 331 -- Retained earnings 2,019 -112 2,566 134 Accumulated other comprehensive 124 173 -- income ------------------- ------------------- ------------------- ------------------- Total owners' equity 7,489 4,859 8,088 5,105 ------------------- ------------------- ------------------- ------------------- TOTAL LIABILITIES AND OWNERS' EQUITY $ 15,775 $ 4,990 $ 17,788 $ 5,459 =================== =================== =================== ===================
The accompanying notes are an integral part of these consolidated financial statements. F-3 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION AND Subsidiary Consolidated Statements of Operations for the Years Ended December 31, 2005 and 2004 (Audited) and Quarters Ended March 31, 2006 and 2005 (Un-audited)
--------------- ------------------------ ------------------ --------------- Note(s) For the Year From October 29, 2004 For the Quarter For the Quarter Ended (date of incorporation) Ended Ended December 31, to December 31, March 31, March 31, 2005 2004 2006 2005 --------------- ------------------------ ------------------ --------------- NET REVENUE 17 $ 8,236 $ -- $ 2,500 $ 574 COST OF REVENUE (3,821) -- (1,245) (104) --------------- ------------------------ ------------------ ---------------- GROSS PROFIT 4,415 -- 1,255 470 OPERATING EXPENSES Selling expenses 110 7 64 34 General and administrative 586 57 265 81 expenses --------------- ------------------------ ------------------ ---------------- TOTAL OPERATING EXPENSES 695 64 329 115 --------------- ------------------------ ------------------ ---------------- INCOME(LOSS) FROM OPERATIONS 3,719 926 355 OTHER INCOME(EXPENSES) Other non-operating income 76 2 -- Interest expense (41) (42) -- Other expenses (106) (48) (3) -- --------------- ------------------------ ------------------ ---------------- OTHER INCOME (LOSS) NET (71) (112) (43) -- INCOME (LOSS) BEFORE INCOME TAXES 3,647 (112) 883 355 Income tax (1,173) -- (313) (109) --------------- ------------------------ ------------------ ---------------- INCOME (LOSS) BEFORE MINORITY 2,474 (112) 570 246 INTEREST Minority interest 14 14 -- 22 -- --------------- ------------------------ ------------------ ---------------- NET INCOME $ 2,460 $ (112) $ 548 $ 246 =============== ======================== ================== ================
The accompanying notes are an integral part of these consolidated financial statements. F-4 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION AND SUBSIDIARY Statements of Changes in Owners' Equity for the Years Ended December 31, 2005 and 2004 (Audited) and Quarters Ended March 31, 2006 and 2005 (Un-audited)
STATUTORY ACCUMULATED TOTAL PAIN-IN SURPLUS COMPREHENSIVE RETAINED CAPTIAL OWNERS' CAPITAL RESERVE INC0ME EARNINGS SURPLUS EQUITY ------------- ------------- ------------- ------------- ------------- ------------- Oct.29, 2004 (date of 4,950 -- -- -- 21 4,971 incorporation) Net income for the period from -- -- -- (112) -- (112) Oct. 29 to Dec. 31, 2004 ------------- ------------- ------------- ------------- ------------- ------------- Balance, December 31, 2004 4,950 -- -- (112) 21 4,859 Net income for 2005 -- -- 2,460 2,460 Transfer -- 329 124 (329) 46 170 ------------- ------------- ------------- ------------- ------------- ------------- Balance, December 31, 2005 4,950 329 124 2,019 67 7,489 ============= ============= ============= ============= ============= ============= Net income for the quarter ended -- -- 548 548 March 31 2006 Transfer -- -- 50 -- -- 50 ------------- ------------- ------------- ------------- ------------- ------------- Balance, March 31, 2006 4,950 329 179 2,567 67 8,088 ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-5 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 and 2004 (Audited) and Quarters Ended March 31, 2006 and 2005 (Un-audited)
For the Year Ended From October29, 2004 For the First Quarter ended Mar. 31 December 31, (date of incorporation) to December 31, ------------------ -------------------- ------------------ ------------------ 2005 2004 2006 2005 ------------------ -------------------- ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,460 $ (112) $ 547 $ 246 Depreciation 289 50 73 50 Amortization of intangible assets 14 3 13 4 Provision for doubtful debts 4 -- -- -- Changes in operating assets and liabilities: Increase in accounts receivable (2,181) -- (1,781) 9 Increase in other receivables, deposits and (1,203) (1,281) (150) (477) prepayments (Decrease)/increase in inventories (1,783) (41) (223) 28 (Decrease)/increase in accounts payable 479 -- 730 2 Increase in accrued expenses 23 -- 5 -- Decrease/(increase) in deferred expenses 3 (2) 2 (28) Increase in advance from customers 2,225 -- (334) 222 (Decrease)/increase in other payables 1,100 131 469 (120) Increase in income tax payable 1,162 -- 492 119 Deferred tax credit/(debit) 11 -- -- (10) ------------------ -------------------- ------------------ ------------------ Net cash provided by operating activities $ 2,603 $ (1,252) $ (157) $ 45 CASH FLOWS FROM INVESTING ACTIVITES Payment for purchase of property, plant and $ (134) $ (55) $ (65) $ (48) equipment Purchase of property rights (4,986) ------------------ -------------------- ------------------ ------------------ Net cash used in investing activities $ (5,120) $ (55) $ (65) $ (48) ------------------ -------------------- ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITES Cash received from short term borrowing $ 2,478 $ -- $ -- $ -- Cash received from capital contribution 1,329 -- -- Cash received /(paid) for other financing 328 19 -- -- activities ------------------ -------------------- ------------------ ------------------ Net cash used in financing activities $ 2,807 $ 1,348 $ -- $ -- ------------------ -------------------- ------------------ ------------------ Net increase/(decrease) in cash and cash Equivalents $ 290 $ 41 $ (222) $ (3) Cash and cash equivalents at beginning of year 42 -- 334 41 ------------------ -------------------- ------------------ ------------------ Cash and cash equivalents at end of year $ 332 $ 41 $ 112 $ 38 ================== ==================== ================== ==================
The accompanying notes are an integral part of these consolidated financial statements. F-6 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company (1) The History of the Company Qingdao Sinogas General Machinery Limited Corporation (herein after referred to as the "Company") was registered in Qingdao, China in September 2004, as a limited liability company under the laws of the People's Republic of China ("PRC") and the registered capital was US$7.5 million (one USD converts into 8 RMB), which was paid in full. The Company was jointly owned by the following three entities: (a) Beijing Sanhuan Technology Development Co., Ltd. (Beijing Sanhuan), with an agreed contribution of US$6.75 million, representing 90% of the aggregate capital; (b) Qingdao Machinery Industry Co., Ltd., with an agreed contribution of US$375,000, representing 5% of the aggregate capital; (c) Jiangsu Dong Fang Hong Chemical Fertilizer Co., Ltd. ("Jiangsu"), with an agreed contribution of US$375,000, representing 5% of the aggregate capital. The predecessor of the Company was Qingdao General Machinery Plant (the "Plant"), a state-owned entity. With the approval from Qingdao Municipal Government, Beijing Sanhuan acquired the Plant's total assets provided that it paid the Plant's debts. After Beijing Sanhuan paid the Plant's debts, Bejing Sanhuan was entitled to all the assets of the Plant, and having obtained government approval, reorganized the Plant into the Company. On July 30, 2004, PRC government approved the acquisition by Beijing Sanhuan of the Plant. On October 29, 2004, the Company acquired its business license from Qingdao Municipal Government to operate business in industries of Compressed Natural Gas (CNG) station and equipments/services, as well as non-standard chemical and refinery equipments. In October 2005 Beijing Sanhuan purchased the 5% interest in the Company held by Qingdao Machinery Industry Co., Ltd., with the result that Beijing Sanjuan held 95% of the Company's equity and Jiangsu held the remaining 5%. In November, 2005, Beijing Sanhuan and Jiangsu transferred 100% of their equity to Sinoenergy Holding Limited, a British Virgin Islands corporation which is owned by Wentao Yang. On November 29, 2005, Qingdao Foreign Trade and Economic Cooperation Bureau approved the Sinoenergy Holding Limited purchase of all the shares from the former shareholders of the Corporation and the Corporation changed from the local investment limited liability company into the wholly-owned foreign investment enterprise. On February 21, 2006, Sinoenergy entered into a share transfer agreement with Skywide Capital Management Limited, a British Virgin Islands corporation which is owned by Tianzhou Deng and Bo Huang ("Skywide") and Eastpride Capital Limited, a British Virgin Islands corporation owned by Wentao Yang ("Eastpride"), with the result that 90% shares of the Corporation were held by Skywide and 10% share of the Corporation were held by Eastpride. F-7 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company (continued) (2) The Business of the Company In accordance with provisions of Articles of Association and Business License, the business term of the Corporation is fifteen years, from October 29, 2004 to October 29, 2019. The Company manufactures pressure containers of class 1, 2, 3 petroleum refinery equipment, designs and installs compressed natural gas station equipment, and compressed natural gas storage and transportation equipment. (3) Subsidiary of the Company Together with Qingdao Kangtai Machinery Equipment Manufacture Co. Limited (Kantai), the Company established Qingdao Sinogas Yuhen Chemical Equipment Co., Ltd. (Qingdao Yuhen). The Company contributed capital totaling US$681,000 in the form of Property and equipment, representing 55% of the registered capital, and Qingdao Kangtai Machinery Equipment Manufacture Co. Limited contributed capital of US$558,000 in the form of cash and cash equivalents ($352,708) and intangible assets ($205,292), which represents 45% of the registered capital. The term of the business of Qingdao Yuhen is from May 25, 2005 to April 30, 2009 and the business scope is to manufacture, process and install machinery facilities (not including special equipments and cars); as the wholesaler and retailer of steels, machinery and electronic products, hardware, chemical equipments (not including dangerous equipments). The accompanying consolidated financial statements include the accounts of the Company and subsidiary Qingdao Yuhen for the seven months ended 31 December 2005. 2. Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying financial statements and its subsidiary were prepared in accordance with the accounting principles generally accepted in the United States of America ("US GAAP"). F-8 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) (b) Use of Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Significant estimates include depreciation and allowance for doubtful accounts receivable. Actual results could differ from those estimates. (c) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2004 and 2005 the Company did not have any cash equivalents. (d) Allowance for Doubtful Accounts The Company recognizes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectibility. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer's inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. (e) Inventories Inventories comprise of raw materials, work in process, finished goods and low value consumable articles. Amounts are stated at the lower of cost or market. Substantially all inventory costs are determined using the weighted average basis. Costs of finished goods include direct labor, direct materials, and production overhead before the goods are ready for sale. Inventory costs do not exceed net realizable value. F-9 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) (f) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is provided principally by use of the straight-line method over the useful lives of the related assets. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized. Management estimates a 10% residual value for its property, plant and equipment according to industry standards in the PRC. The estimated useful lives are as follows: Building and facility 20 years Machinery and equipment 8 years Motor vehicles 10 years Office equipment and others 5~8 years The gain or loss on disposal of property, plant and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets, and, if any, is recognized in the statements of operations. (g) Intangible Assets Intangible assets, representing patents and technical know-how acquired, are stated at cost less accumulated amortization and impairment losses. Amortization is calculated on the straight-line method over the estimated useful lives of 10 years. The technical know how, which is acquired in the end of year 2004 is valued and amortized according to relative industry standard. The patent is acquired in May of 2005, and is amortized according to its validated period. Till the balance sheet date, the patent is evaluated with no value change. (h) Impairment of Assets In accordance with Statement of Financial Accounting Standards (`SFAS") No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", the Company evaluates its long-lived assets to determine whether later events and circumstances warrant revised estimates of useful lives or a reduction in carrying value due to impairment. If indicators of impairment exist and if the value of the assets is impaired, an impairment loss would be recognized. F-10 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) (i) Revenue Recognition Revenue Recognition - The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to PRC law, including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, sales and value added tax laws have been complied with, and collectibility is probable. The Company recognizes product sales generally at the time the product is shipped. The Company has a large construction contract open at the fiscal year end. Revenue is recognized at the balance sheet date on the percentage of completion basis, measured by reference to the proportion of physical construction work completed to the total estimated work according to the report provided by technical department of the Company. Revenue is presented net of any sales tax and value added tax. Sales Taxes - The Company is subject to value added tax ("VAT"). The applicable VAT tax rate is 17% for products sold in the PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold less VAT paid on purchases made with the relevant supporting invoices. VAT is collected from customers by the Company on behalf of the PRC tax authorities and is therefore not charged to the consolidated statements of operations. (j) Warranty Reserves Warranty reserves represent the Company's obligation to repair or replace defective products under certain conditions. The estimate of the warranty reserves is based on historical experience. In 2005, the warranty rate was determined to be 0.2 % of gross sales. At present, the nearly all the products sold are pressure vessels, of which the operating permission is firmly controlled by PRC government. As a result, all the pressure vessels being sold must be tested by the Qingdao Bureau of Quality and Technical Supervision. F-11 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) (k) Income Taxes The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company reviewed the differences between the tax basis under PRC tax laws and financial reporting under PRC GAAP. Timing differences, relative deferred tax asset or liabilities have been recognized. (k) Foreign Currency Transactions The Company's functional currency is Renminbi ("RMB") and its reporting currency is U.S. dollars. The Company's balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and operating accounts are translated using the average exchange rate prevailing during the reporting period. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in owners' equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred. (l) Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Values of Financial Instruments", requires disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. For certain financial instruments, including cash, account receivable, related party and other receivables, accounts payable, other payables and accrued expenses, it was assumed that the carrying amounts approximate fair value because of the near term maturities of such obligations. (m) Minority Interest The minority shareholders' interest refers to the percentage of the owner's equity of Qingdao Yuhen owned by Kangtai. The minority shareholders' interest in the consolidated financial statements means the percentage of the Company's net assets owned by Kangtai other than the Company, according to their respective investment ratios. F-12 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Summary of Significant Accounting Policies (continued) (n) Earnings Per Share Basic earnings per share is computed by dividing the earnings for the year by the weighted average number of common shares outstanding for the year. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including stock options and warrants, in the weighted average number of common shares outstanding for a period, if dilutive. For the years ended December 31, 2004 and 2005, and for the first quarter of year 2005 and 2006, earnings per share are not shown as there are no shares outstanding. F-13 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Account Receivables and Allowance for Doubtful Receivables Details of allowance for doubtful receivables deducted from accounts receivable are as follows:-
------------------------------------------ ------------------------------------------ December 31 March 31 --------------------- -------------------- -------------------- --------------------- 2005 2004 2006 2005 --------------------- -------------------- -------------------- --------------------- US$'000 US$'000 US$'000 US$'000 3,131 209 Accounts receivable 4,786 204 Less: allowance for doubtful accounts 4 - 4 4 --------------------- -------------------- -------------------- --------------------- Balance, end of year 3,127 209 4,782 200 ===================== ==================== ==================== =====================
The Company did not have any bad debts in the years ended December 31, 2004 and 2005. The Company began operations in the second half year of 2005. Consistent with few sales, the AR balance as at March 31, 2005 was small. Within the balance at March 31 2006, US$2.443 million represents receivables for sales of CNG gas station construction contracts, which have not been completed at the balance sheet date, and the relative revenue is recognized according to percentage of completion basis. 4. Other Receivables (1) Other Receivable With Related Party The related party receivable balance at December 31 2005 represents power and water fee receivables from Qingdao Kangtai Machinery Equipment Manufacture Co. Limited. The balance as at March 31, 2006 also includes unsecured demand loans with different related parties. Please refer to note 15 for detailed information. (2) Other Receivable With Third Party Other receivables consist of receivable amount to unrelated parties as unsecured demand loans, with no stated interest rate or due date. 5. Deposits and Prepayments The related parties balance as at December 31, 2005 and March 31, 2006 consisted of a US$4,956,691 prepayment to Beijing Sanhuan for land use right transferring; And the related party balances as at December 31, 2004 and March 31, 2005 are related to the prepayment for the above mentioned transaction. The third parties balances represent advance payments to suppliers by the Company, as well as its subsidiary for routine operations. F-14 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Inventories Inventories at December 31, 2005 and 2004 and March 31, 2005 and 2006 are summarized as follows:
December 31, March 31, ------------------------------------------- ----------------------------------------- 2005 2004 2006 2005 ------------------------ ------------------ -------------------- -------------------- US$'000 US$'000 US$'000 US$'000 Raw materials 423 11 370 11 Work in progress 1,249 30 1,179 - Finished goods 55 - 462 1 Low value consumable articles 48 - - ------------------------ ------------------ -------------------- -------------------- Total 1,825 41 2,060 12 ======================== ================== ==================== ====================
There was no allowance for losses on inventories as of December 31, 2004 and 2005 and March 31, 2005 and 2006. As production expanded gradually since the Company's corporation, the volume of raw material purchasing, work in progress, and overall inventory levels have increased. F-15 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Property, Plant and Equipment As of December 31, 2004 and 2005 and March 31, 2005 and 2006, property, plant and equipment consist of following:
December 31, March 31, ------------------------------------------- ------------------------------------------ 2005 2004 2006 2005 ---------------------- -------------------- -------------------- --------------------- US$'000 US$'000 US$'000 US$'000 Cost Buildings and facility 2,571 2,451 2,587 2,451 Machinery equipment 2,031 905 2,110 941 Motor vehicles 36 24, 36 36, Office equipment and others 21 6 21 7 ---------------------- -------------------- -------------------- --------------------- 4,659 3,387 4,755 3,435 ---------------------- -------------------- -------------------- --------------------- Accumulated depreciation Buildings and facility 215 33 252 59 Machinery equipment 985 17 1,011 40 Motor vehicles 19 - 20 1 Office equipment and others 1 - 2 - ---------------------- -------------------- -------------------- --------------------- 1,204 50 1,204 100 ---------------------- -------------------- -------------------- --------------------- Carrying value Buildings and facility 2,356 2,418 2,335 2,292 Machinery equipment 1,046 888 1,099 901 Motor vehicles 17 24 16 35 Office equipment and others 20 6 19 7 ---------------------- -------------------- -------------------- --------------------- 3,455 3,337 3,469 3,335 ====================== ==================== ==================== =====================
Within the fixed asset balance as at March 31, 2006, there is US$64,053 of work in progress on self made machinery. 8. Intangible Assets
---------------------------------------- ---------------------------------------- December 31, March 31, -------------------- ------------------- --------------------- ------------------ 2005 2004 2006 2005 -------------------- ------------------- --------------------- ------------------ Patent US$'000 US$'000 US$'000 US$'000 Cost 285 82 285 82 Accumulated amortization 17 3 28 7 -------------------- ------------------- --------------------- ------------------ Carrying value 268 79 257 75 ==================== =================== ===================== ==================
Patents of the Company are amortized over 10 years up to September 2014 (see Note 5). To the cost of intangible assets as at December 31, 2005, $82,000 is the technical know how purchased from the Plant and $203,000 is paid in capital input by Kangtai (minority shareholder) when the Qingdao Yuhen was incorporated. F-16 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Short Term Loan The balance totaled UD$ 2,478,455 represents the short term loan borrowed from the Qingdao First Branch of Shibei District, Agriculture Bank of China, (hereafter refers to as 1st Branch) on November 1, 2005. According to the Loan Contract, the type of loan is specified as short-term working capital loan with the borrowing date starting from November 2, 2005 for US$1,487,073 and from November 7, 2005 for US$991,382 and maturing on November 1, 2006. The interest rate for the short term loan is 6.669% annually. The 1st Branch and Beijing Zhongyou Environment Tech. Corp. (a third party of the Company), signed the Ceiling Guarantee Contract, with the latter providing a voluntary guarantee for the loan contract. According to this contract, the guarantee period starts from the next day after the loan matures as specified in the master contract and lasts for two years. 10. Other Payables (1) Other Payables to Related Party: The balances as at December 31, 2005 and March 31, 2006 consist of unsecured demand loans from related party Qingdao Kangtai Machinery Equipment Manufacture Co. Limited, with no stated interest rate or due date; (2) Other Payables to Third Party The balances are mainly for payables for sales tax (VAT and business tax), unsecured demand loans from third parties and miscellaneous payables to other creditors. 11. Advance from Customers The balances as at December 31, 2005 and March 31, 2006 consist of a $2,152,060 advance from Qindao Yuheng. F-17 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Income Taxes Payable Pursuant to the PRC Income Tax Laws, the Company is subject to enterprise income tax at a statutory rate of 33% (30% national income tax plus 3% local income tax). Being licensed as wholly foreign owned enterprises, the Company is in the process of applying a tax-free permission, so no income tax payment for the accrual has been done, the balance increase is in line with the accumulated operating profit increase. 13. Long Term Deferred Tax Liabilities During the establishment of Qingdao Yuhen, the actual contributed capital amount by minority shareholder Qingdao Kangtai Machinery Equipment Manufacture Co. Limited is $158,084 higher than shared registered capital. Under PRC accounting policy, the Company records that pro rata over contributed capital amount $86,946 into capital surplus. Under PRC tax law, that capital surplus would not be regarded as taxable income until the investment to Qingdao Yuhen is sold. Under US GAAP recording, that negative goodwill amount is recognized in operating income. Deferred tax liabilities resulting from timing differences are recognized. 14. Minority Interests' Equity The activities of the minority interests' equity during the year ended December 31, 2005 (see note 2 (m) Minority Interest) are summarized as follows: Beginning balance (May 2005) $ -- Add: contribution by minority shareholders 557,835 Minority interests' income 13,893 Others 69,236 ------------------ Balance, December 31, 2005 $ 640,964 Add: contribution by minority shareholders 24,413 Minority interests' income Balance, March 31, 2006 $ 665,377 ------------------ F-18 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Related Party Relationships and Transactions The principal related companies with which the Company had transactions during the year are as follows: Name of the Company Relationship Beijing Sanhuan Parent company before November 8, 2005. Qingdao Yuhen Subsidiary from May 2005 Kangtai Minority investor of Qingdao Yuhen from May 2005 Significant transactions between the Company and its related company during the year are as follows: (1) Sales and purchase transactions with related parties For the first quarter as at Name of the Company December 31 March 31 2005 2004 2006 2005 Kangtai Sales with amount Sales with ofUSD978,587; USD amount of 446,767 purchases; USD672,945 Rental services sold USD1,054,301 Beijing Sanhuan USD30,517 purchase Qingdao Kantai Machinery Equipment Manufacture Company (Kangtai) is the predecessor Company of Qingdao Yuhen. Kangtai purchases products from Qingdao Yuhen to fulfill open purchase orders. Qingdao Yuhen completes those contracts fulfilled by Kantai prior the separation. The sales and purchases to and from related parties were made according to a price mutually agreed after taking into account prevailing market prices. F-19 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. Related Party Relationships and Transactions (continued) (2) Inter-company receivables
December 31, March 31, Name of the 2005 2004 2006 2005 Company Beijing Sanhuan USD4,986,279 USD 988,027 USD4,986,279 USD 616,965 prepayment for land use prepayment for asset prepayment for land prepayment right transferring transferring use right transfer Qingdao Yuhen USD 155,971 USD 122,230 inter-company loan inter-company loan Kangtai USD2,921,415 USD 129,860 Including the receivable on inter-company loan a rental of1,063,606
(3) Inter-company payables
December 31, March 31, Name of the Company 2005 2004 2006 2005 Beijing Sanhuan USD 128,543 Inter-company loan Kangtai USD395,726 USD621,514 inter-company inter-company loan loan
The amount due from/to related parties are interest-free, unsecured and have no fixed terms. F-20 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Statutory Surplus Reserve Fund In accordance with PRC regulations, the Company is required to make appropriations to the statutory surplus reserve fund, based on after-tax net income determined in accordance with PRC GAAP. According to the PRC corporate regulation, appropriation to the statutory surplus reserve fund should be at least 10% of the after-tax net income determined in accordance with the PRC GAAP until the reserve fund is equal to 50% of the entity's registered capital. Appropriations to the statutory public welfare fund should be at least 5% of the after-tax net income determined in accordance with the PRC GAAP. Statutory surplus reserve is established for the purpose of expanding operations, or increasing registered capital, and is non-distributable other than in liquidation. 17. Revenue Gross Profit Margin
According to products sold, the revenue is mainly composed of the following: -------------------- ------------------------------------ ------------------- For the year For the three moths ended March 31 GP margin Ended December 31, -------------------- ------------------- ---------------- ------------------- 2005 2006 2005 -------------------- ------------------- ---------------- ------------------- US$'000 US$'000 US$'000 % CNG Tow truck trailers i (1) 1,570 243 107 22% CNG Gas stations i (2) 3,741 1,064 467 67% Pressure Containers (ii) 2,035 1,193 -- 23% Rental income and others 890 -- -- -------------------- ------------------- ---------------- ------------------- 8,236 2,500 574 ==================== =================== ================ ===================
(i) CNG/LPG vehicle and gas station equipment business CNG/LPG vehicle and gas station equipment business include two parts of divisions/services. (1) CNG/LPG vehicle and gas station equipment manufacture and installation, which include following products: (ss.)CNG trailer (ss.)CNG deposited system for gas station usage (ss.)Conversion kits for various types of vehicle (ss.)CNG compressor skid (ss.)CNG dispenser (retail measurement system) F-21 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. Revenue Gross Profit Margin (continued) (2) CNG station system business It includes the design of CNG station construction plans, construction of CNG stations, and installation of CNG station equipment and related systems. Due to rapid development and early stage of CNG station business in China, the company enjoys a very high profit margin in this segment by utilizing its specialty in this area. (ii) Non-standard equipment and pressure container business: Non-standard equipment and pressure container business has been carried over from the predecessor since Qingdao Sinogas was set up. It is a traditional chemical equipment manufacture business with low profit margin. It includes: (ss.)design and manufacture of various types of pressure containers in the petroleum and chemical industries. (ss.)design and manufacture of various types of pressure containers in the metallurgy and electricity generation industries (ss.)design and manufacture of various types of pressure containers in the food and brewery industries (ss.)design and manufacture of various types of non-standard equipment The gross profit margin for CNG Gas stations is much higher than others which is the result of technology and low market competition for Gas stations in China. In 2005, the revenue of CNG Gas stations represents the sale of one big contract for 22 CNG Gas stations, including designing, construction, equipment installation, and related engineering work. The total contract price is RMB25,600,000 ($2,976,433) . 18. Concentrations and Credit Risk The Company operates principally in the PRC and grants credit to its customers in this geographic region. Although the PRC is economically stable, it is always possible that unanticipated events in foreign countries could disrupt the Company's operations. At December 31, 2005, the Company has a credit risk exposure of uninsured cash in banks of approximately US$331,528. The Company does not require collateral or other securities to support financial instruments that are subject to credit risk. F-22 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Concentrations and Credit Risk (continued) The net sales to customers representing at least 10% of net total sales as well as relative account receivable balance are as follows:-
Sales AR Sales AR December 31, December 31, March 31, March 31, Customers 2005 2005 2006 2006 US$'000 % US$'000 % US$'000 % US$'000 % Customer A 3,740 46 1,494 67 Customer B 831 10 - - Customer C 1,064 42% - - Customer D 358 14% - -
19. Commitments and Contingencies (1) Legal Proceedings - The Company is not currently a party to any threatened or pending legal proceedings, other than incidental litigation arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. The Company has the following material contractual obligations and capital expenditure commitments: (a) CNG Gas Station Construction Contract signed between the Company and CNPC New Energy Enterprise Group Corp. on December 26, 2005. According to the contract, the Company will construct 22 CNG Gas stations for CNPC New Energy Enterprise Group Corporation. The construction project includes design, construction, equipment installation, and related engineering work. The total contract price is US$3.2 million. It goes into effect after being signed by both parties and is legally binding to. The fulfillment of this contract is ongoing. To the contract, no liability insurance has been made for the contracted construction. Of which the situation is common in PRC circumstance. (b) the Agreement signed between the Corporation (Party A) and Beijing Sanhuan (Party B) on April 6, 2005. According to the agreement, with the precondition that Party A is responsible for the procedures of designating the land as land for commercial use, Party B transfers the 24,593 square meters land of the south factory site at No. 45, Jinhua Road, Qingdao and the 34,604.02 square meters land of the north factory site at No. 66, Jinhua Road, Qingdao city to Party A at the price of US$11,900,482. It goes into effect after being signed by both parties and is legally binding to. According to the Corporation, the fulfillment of this contract is proceeding normally. F-23 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19. Commitments and Contingencies (continued) (c) The Contract signed between the Corporation and Qingdao Jinyu Industrial Development Co., Ltd. on May 20, 1997. According to the Contract, the Corporation leases its own land at No. 18, Siliu South Road (within its factory site) to Qingdao Jinyu Industrial Development Co., Ltd.. The contractual rate is US$7,500 for the first year and is specified to yearly increase by 6% afterwards. Starting from the ninth year, the yearly increase with the rent should be 8%, with the total lease duration being 20 years. It goes into effect after being signed by both parties and is legally binding to. Meanwhile, the rights and obligations of both parties are protected by Chinese laws. According to the Corporation, the fulfillment of this contract is proceeding normally. (2) Capital commitments - the Company has entered into an agreement with Beijing Sanhuan (see note 1 about Beijing Sanhuan). Per the agreement, the Company would purchase the land use right for the land on which the Company located from Beijing Sanhuan, the predecessor shareholder of the Company, with the price of US$11,900,482. In current year, $4,956,691 has been prepaid. The land use right ownership transferring process is in process. 20. Retirement Benefits The full-time employees of the Company are entitled to staff welfare benefits including medical care, casualty, housing benefits, education benefits, unemployment insurance and pension benefits through a Chinese government-mandated multi-employer defined contribution plan. The Company is required to accrue the employer-portion for these benefits based on certain percentages of the employees' salaries. The total provision for such employee benefits was US$148 and US$38,696 for the year ended December 31, 2004 and 2005, respectively and were recorded as other payables. The PRC government is responsible for the staff welfare benefits including medical care, casualty, housing benefits, unemployment insurance and pension benefits to be paid to these employees. The Company is responsible for the education benefits to be paid. F-24 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Subsequent Events On June 2, 2006, a securities purchase agreement (the "Purchase Agreement") with Barron Partners LP, JCAR Funds Ltd., Ray Rivers and Steve Mazur pursuant to which the investors purchased 6% convertible notes in the principal amount of $3,500,000, 369,000 shares of common stock (the "Initial Shares"), and total warrants to purchase 18,000,000 shares of common stock, which include: 6,000,000 shares of common stock at $.85 per share, 6,000,000 shares of common stock at $1.20 per share, and 6,000,000 shares of common stock at $1.75 per share. The following table sets forth the investment by each of the investors, the principal amount of note received, the number of Initial Shares issued and the number of shares issuable upon exercise of each set of warrants. Initial Note Shares Warrants Barron Partners LP $3,100,000 305,743 4,971,429 JCAR Funds Ltd. 200,000 21,086 342,857 Steven Mazur 100,000 10,543 171,429 Ray Rivers 100,000 10,543 171,429 TOTAL $3,500,000 369,000 6,000,000 The numbers under the column "Warrants" represents the number of shares of common stock issuable upon exercise of each set of warrants. Thus, each investor has the same number of warrants exercisable at $.85, $1.20 and $1.75. 22. New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board ("FASB") issued interpretation No. 46 "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46 clarifies when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest entity. FIN 46 provides general guidance as to the definition of a variable interest entity and requires a variable interest entity to be consolidated if a company absorbs the majority of the variable interest entity's expected losses, or is entitled to receive majority of the variable interest entity's residual returns, or both. In December 2003, the FASB issued a revised interpretation of FIN 46 ("FIN 46-R"), which supersedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities. Both interpretations are effective immediately for any variable interest entity created subsequent to January 31, 2003, and for variable interest entities created before February 1, 2003, no later than the end of the first reporting period after March 15, 2004. The adoption of FIN 46-R has no impact on the Company's financial statements. F-25 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. New Accounting Pronouncements (continued) In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 has no impact on the Company's financial reporting and disclosures. In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 revises the accounting for certain financial instruments that previously could be classified as liabilities (or, in some circumstances, assets) in the statement of financial condition. SFAS No. 150 also requires disclosure of the terms of those instruments and settlement alternatives. SFAS No. 150 generally is effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 has no impact on the Company's financial statements. In December 2003, the FASB issued SFAS No. 132R "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132R"). This Statement revises disclosures by employers about pensions and other postretirement benefits. The additional disclosures are about the asset, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information must be provided separately for pension plans and other postretirement benefit plans. New disclosures for interim periods beginning after December 15, 2003 are also required by SFAS No. 132R. The adoption of SFAS No. 132R has no impact on the Company's financial statements. In December 2003, the staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition, which supersedes SAB 101, "Revenue Recognition in Financial Statements." The primary purpose of SAB 104 is to rescind the accounting guidance included in SAB 101 about multiple element revenue arrangements. SAB 104 also revises the SEC's "Revenue Recognition in Financial Statements Frequently Asked Questions and Answers that have been codified in Topic 13. SAB 104 was effective immediately upon issuance and did not have a material impact of the Company's financial reporting and disclosures. F-26 - -------------------------------------------------------------------------------- QINGDAO SINOGAS GENERAL MACHINERY LIMITED CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. New Accounting Pronouncements (continued) The FASB has issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosures". SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure requirements of SFAS No. 148. The Company has no stock-based compensation. In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment, an Amendment of SFAS No. 123." SFAS No. 123R requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees. The Company has no stock-based compensation. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29. SFAS No. 153 eliminates the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. The adoption of SFAS No. 153 has no impact on the Company's financial statements. F-27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FRANKLYN RESOURCES III, INC. (Registrant) Date: June 15, 2006 /s/ Bo Huang ---------------------------------- Bo Huang, CEO EX-2.1 2 v045248_ex2-1.txt EXHIBIT 2.1 STOCK EXCHANGE AGREEMENT This Agreement dated as of the 2nd day of June, 2006, by and among Franklyn Resources III, Inc., a Nevada corporation whose address is P. O. Box 461029, Glendale, Colorado 80246 (the "Issuer"), Sinoenergy Holding Limited, a corporation organized under the laws of the British West Indies with offices at Akara Building, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands ("Sinoenergy"), Skywide Capital Management Limited, a corporation organized under the laws of the British West Indies with offices at Portcullis TrustNet Chambers, Road Town, Tortola, British Virgin Islands ("Skywide"), and Eastpride Capital Limited, a corporation organized under the laws of the British West Indies with offices at Akara Building, 24 De Castro Street, Wickhams Cay I, Road Town, Tortola, British Virgin Islands ("Eastpride," and, together with Skywide, the "Stockholders" and each, individually, a "Stockholder"). W I T N E S S E T H: WHEREAS, the Stockholders are the holders of all of the issued and outstanding capital of Sinoenergy (the "Sinoenergy Shares"); and WHEREAS, the Issuer desires to acquire all of the Sinoenergy Shares, which represent all of the capital stock of Sinoenergy, from the Stockholders, and is willing to issue shares of its common stock, par value $.001 per share ("Common Stock"), to the Stockholders in exchange for the Sinoenergy Shares on and subject to the terms and conditions of this Agreement; and WHEREAS, this Agreement sets forth the terms and conditions on which the Stockholders are transferring the Sinoenergy Shares to the Issuer; and WHEREAS, Sinoenergy owns all of the issued and outstanding capital stock of Qingdau Sinogas General Machinery Corporation, a Chinese corporation which is qualified as a WOFE ("Sinogas"), NOW, THEREFORE, for the mutual consideration set out herein, the parties agree as follows: 1. Exchange of Shares. (a) Issuance of Shares by Issuer. On and subject to the conditions set forth in this Agreement, the Issuer will issue to Stockholders, in exchange for all of the capital of Sinoenergy, which is represented by the Sinoenergy Shares, an aggregate of 14,215,385 shares of Common Stock (the "Shares"). The Shares will be issued to the Stockholders in the amounts set forth after their respective names in Schedule A to this Agreement. (b) Transfer of Sinoenergy Shares by the Stockholders. On and subject to the conditions set forth in this Agreement, the Stockholders will transfer to the Issuer all of the Sinoenergy Shares in exchange for the Shares. Each Stockholder holds the number of Sinoenergy Shares set forth after his or her name in Schedule A to this Agreement. (c) Closing. The issuance of the Shares to the Stockholders and the transfer of the Sinoenergy Shares to the Issuer will take place at a closing (the "Closing") to be held at the office of Katsky Korins LLP, 605 Third Avenue, New York, New York 10158 as soon as possible after or contemporaneously with the satisfaction or waiver of all of the conditions to closing set forth in Sections 4 and 5 of this Agreement. 2. Representations and Warranties of the Issuer. The Issuer hereby represents and warrants to the Stockholders as follows: (a) General. (i) The Issuer is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. The Issuer does not have any equity investment or other interest, direct or indirect, in, or any outstanding loans, advances or guarantees to or on behalf of, any domestic or foreign corporation, limited liability company, association, partnership, joint venture or other entity. (ii) Complete and correct copies of the Issuer's certificate of incorporation and by-laws are available for review on the Edgar system maintained by the United States Securities and Exchange Commission (the "Commission"). (iii) The has authorized capital stock consisting of 25,000,000 shares of Common Stock, of which 3,336,000 shares, including the Shares, are presently issued and outstanding. Each Seller owns the Shares listed after such Seller's name on Exhibit A to this Agreement, free and clear of all any and all liens, claims, encumbrances, preemptive rights, right of first refusal and adverse interests of any kind. Pursuant to a separate agreement, the Issuer is acquiring 3,305,000 shares of Common Stock contemporaneously with the Closing. (iv) The Issuer has full power and authority to carry out the transactions provided for in this Agreement, and this Agreement constitutes the legal, valid and binding obligations of the Issuer, enforceable in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency and other laws of general application affecting the enforcement of creditor's rights and except that any remedies in the nature of equitable relief are in the discretion of the court. All necessary action required to be taken by the Issuer for the consummation of the transactions contemplated by this Agreement has been taken. (v) The Shares, when issued pursuant to this Agreement, will be duly and validly authorized and issued, fully paid and non-assessable. The issuance of the Shares to Stockholders is exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to an exemption provided by Section 4(2) thereunder. (vi) Except as contemplated by this Agreement and except as contemplated by a securities purchase agreement dated the date of this Agreement among the Issuer, Barron Partners LP and JCAR Funds Ltd., the Issuer is not a party to any agreement or understanding pursuant to which any securities of any class of capital stock are to be issued or created or transferred, and the Issuer does not have any agreements, plans, understandings or proposals, whether formal or informal or whether oral or in writing, pursuant to which it or he granted or may have issued or granted any individual or entity any Convertible Securities or any interest in the Issuer or the Issuer's earnings or profits, however defined. As used in this Agreement, the term "Convertible Securities" shall mean any options, rights, warrants, convertible debt, equity securities or other instrument or agreement upon the exercise or conversion of which or upon the exchange of which or pursuant to the terms of which additional shares of any class of capital stock of the Issuer may be issued. (b) Financial. The Issuer's audited balance sheet at December 31, 2005 and the results of its operations and cash flows for the years ended December 31, 2005 and 2004, and for the period from inception (March 2, 1999) to December 31, 2005, audited by Comiskey & Company, are included in the Issuer's Form 10-KSB for the year ended December 31, 2005, and its unaudited balance 2 sheet at March 31 2006 and the related statements of operations and cash flows for the three months ended March 31, 2006 and 2005 are included in the Issuer's Form 10-QSB for the quarter ended March 31, 2006. Such financial statements are collectively referred to as the "Issuer Financial Statement" and have been made available to the Stockholder on the Edgar system of the Commission. The Issuer Financial Statements are in accordance with all books, records and accounts of the Issuer, have been prepared in accordance with generally accepted accounting principles, consistently applied, except that the Issuer Financial Statements for the period ended March 31, 2006 and 2005 do not include statements or other information which is not required to be included in a Form 10-QSB. Comiskey & Company is independent as to the Issuer under the rules of the Commission pursuant to the Securities Act. The Issuer Financial Statements present fairly the financial position of the Issuer at the respective balance sheet dates, and fairly present the results of the Issuer's operations, changes in stockholders' equity and cash flows for the periods covered in accordance with generally accepted accounting principles consistently applied. The Issuer Financial Statements for the periods ended March 31, 2006 and 2005 include all adjustments (which include only normal recurring adjustments) necessary to present fairly the information for such period. (i) At the close of business on March 31, 2006, the Issuer did not have any material liabilities, absolute or contingent, of the type required to be reflected on balance sheets prepared in accordance with generally accepted accounting principles which are not fully reflected, reserved against or disclosed on the March 31, 2006 balance sheet. The Issuer has not guaranteed or assumed or incurred any obligation with respect to any debt or obligations of any Person, except endorsements made in the ordinary course of business in connection with the deposit of items for collection and except as disclosed in the Issuer Financial Statements and the SEC Documents, as hereinafter defined. The Issuer has no debts, contracts, guaranty, standby, indemnity or hold harmless commitments, liabilities or obligations of any kind, character or description, whether accrued, absolute, contingent or otherwise, or due or to become due except to the extent set forth or noted in the Issuer Financial Statement, and not heretofore paid or discharged. As used in this Agreement, the term "Person" shall be construed broadly and shall include an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity (or any department, agency or political subdivision thereof). (ii) Since March 31, 2006, there has not been any Material Adverse Change affecting the Issuer or any damage or destruction, whether covered by insurance or not, affecting the business, property or assets of the Issuer, it being understood that the Issuer is not engaged in any active business activity, but is incurring expenses in the normal course of operations as a public company. A Material Adverse Change, with respect to any party to this Agreement, means any material adverse change in the business, operations, assets, financial condition, operating results, liabilities, employee relations or prospects of such party or which would affect the ability of a party to consummate the transactions contemplated by this Agreement. For purposes of this Agreement, a change in a party's prospects shall not be deemed a Material Adverse Change if such change resulted from general economic conditions, including economic conditions applicable to a specific industry. (c) SEC Documents. The Issuer is registered pursuant to Section 12 of the Exchange Act and it current with its reporting obligations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). None of the Issuer's filings made pursuant to the Exchange Act (collectively, the "Issuer SEC Documents") contains any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Issuer SEC Documents, as of their respective dates, complied in all material respects with the requirements of the Exchange Act, and the rules and regulations of the Commission thereunder, and are available on the Commission's EDGAR system. 3 (d) Property. The Issuer does not owns any real property or intellectual property rights. (e) Litigation. There are no material claims, actions, suits, proceedings, inquiries, labor disputes or investigations (whether or not purportedly on behalf of the Issuer) pending or, to the Issuer's Best Knowledge, threatened against the Issuer or any of its assets, at law or in equity or by or before any governmental entity or in arbitration or mediation. No bankruptcy, receivership or debtor relief proceedings are pending or, to the best of the Issuer's knowledge, threatened against the Issuer. (f) Compliance with Laws. The Issuer has complied with, is not in violation of, and has not received any notices of violation with respect to, any federal, state, local or foreign Law, judgment, decree, injunction or order, applicable to it, the conduct of its business, or the ownership or operation of its business. References in this Agreement to "laws" shall refer to any laws, rules or regulations of any Chinese or United States, as the case may be, federal, state or local government or any governmental or quasi-governmental agency, bureau, commission, instrumentality or judicial body (including, without limitation, any federal or state securities law, regulation, rule or administrative order). (g) No Broker. The Issuer has not employed or engaged any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated by this Agreement. The Issuer shall indemnify and hold Sinoenergy and the Stockholders harmless from and against any manner of loss, damage, liability or expense, including reasonable fees and expenses of counsel, as a result of any fees or commissions due to any finder or broker for compensation in connection with the transactions contemplated by this Agreement. The obligations of the Issuer pursuant to this Section 2(i) shall survive the Closing. (h) Reliance by Stockholders. The representations and warranties set forth in this Section 3, taken together, do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein and therein, when taken together, not misleading. Notwithstanding the foregoing, Stockholders acknowledges that no representation or warranty is made by the Issuer with respect to any projections made by the Issuer. 3. Representations and Warranties of Stockholders. The Stockholders jointly and severally (except as to Section 3(b),of this Agreement as to which the representations and warranties are several) represent and warrant to the Issuer as follows: (a) Organization. (i) Sinoenergy is a company, duly organized, validly existing and in good standing under the laws of the British West Indies and it owns all of the capital stock and equity of Qingdau Sinogas General Machinery Corporation, a corporation organized under the laws of the People's Republic of China and it has full power and authority to carry on its business as and where such business is operated. All necessary company action required to be taken by Sinoenergy and the Stockholders relating to the execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement has been duly and validly taken, and this Agreement constitutes the legal, valid and binding and enforceable obligation of Stockholders, except as enforceability may be limited by bankruptcy, insolvency and other laws of general application affecting the enforcement of creditor's rights and that any remedies in the nature of equitable relief are in the discretion of the court. All necessary action required to be taken by Stockholders for the consummation of the transactions contemplated by this Agreement has been taken, and all regulatory approval of . 4 (ii) The execution and performance of this Agreement will not violate or conflict with any provision of Sinoenergy's certificate of incorporation, by-laws or other organizational documents. No approval or consent of, or notice to or filing with, any Person not a party to this Agreement or any governmental or quasi-governmental agency, is necessary to authorize the execution or delivery of this Agreement or the consummation of any of the transactions contemplated herein by Stockholders other than approvals which have been obtained or will have been obtained at or prior to Closing. (iii) The capital of Sinoenergy is represented solely by the Sinoenergy Shares. Sinoenergy is not a party to any agreement or understanding pursuant to which any securities of any class of capital stock or any interest in the capital of Sinoenergy is to be issued or created or transferred, and Sinoenergy does not have any agreements, plans, understandings or proposals, whether formal or informal or whether oral or in writing, pursuant to which it or he granted or may have issued or granted any individual or entity any Convertible Securities or any interest in Sinoenergy or Sinoenergy's earnings or profits, however defined. (b) Several Representations by the Stockholders. Each Stockholder, for itself: (i) Is the sole record and beneficial owner of the Sinoenergy Shares set forth after his or her name in Schedule A to this Agreement, subject to no Claim. (ii) Is a British West Indies corporation. (iii) Has full power and authority to carry out the transactions provided for in this Agreement, and this Agreement constitutes the legal, valid and binding obligations of such Stockholder, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency and other laws of general application affecting the enforcement of creditor's rights and that any remedies in the nature of equitable relief are in the discretion of the court. All necessary action required to be taken by Stockholders for the consummation of the transactions contemplated by this Agreement has been taken. (iv) Is an accredited investor within the meaning of Rule 501 of the Commission pursuant to the Securities Act; (v) Is acquiring the Shares pursuant to this Agreement for investment and not with a view to the sale or distribution thereof; (vi) Understands that the Shares constitute restricted securities within the meaning of Rule 144 of the Commission pursuant to the Securities Act and may not be sold or otherwise transferred except pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act; (vii) Has been advised by counsel as to the meaning and implication of the acquisition of restricted securities and the illiquid nature of the Shares; (viii) Acknowledges that the certificate or certificates for the Shares will bear the Issuer's customary Securities Act restrictive legend; (ix) Represents that he or she understands that an investment in the Shares involves a high degree of risk; and 5 (x) Represents that the execution and performance of this Agreement will not constitute a breach of any contract to which such Stockholder is a party or by which he or she is bound, and will not violate any judgment, decree, order, writ, rule, statute, or regulation applicable to such Stockholders or his or her properties. (c) Financial Statements. (i) Sinoenergy has delivered to the Issuer the following financial statements (collectively, the "Sinoenergy Financial Statements") of Sinogas: Audited balance sheet at December 31, 2005 and the statements of operations, stockholders' equity, cash flow and notes thereto for the two years in the period then ended, certified by Schwartz Levitsky Feldman, LLP, and the unaudited balance sheet as of March 31, 2006 and the statements of operations, cash flows and notes to financial statements for the three months ended March 31, 2006 and 2005 and stockholders' equity for the three months ended September 30, 2005, which have been reviewed, but not audited, by Schwartz Levitsky Feldman, LLP. The Sinoenergy Financial Statements are in accordance with all books, records and accounts of Sinoenergy, have been prepared in accordance with United States generally accepted accounting principles consistently applied and the requirements of the PACOB, except that the Sinoenergy Financial Statements for the period ended September 30, 2005 do not include information which is not required to be included in a Form 10-Q. Schwartz Levitsky Feldman, LLP is independent as to the Issuer under the rules of the Commission pursuant to the Securities Act. The Sinoenergy Financial Statements present fairly the financial position of Sinogas at the respective balance sheet dates, and fairly present the results of Sinogas' operations, changes in stockholders' equity and cash flows for the periods covered in accordance with generally accepted accounting principles consistently applied. The Sinoenergy Financial Statements for the periods ended March 31, 2006 and 2005 include all adjustments (which include only normal recurring adjustments) necessary to present fairly the information for such period. (ii) At the close of business on March 31, 2006, Sinoenergy did not have any material liabilities, absolute or contingent, of the type required to be reflected on balance sheets prepared in accordance with generally accepted accounting principles which are not fully reflected, reserved against or disclosed on the March 31, 2006 balance sheet. Sinogas has not guaranteed or assumed or incurred any obligation with respect to any debt or obligations of any Person, except endorsements made in the ordinary course of business in connection with the deposit of items for collection and except as disclosed in the Sinoenergy Financial Statements. Sinogas has no debts, contracts, guaranty, standby, indemnity or hold harmless commitments, liabilities or obligations of any kind, character or description, whether accrued, absolute, contingent or otherwise, or due or to become due except to the extent set forth or noted in the Sinoenergy Financial Statement, and not heretofore paid or discharged. (iii) Except as disclosed in the Sinoenergy Financial Statements, since March 31, 2006, there has not been any Material Adverse Change affecting Sinoenergy or Sinogas or any damage or destruction, whether covered by insurance or not, affecting the business, property or assets of Sinoenergy or Sinogas. (d) Litigation. There are no material claims, actions, suits, proceedings, inquiries, labor disputes or investigations (whether or not purportedly on behalf of Sinoenergy) pending or, to Sinoenergy's or any Stockholder's Best Knowledge, threatened against Sinogas or Sinoenergy or any of their respective assets, at law or in equity or by or before any governmental entity or in arbitration or mediation. No bankruptcy, receivership or debtor relief proceedings are pending or, to the best of Stockholder's knowledge, threatened against Sinoenergy. 6 (e) No Broker. Neither the Stockholders nor Sinoenergy has employed or engaged any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated by this Agreement. Stockholders shall indemnify and hold the Issuer harmless from and against any manner of loss, damage, liability or expense, including reasonable fees and expenses of counsel, as a result of any fees or commissions due to any finder or broker for compensation in connection with the transactions contemplated by this Agreement as a result of the conduct by, or agreements entered into by, Stockholders. This obligations of Stockholders pursuant to this Section 3(k) shall survive the Closing. (f) Reliance by the Issuer. The representations and warranties set forth in this Section 3 do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein and therein, when taken together, not misleading. (g) Registration Rights. The Stockholders shall have the registration rights with respect to the Shares as are set forth in Exhibit B to this Agreement. The shares shall be subject to a lock-up, as provided in said Exhibit B. 4. Conditions to the Obligation of the Issuer. The obligations of the Issuer under this Agreement are subject to the satisfaction of the following conditions unless waived by the Issuer: (a) Representations and Warranties. On the Closing Date, the representations and warranties of Stockholders shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as if made on such date, and Stockholders shall have performed all of its obligations required to be performed by it pursuant to this Agreement at or prior to the Closing Date, and the Issuer shall have received the certificate of Stockholders to such effect and as to matters set forth in Section 4(b) of this Agreement.. (b) No Material Adverse Change. No Material Adverse Change in the business or financial condition of Sinoenergy or Sinogas shall have occurred or be threatened since the date of this Agreement, and no action, suit or proceedings shall be threatened or pending before any court of governmental agency or authority or regulatory body seeking to restraint, prohibition or the obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated by this Agreement or that, if adversely decided, has or may have a material adverse effect on any of the assets, properties, business, prospects, operations or financial condition of Sinoenergy. 5. Conditions to the Obligation of Stockholders. The obligations of Stockholders under this Agreement are subject to the satisfaction of the following conditions unless waived by Stockholders: (a) Representations and Warranties. On the Closing Date, the representations and warranties of the Issuer shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as if made on such date, and the Issuer shall have performed all of its respective obligations required to be performed by it pursuant to this Agreement at or prior to the Closing Date, and Stockholders shall have received the certificate of the Issuer to such effect and as to matters set forth in Section 5(b) of this Agreement. (b) No Material Adverse Change. No Material Adverse Change in the business or financial condition of the Issuer shall have occurred or be threatened since the date of this Agreement, and no action, suit or proceedings shall be threatened or pending before any court of governmental agency or authority or regulatory body seeking to restraint, prohibition or the obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated by this 7 Agreement or that, if adversely decided, has or may have a material adverse effect on any of the assets, properties, business, prospects, operations or financial condition of the Issuer. (c) Investment by Barron Partners. Barron Partners shall have invested not less than US$3,400,000 in the Issuer pursuant to the Barron Agreement, the net proceeds of which are to be used to provide Sinoenergy with working capital. (d) SEC Filings. The Issuer shall be current with its filings pursuant to the Exchange Act. (e) Other Instruments. the Issuer shall have delivered such other documents as counsel for Stockholders may reasonably request. 6. Termination. (a) Basis For Termination. This Agreement may be terminated prior to the Closing Date: (i) By the written agreement of the parties. (ii) By either party in the event that the other party shall have breached its representations, warranties, covenants and agreements in any material respect or failed to comply in any material respect with their respective obligations pursuant to this Agreement in any material respect, and such failure shall have continued for more than thirty (30) days after notice thereof, in reasonable detail, shall have been given by the party seeking to terminate this Agreement. (iii) By either party if the conditions to such party's obligation to close shall not have been satisfied or waived. (iv) By either party if the Closing shall not have taken place by June 15, 2006 other than as a result of a breach by the party seeking to terminate this Agreement pursuant to this Section 6(a)(iv). (b) Effect of Termination. In the event of a termination of this Agreement pursuant to this Section 6, neither party shall have any obligation or liability to the other, and each party shall bear its own expenses. 7. Miscellaneous. (a) Entire Agreement. This Agreement, including the Exhibits and the Schedule, which constitutes integral parts of this Agreement, constitutes the entire agreement of the parties, superseding and terminating any and all prior or contemporaneous oral and written agreements, understandings or letters of intent between or among the parties with respect to the subject matter of this Agreement. No part of this Agreement may be modified or amended, nor may any right be waived, except by a written instrument which expressly refers to this Agreement, states that it is a modification or amendment of this Agreement and is signed by the parties to this Agreement, or, in the case of waiver, by the party granting the waiver. No course of conduct or dealing or trade usage or custom and no course of performance shall be relied on or referred to by any party to contradict, explain or supplement any provision of this Agreement, it being acknowledged by the parties to this Agreement that this Agreement is intended to be, and is, the complete and exclusive statement of the agreement with respect to its subject matter. Any waiver shall be limited to the express terms thereof and shall not 8 be construed as a waiver of any other provisions or the same provisions at any other time or under any other circumstances. (b) Severability. If any section, term or provision of this Agreement shall to any extent be held or determined to be invalid or unenforceable, the remaining sections, terms and provisions shall nevertheless continue in full force and effect. (c) Notices. All notices provided for in this Agreement shall be in writing signed by the party giving such notice, and delivered personally or sent by overnight courier, mail or messenger against receipt thereof or sent by registered or certified mail, return receipt requested, or by facsimile transmission or similar means of communication if receipt is confirmed or if transmission of such notice is confirmed by mail as provided in this Section 7(c). Notices shall be deemed to have been received on the date of personal delivery or telecopy or attempted delivery. Notice shall be delivered to the parties at the following addresses: If to the Issuer: c/o Asher S. Levitsky PC Katsky Korins LLP 605 Third Avenue New York, New York 10158 Facsimile: 212/716-3239 If to Sinoenergy or the Stockholders: To their respective address set forth at the beginning of this agreement, to the attention of the person signing this Agreement. With a copy to: Asher S. Levitsky P.C. Katsky Korins LLP 605 Third Avenue New York, New York 10158 Facsimile: 212/716-3239 Any party may, by like notice, change the address, person or telecopier number to which notice shall be sent. (d) Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements executed and to be performed wholly within such State, without regard to any principles of conflicts of law; provided, however, that the transfer of the Sinoenergy Shares to the Issuer shall be in compliance with the law of the British West Indies. Each of the parties hereby irrevocably consents and agrees that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought in the federal or state courts located in the County of New York in the State of New York, by execution and delivery of this Agreement, irrevocably submits to and accepts the jurisdiction of said courts, (iii) waives any defense that such court is not a convenient forum, and (iv) consent to any service of process made either (x) in the manner set forth in Section 7(c) of this Agreement (other than by telecopier), or (y) any other method of service permitted by law. (e) Survival of Representations and Warranties. The representations and warranties shall terminate at, and shall not survive, the Closing, except that the representations set forth in Sections 2(g) and 3(e) shall survive the Closing. 9 (f) Waiver of Jury Trial. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN THE EVENT OF ANY SUIT, ACTION OR PROCEEDING TO ENFORCE THIS AGREEMENT OR ANY OTHER ACTION OR PROCEEDING WHICH MAY ARISE OUT OF OR IN ANY WAY BE CONNECTED WITH THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS. (g) Parties to Pay Own Expenses. Each of the parties to this Agreement shall be responsible and liable for its own expenses incurred in connection with the preparation of this Agreement, the consummation of the transactions contemplated by this Agreement and related expenses. (h) Tax Consequences. Each party to this Agreement is relying on his or its own tax advisors as to the tax consequences of this Agreement and the transactions contemplated by this Agreement, and no party is making any representations or warranties of any kind as to such tax consequences to any other party. (i) Successors. This Agreement shall be binding upon the parties and their respective heirs, executors, administrators, legal representatives, successors and assigns; provided, however, that Stockholders may not assign this Agreement or any of its rights under this Agreement without the prior written consent of the Issuer. (j) Further Assurances. Each party to this Agreement agrees, without cost or expense to any other party, to deliver or cause to be delivered such other documents and instruments as may be reasonably requested by any other party to this Agreement in order to carry out more fully the provisions of, and to consummate the transaction contemplated by, this Agreement. (k) Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (l) No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties with the advice of counsel to express their mutual intent, and no rules of strict construction will be applied against any party. (m) Headings. The headings in the Sections of this Agreement are inserted for convenience only and shall not constitute a part of this Agreement. (n) Exhibits; Schedules. One complete set of the Exhibits and Schedules has been marked for identification and delivered by each of the parties to the other on or before the execution and delivery of this Agreement. [Signatures on following page] 10 IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written. FRANKLYN HOLDINGS III, INC. By:___________________________________ Name: Title: STOCKHOLDERS SINOENERGY HOLDING LIMITED By:___________________________________ Name: Title: SKYWIDE CAPITAL MANAGEMENT LIMITED By:___________________________________ Name: Title: EASTPRIDE CAPITAL LIMITED By:___________________________________ Name: Title: 11 Schedule A Information Concerning Stockholders Name and Address Sinoenergy Shares Shares - ---------------------------------- ----------------- ---------- Skywide Capital Management Limited 45 12,793,847 Eastpride Capital Limited 5 1,421,538 12 EX-4.1 3 v045248_ex4-1.txt EXHIBIT 4.1 NEITHER THIS NOTE NOR THE SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK OR COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW, AND SUCH SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR STATE LAW OR AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. $3,100,000 New York, New York June 2, 2006 FRANKLYN RESOURCES III, INC. 6% CONVERTIBLE SUBORDINATED NOTE DUE MARCH 31, 2007 FOR VALUE RECEIVED, Franklyn Resources III, Inc., a Nevada corporation (the "Company"), hereby promises to pay to the order of Barron Partners LP or registered assigns (the "Holder"), the principal amount of three million one hundred thousand dollars ($3,100,000) on March 31, 2007 ("Maturity Date"). Interest on the outstanding principal balance shall be paid at the rate of six percent (6%) per annum, payable quarterly on the Maturity Date. Interest shall be computed on the basis of a 360-day year, using the number of days actually elapsed. This Note is issued pursuant to a securities purchase agreement (the "Agreement") between the Company and Barron Partners LP. Article 1. Covenants of the Company (a) Amendment to Certificate of Incorporation. The Company shall, not later than ninety (90) days from the issuance of this Note, the Company shall (i) file a proxy statement or information statement with the Securities and Exchange Commission seeking stockholder of the Restated Articles, as defined in the Agreement, and (ii) seek stockholder approval of the Restated Articles as soon as practical after the Company may mail the proxy statement or information statement to the Company's stockholders. (b) File Certificate of Designation. Immediately after the filing of the amendment to or restatement of the Company's articles of incorporation, the Company shall filed the Certificate of Designation, as defined in the Agreement. (c) Fundamental Transaction. The Company shall not enter into any agreement with respect to any Fundamental Transaction, or consummate any Fundamental Transaction without the approval of the Holder. Article 2. Events of Default; Acceleration (a) Events of Default Defined. The entire unpaid principal amount of this Note, together with interest thereon shall, on written notice to the Company given by the holders of this Note, forthwith become and be due and payable if any one or more the following events ("Events of Default") shall have occurred (for any reason whatsoever and whether such happening shall be voluntary or involuntary or be affected or come about by operation of law pursuant to or in compliance with any judgment, decree, or order of any court or any order, rule or regulation of any administrative or governmental body) and be continuing. An Event of Default shall occur: (i) if failure shall be made in the payment of the principal or interest on the Note when and as the same shall become due and such failure shall continue for a period of five (5) business days after such payment is due; or (ii) if the Company shall violate or breach any of the representations, warranties and covenants contained in the Note or the Agreement and such violation or breach shall continue for thirty (30) days after written notice of such breach shall been received by the Company from the Holder; or (iii) if the Company or any Significant Subsidiary (which term shall mean any subsidiary of the Company which would be considered a significant subsidiary, as defined in Rule 1-02 of Regulation S-X of the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act of 1933, as amended (the "Securities Act")) shall consent to the appointment of a receiver, trustee or liquidator of itself or of a substantial part of its property, or shall admit in writing its inability to pay its debts generally as they become due, or shall make a general assignment for the benefit of creditors, or shall file a voluntary petition in bankruptcy, or an answer seeking reorganization in a proceeding under any bankruptcy law (as now or hereafter in effect) or an answer admitting the material allegations of a petition filed against the Company or any Significant Subsidiary, in any such proceeding, or shall by voluntary petition, answer or consent, seek relief under the provisions of any other now existing or future bankruptcy or other similar law providing for the reorganization or winding up of corporations, or an arrangement, composition, extension or adjustment with its or their creditors, or shall, in a petition in bankruptcy filed against it or them be adjudicated a bankrupt, or the Company or any Significant Subsidiary or their directors or a majority of its stockholders shall vote to dissolve or liquidate the Company or any Significant Subsidiary other than a liquidation involving a transfer of assets from a Subsidiary to the Company or another Subsidiary; or (iv) if an involuntary petition shall be filed against the Company or any Significant Subsidiary seeking relief against the Company or any Significant Subsidiary under any now existing or future bankruptcy, insolvency or other similar law providing for the reorganization or winding up of corporations, or an arrangement, composition, extension or adjustment with its or their creditors, and such petition shall not be vacated or set aside within ninety (90) days from the filing thereof; or (v) if a court of competent jurisdiction shall enter an order, judgment or decree appointing, without consent of the Company or any Significant Subsidiary, a receiver, trustee or liquidator of the Company or any Significant Subsidiary, or of all or any substantial part of the property of the Company or any Significant Subsidiary, or approving a petition filed against the Company or any Significant Subsidiary seeking a reorganization or arrangement of the Company or any Significant Subsidiary under the Federal bankruptcy laws or any other applicable law or statute of the United States of America or any State thereof, or any substantial part of the property of the Company or any Significant Subsidiary shall be sequestered; and such order, judgment or decree shall not be vacated or set aside within ninety (90) days from the date of the entry thereof; or (vi) if, under the provisions of any law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the Company or any Significant Subsidiary or of all or any substantial part of the property of the Company or any Significant Subsidiary and such custody or control shall not be terminated within ninety (90) days from the date of assumption of such custody or control. 2 (b) Rights of Note Holder. Nothing in this Note shall be construed to modify, amend or limit in any way the right of the holder of this Note to bring an action against the Company. Article 3. Conversion (a) Automatic Conversion. Upon the filing of both the Restated Certificate and the Certificate of Designation, this Note shall be converted into such number of shares of Series A Preferred Stock, as defined in the Agreement, as is determined by dividing the principal amount of this Note by the Conversion Price then in effect. Upon such conversion, the Company's this Note and the Company's obligations under this Note (including the obligation to pay interest) shall terminate. (b) Definitions. Unless otherwise defined in this Note, all terms defined in the Certificate of Designation and used in this Note shall have the same meanings in this Note as in the Certificate of Designation; provided, however, that the term "Conversion Shares" shall mean the shares of Common Stock issuable upon conversion of the Note. (c) Conversion Price. The Conversion Price shall be sixty five cents ($.65) subject to adjustment as hereinafter provided. (d) Conversions at Option of Holder. This Note shall be initially convertible (subject to the 4.9% Limitations, as defined in Section 3(f) of this Note), in whole at any time, subject to the 4.9% Limitation, or in part from time to time into such number of shares of the Company's Common Stock determined by dividing the principal amount of this Note being converted by the Conversion Price in effect on the date of conversion by the Conversion Price. Holders shall effect conversions by providing the Company with the form of conversion notice attached hereto as Annex A (a "Notice of Conversion") as fully and originally executed by the Holder, together with the delivery by the Holder to the Company of this Note, with this Note being duly endorsed in full for transfer to the Company or with an applicable stock power duly executed by the Holder in the manner and form as deemed reasonable by the transfer agent of the Common Stock. Each Notice of Conversion shall specify the principal amount of this Note to be converted, the principal amount of this Note outstanding prior to the conversion at issue, the principal amount of this Note owned subsequent to the conversion at issue, and the date on which such conversion is to be effected, which date may not be prior to the date the Holder delivers such Notice of Conversion and the Note to the Company by overnight delivery service (the "Conversion Date"). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the Trading Day immediately following the date that such Notice of Conversion and applicable stock certificates are received by the Company. The calculations and entries set forth in the Notice of Conversion shall control in the absence of manifest or mathematical error. The principal amount of this Note being converted into Common Stock in accordance with the terms hereof shall be canceled and may not be reissued. (e) Automatic Conversion Upon Change of Control. This Note shall be automatically converted into Common Stock at the Conversion Price upon the close of business on the business day immediately preceding the date fixed for consummation of any transaction resulting in a Change of Control of the Company (an "Automatic Conversion Event"). A "Change in Control" means a consolidation or merger of the Company with or into another company or entity in which the Company is not the surviving entity or the sale of all or substantially all of the assets of the Company to another company or entity not controlled by the then existing stockholders of the Company in a transaction or series of transactions. The Company shall not be obligated to issue certificates evidencing the Common Stock or other consideration issuable upon such conversion unless this Note is either delivered to the 3 Company or its transfer agent or the Holder notifies the Company or its transfer agent in writing that such certificates have been lost, stolen, or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. Upon the conversion of this Note pursuant to this Section 3(e), the Company shall promptly send written notice thereof, by hand delivery or by overnight delivery, to the Holder at its address then shown on the records of the Company, which notice shall state that this Note must be surrendered at the office of the Company (or of its transfer agent for the Common Stock, if applicable). (f) Beneficial Ownership Limitation. Except as provided in Section 3(e) of this Note, which shall apply as stated therein if an Automatic Conversion Event shall occur, the Company shall not effect any conversion of this Note, and the Holder shall not have the right to convert any portion of this Note to the extent that after giving effect to such conversion, the Holder (together with the Holder's affiliates), as set forth on the applicable Notice of Conversion, would beneficially own in excess of 4.9% of the number of shares of the Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of the Note with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, non-converted portion of this Note beneficially owned by the Holder or any of its affiliates, so long as such portion of this Note is not convertible within sixty (60) days from the date of such determination, and (B) exercise or conversion of the unexercised or non-converted portion of any other securities of the Company (including warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates, so long as such other securities of the Company are not exercisable nor convertible within sixty (60) days from the date of such determination. For purposes of this Section 3(f), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in the most recent of the following: (A) the Company's most recent quarterly reports, Form 10-Q, Form 10-QSB, Annual Reports, Form 10-K, or Form 10-KSB, as the case may be, as filed with the Commission under the Exchange Act (B) a more recent public announcement by the Company or (C) any other written notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two (2) Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including the Note, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was publicly reported by the Company. Beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. This Section 3(f) may be not be waived or amended. The limitation set forth in this Section 3(f) is referred to as the "4.9% Limitation." (g) Mechanics of Conversion (i) Delivery of Certificate Upon Conversion. Except as otherwise set forth herein, not later than three Trading Days after each Conversion Date (the "Share Delivery Date"), the Company shall deliver to the Holder (A) a certificate or certificates which, after the Effective Date, shall be free of restrictive legends and trading restrictions (other than those required by the Agreement) representing the number of shares of Common Stock being acquired upon the conversion of this Note, and (B) a bank check in the amount of accrued and unpaid dividends (if the Company has elected or is required to pay accrued dividends in cash). After the Effective Date, the Company shall, upon request of the Holder, deliver any certificate or certificates required to be delivered by the Company under this Section 4 electronically through the Depository Trust Company or another established clearing Company performing similar functions if the Company's transfer agent has the ability to deliver shares of Common Stock in such manner. If in the case of any Notice of Conversion such certificate or certificates are not delivered to or as directed by the applicable Holder by the third Trading Day after the Conversion Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the this Note to the Holder. (ii) Obligation Absolute; Partial Liquidated Damages. The Company's obligations to issue and deliver the Conversion Shares upon conversion of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares. In the event a Holder shall elect to convert any or all of this Note, the Company may not refuse conversion based on any claim that such Holder or any one associated or affiliated with the Holder of has been engaged in any violation of law, agreement or for any other reason (other than the inability of the Company to issue shares of Common Stock as a result of the 4.9% Limitation) unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or part of this Note shall have been sought and obtained and the Company posts a surety bond for the benefit of the Holder in the amount of 150% of the Conversion Value of the principal amount of the Note outstanding (i.e., the value of the shares of Common Stock issued upon conversion of such principal amount of this Note) which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder to the extent it obtains judgment. In the absence of an injunction precluding the same, the Company shall issue Conversion Shares or, if applicable, cash, upon a properly noticed conversion. If the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 3(g)(i) within two Trading Days of the Share Delivery Date applicable to such conversion, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, for each $5,000 of Conversion Value of Note being converted, $50 per Trading Day (increasing to $100 per Trading Day after three (3) Trading Days and increasing to $200 per Trading Day six (6) Trading Days after such damages begin to accrue) for each Trading Day after the Share Delivery Date until such certificates are delivered. Nothing herein shall limit a Holder's right to pursue actual damages for the Company's failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. (iii) Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion. If the Company fails to deliver to the Holder such certificate or certificates pursuant to Section 6(d)(i) by a Share Delivery Date, and if after such Share Delivery Date the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a "Buy-In"), then the Company shall pay in cash to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder was entitled to receive from the conversion at issue multiplied by (2) the price at which the sell order giving rise to such purchase obligation was executed. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an 5 attempted conversion of a portion of this Note with respect to which the aggregate sale price giving rise to such purchase obligation is $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing shares of Common Stock upon conversion of this Note as required pursuant to the terms hereof. (iv) Reservation of Shares Issuable Upon Conversion. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of this Note, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of the Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 3(h)) upon the conversion of this Note. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and, if the Conversion Shares Registration Statement is then effective under the Securities Act, registered for public sale in accordance with such Conversion Shares Registration Statement. (v) Fractional Shares. Upon a conversion hereunder, the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock. All fractional shares shall be carried forward and any fractional shares which remain after the Holder converts the full principal amount of this Note shall be dropped and eliminated. (vi) Transfer Taxes. The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (vii) Absolute Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the liquidated damages (if any) on, this Note at the time, place, and rate, and in the coin or currency, herein prescribed. (h) Certain Adjustments. (i) Stock Dividends and Stock Splits. If the Company, at any time while this Note is outstanding: (A) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company pursuant to this Note), (B) subdivide outstanding shares of Common Stock into a larger number of shares, (C) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issue by reclassification of shares of the Common Stock 6 any shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 3(h)(i) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. (ii) Price Adjustment. Until such time as the Investors hold no Securities, except for (i) Exempt Issuances, (ii) issuances covered by Sections 3(h)(i), 3(h)(iii) and 3(i) of this Note, or (iii) an issuance of Common Stock upon exercise or upon conversion of warrants, options or other convertible securities for which an adjustment has already been made pursuant to this Section 3(h), as to all of which this Section 3(h)(ii) does not apply, if the Company closes on the sale or issuance of Common Stock at a price, or issues warrants, options, convertible debt or equity securities with a exercise price per share or conversion price which is less than the Conversion Price then in effect (such lower sales price, conversion or exercise price, as the case may be, being referred to as the "Lower Price"), the Conversion Price in effect from and after the date of such transaction shall be reduced to the Lower Price. For purpose of determining the exercise price of warrants issued by the Company, the price, if any, paid per share for the warrants shall be added to the exercise price of the warrants. (iii) Conversion Price Adjustment Based on Pre-Tax Income Per Share. (A) In the event the Company's consolidated Pre-Tax Income, as defined in the Agreement, for the year ended December 31, 2006 is less than $.212 per share on a fully-diluted basis, then the Conversion Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Thus, if Net Income for the year ended December 31, 2006 is $.1272 per share on a fully-diluted basis, the Conversion Price shall be reduced by 40%. Such reduction shall be made at the time the Company files its Form 10-KSB for the year ended December 31, 2006, and shall apply to the Notes which are outstanding on the date the Form 10-KSB is filed, or, if not filed on time, on the date that filing was required. (B) In the event the Company's consolidated Pre-Tax Income for the year ended December 31, 2007 is less than $.353 per share on a fully-diluted basis, then the Conversion Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Thus, if Pre-Tax Income for the year ended December 31, 2008 is $.2118 per share on a fully-diluted basis, the Conversion Price shall be reduced by 40%. Such reduction shall be made at the time the Company files its Form 10-KSB for the year ended December 31, 2007, and shall apply to the Notes which are outstanding on the date the Form 10-KSB is filed, or, if not filed on time, on the date that filing was required. (C) For purpose of determining Net Income Per Share and Pre-Tax Income Per Share on a fully-diluted basis, all shares of Common Stock issuable upon conversion of convertible securities and upon exercise of warrants and options shall be deemed to be outstanding, regardless of whether (i) such shares are treated as outstanding for determining diluted earnings per share under GAAP, (ii) such securities are "in the money," or (iii) such shares may be issued as a result of the 4.9% Limitation. (i) Pro Rata Distributions. If the Company, at any time while this Note is outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security, then in each such case the Conversion Price shall be determined by multiplying such Conversion Price in effect immediately prior to the record date 7 fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holders of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (j) Calculations. All calculations under Section 3(h) of this Note shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company or any of its subsidiaries. For purposes of this Section 3(h), the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares and shares owned by subsidiaries, if any) actually issued and outstanding. (k) Notice to Holders. (i) Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to this Section 3, the Company shall promptly mail to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. If the Company issues a variable rate security, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be converted or exercised in the case of a Variable Rate Transaction (as defined in the Purchase Agreement), or the lowest possible adjustment price in the case of an MFN Transaction (as defined in the Purchase Agreement). (ii) Notices of Other Events. If (A) the Company shall declare a dividend (or any other distribution) on the Common Stock; (B) the Company shall declare a redemption of the Common Stock; (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock or any Fundamental Transaction, (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Note, and shall cause to be mailed to the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification or Fundamental Transaction; provided, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. 8 (l) Exempt Issuance. Notwithstanding the foregoing, no adjustment in the Conversion Price will be made in respect of an Exempt Issuance. (m) Fundamental Transaction. If, at any time while this Note is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a "Fundamental Transaction"), then upon any subsequent conversion of this Note, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion absent such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of Common Stock (the "Alternate Consideration"). For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall assume this Note. Article 4. Subordination (a) Agreement of Subordination. The Company, for itself, its successors and assigns, covenants and agrees, and the Holder of this Note by his or her acceptance of this Note likewise covenants and agrees, that the payment of the principal of and interest on this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, to the prior payment in full of all Senior Indebtedness, as hereinafter defined. The provisions of this Article 4 shall constitute a continuing offer to all persons who, in reliance upon such provision, become holders of, or continue to hold, Senior Indebtedness, and such provisions are made for the benefit of the holders of Senior Indebtedness, and such holders are hereby made obligees hereunder the same as if their names were written herein as such, and they and/or each of them may proceed to enforce such provisions. (b) Company Not to Make Payments with Respect to Note in Certain Circumstances. (i) Upon the maturity of any Senior Indebtedness by lapse of time, acceleration or otherwise, all principal thereof and premium, if any, and interest thereon shall first be paid in full, or such payment duly provided for in cash or in a manner satisfactory to the holder or holders of such Senior Indebtedness, before any payment is made by the Company (A) on account of the principal of or interest on this Note or (B) to acquire this Note. 9 (ii) Upon the happening of an event of default with respect to any Senior Indebtedness, as such event of default is defined therein or in the instrument under which it is outstanding, permitting the holders to accelerate the maturity thereof, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, no payment shall be made by the Company (A) on account of the principal of or interest on this Note or (B) to acquire this Note. (iii) Subject to Paragraphs 4(b)(i) and (ii), as long as any Senior Indebtedness shall be outstanding, (A) the Company shall not make any payment of principal on this Note except upon the Maturity Date, and (B) the Company may pay interest on this Note as long as the payment of such principal or interest will not result in an event of default under the terms of the instruments pursuant to which the Senior Indebtedness is issued. (iv) In the event that, notwithstanding the provision of this Paragraph 4(b), the Company shall make any payment to the Holder of this Note on account of the principal of or interest on this Note after the happening of a default in payment of the principal of or premium, if any, or interest on Senior Indebtedness or after receipt by the Company of written notice of an event of default with respect to any Senior Indebtedness, then unless and until such default or event of default shall have been cured or waived or shall have ceased to exist, such payment shall be held by the holder of this Note in trust for the benefit of, and shall be paid forthwith over and delivered to, the holders of Senior Indebtedness (pro rata as to each of such holders on the basis of the respective amounts of Senior Indebtedness held by them) or their representative or the trustee under the indenture or other agreement (if any) pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in accordance with the terms of such Senior Indebtedness, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. (c) Notes Subordinated to Prior Payment of all Senior Indebtedness on Dissolution, Liquidation or Reorganization of Company. Upon any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise): (i) The holders of all Senior Indebtedness shall first be entitled to receive payment in full of the principal thereof, premium, if any, and interest due thereon before the holder of this Note are entitled to receive any payment on account of the principal of or interest on this Note (other than securities of the Company or any other entity provided for by a plan of reorganization or readjustment which stock and securities are subordinated to the payment of all Senior Indebtedness and securities received in lieu thereof which may at the time be outstanding); and (ii) Any payment or distribution of assets of the Company of any kind or character whether in cash, property or securities (other than securities that are subordinated to the payment of all Senior Indebtedness and securities received in lieu thereof which may at the time be outstanding), to which the holder of this Note would be entitled except for the provisions of this Article 4, shall be paid by the liquidating trustee or agent or other person making such payment of distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or other trustee or agent, directly to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution or provision therefor to the holders of such Senior Indebtedness. 10 (iii) In the event that, notwithstanding the foregoing provision of this Paragraph 4(c), any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than shares representing equity of the Company as reorganized or readjusted, or securities of the Company or any other entity provided for by a plan of reorganization or readjustment which stock and securities are subordinated to the payment of all Senior Indebtedness and securities received in lieu thereof which may at the time be outstanding), shall be received by the holder of this Note on account of principal of or interest on this Note before all Senior Indebtedness is paid in full, or effective provision made for its payment or distribution, such payment or distribution shall be received and held in trust for and shall be paid over to the holders of the Senior Indebtedness remaining unpaid or unprovided for or their representative or representatives, or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, for application to the payment of such Senior Indebtedness until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or distribution or provision therefor to the holders of such Senior Indebtedness. (d) Noteholder to be Subrogated to Right of Holders of Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness, the holders of the Notes shall be subrogated, pro rata, to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness until all amounts owing on the Notes shall be paid in full, and, for the purpose of such subrogation, no payments or distributions to the holders of the Senior Indebtedness by or on behalf of the Company or by or on behalf of the holder of this Notes by virtue of this Article 4 which otherwise would have been made to the holder of this Notes shall, as between the Company and the holder of this Note, be deemed to be payment by the Company to or on account of the Senior Indebtedness, it being understood that the provisions of this Article 4 are, and are intended solely, for the purpose of defining the relative rights of the holders of the Notes, on the one hand, and the holders of the Senior Indebtedness, on the other hand. (e) Obligation of the Company Unconditional. Nothing contained in this Article 4 or elsewhere in this Note is intended to or shall impair as between the Company and the holder of this Note, the obligation of the Company, which is absolute and unconditional, to pay to the holder of this Note the principal of and interest on this Note as and when the same shall become due and payable in accordance with its terms, or is intended to or shall affect the relative rights of the holder of this Note and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the holder of this Note of this Note from exercising all remedies otherwise permitted by applicable law upon default under this Note, subject to the rights, if any, under this Article 4 of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy; provided, however, that the holder of this Note shall not exercise any remedies if the exercise of such remedies would result in an event of default under the terms of the Senior Indebtedness. Upon any distribution of assets of the Company referred to in this Article 4, the holders of this Note shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any dissolution, winding up, liquidation or reorganization proceedings are pending, or a certificate of the liquidating trustee or agent or other person making any distribution to the holder of this Note for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 4. In no event shall any provision of this Article 4 be interpreted as limiting or abrogating the right of the holder of this Note to convert principal and interest thereon pursuant to Article 3 of this Note. 11 (f) Subordination Rights Not Impaired by Acts or Omissions of the Company or Holders of Senior Indebtedness. No right of any present or future holders of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Note, regardless of any knowledge thereof which any such holder may have or be otherwise charged with. (g) Definition of Senior Indebtedness. The term "Senior Indebtedness" is defined to mean the principal of and premium, if any, and interest on and any obligations of the Company with respect to the Company's indebtedness to all indebtedness and obligations (other than the Notes) of the Company to banks, insurance companies and other institutional lenders. (h) Additional Agreement. The holder of this Note, by its acceptance of this Note, agrees to execute any formal instruments of subordination which may be reasonably requested by any holder of Senior Indebtedness. Article 5. Miscellaneous (a) Transferability. This Note shall not be transferred except in a transaction exempt from registration pursuant to the Securities Act and applicable state securities law. The Company shall treat as the owner of this Note the person shown as the owner on its books and records. (b) Limited Right of Prepayment. The Company shall have no right to prepay this Note without the prior written consent of the Holder, which consent may be given or withheld by the Holder in its sole discretion. Any prepayment shall be accompanied by interest on this Note to the date of prepayment. (c) WAIVER OF TRIAL BY JURY. IN ANY LEGAL PROCEEDING TO ENFORCE PAYMENT OF THIS NOTE, THE COMPANY WAIVES TRIAL BY JURY. (d) WAIVER OF ANY RIGHT OF COUNTERCLAIM. EXCEPT AS PROHIBITED BY LAW, THE COMPANY HEREBY WAIVES ANY RIGHT TO ASSERT ANY CLAIM IT MAY HAVE AGAINST THE HOLDER OF THIS NOTE BY WAY OF A COUNTERCLAIM (OTHER THAN A COMPULSORY COUNTERCLAIM) IN ANY ACTION ON THIS NOTE. (e) Usury Saving Provision. All payment obligations arising under this Note are subject to the express condition that at no time shall the Company be obligated or required to pay interest at a rate which could subject the holder of this Note to either civil or criminal liability as a result of being in excess of the maximum rate which the Company is permitted by law to contract or agree to pay. If by the terms of this Note, the Company is at any time required or obligated to pay interest at a rate in excess of such maximum rate, the applicable rate of interest shall be deemed to be immediately reduced to such maximum rate, and interest thus payable shall be computed at such maximum rate, and the portion of all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of principal. (f) Notice to Company. Notice to the Company shall be given to the Company at its principal executive offices, presently located at [_______________], attention of Mr. _________________, CEO, or to such other address or person as the Company may, from time to time, advise the holder of this Note, or to the holder of this Note at the address set forth on the Company's records, with a copy to Asher S. 12 Levitsky PC, Katsky Korins LLP, 605 Third Avenue, New York, NY 10158. Notice shall be given by hand delivery, certified or registered mail, return receipt requested, overnight courier service which provides evidence of delivery, or by telecopier if confirmation of receipt is given or of confirmation of transmission is sent as herein provided. (g) Governing Law. This Note shall be governed by the laws of the State of New York applicable to agreements executed and to be performed wholly within such state. The Company hereby (i) consents to the exclusive jurisdiction of the United States District Court for the Southern District of New York and Supreme Court of the State of New York in the County of New York in any action relating to or arising out of this Note, (ii) agrees that any process in any such action may be served upon it either (x) by certified or registered mail, return receipt requested, or by an overnight courier service which obtains evidence of delivery, with the same full force and effect as if personally served upon him in New York City or (y) any other manner permitted by law, and (iii) waives any claim that the jurisdiction of any such tribunal is not a convenient forum for any such action and any defense of lack of in personam jurisdiction with respect thereto. (h) Expenses. In the event that the Holder commences a legal proceeding in order to enforce its rights under this Note, the Company shall pay all reasonable legal fees and expenses incurred by the holder with respect thereto. IN WITNESS WHEREOF, the Company has executed this Note as of the date and year first aforesaid. FRANKLYN RESOURCES III, INC. By: ----------------------------------- Bo Huang, Chief Executive Officer 13 NOTICE OF CONVERSION [To be Signed Only Upon Conversion of Part or All of Notes] Franklyn Resources III, Inc. The undersigned, the holder of the foregoing Note, hereby surrenders such Note for conversion into shares of Common Stock of Franklyn Resources III, Inc. to the extent of $_____* unpaid principal amount of due on such Note, and requests that the certificates for such shares be issued in the name of____________________________, and delivered to ______________________________, whose address is_____________________________________________________________. Dated:________________________________ ______________________________________ (Signature) (Signature must conform in all respects to name of holder as specified on the face of the Note.) * Insert here the unpaid principal amount of the Note (or, in the case of a partial conversion, the portion thereof as to which the Note is being converted). In the case of a partial conversion, a new Note will be issued and delivered, representing the unconverted portion of the unpaid principal amount of this Note, to or upon the order of the holder surrendering such Note. 14 EX-4.2 4 v045248_ex4-2.txt EXHIBIT 4.2 NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR THE SHARES OF COMMON STOCK HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SHARES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE 1933 ACT, OR (2) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS AND THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AS TO SUCH EXEMPTION. IN ADDITION, A SECURITIES PURCHASE AGREEMENT DATED AS OF JUNE 2, 2006 (THE "PURCHASE AGREEMENT"), A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, CONTAINS CERTAIN ADDITIONAL AGREEMENTS BETWEEN THE PARTIES WITH RESPECT TO THIS WARRANT. --------------------------------------- FRANKLYN RESOURCES III, INC. COMMON STOCK PURCHASE WARRANT "A" Number of Shares: 5,314,286 Holder: Barron Partners LP c/o Barron Capital Advisors LLC Original Issue Date: June 2, 2006 Managing Partner Attn: Andrew Barron Worden 730 Fifth Avenue, 9th Floor Expiration Date: June 2, 2011 New York NY 10019 tel 212-659-7790 Exercise Price per Share: $.85 fax 646-607-2223 Franklyn Resources III, Inc., a Nevada corporation (the "Company"), hereby certifies that, for value received, BARRON PARTNERS LP, or its registered assigns (the "Warrant Holder"), is entitled, subject to the terms set forth below, to purchase from the Company up to five million eight hundred twenty eight thousand five hundred seventy one (5,828,571) shares (as adjusted from time to time as provided in Section 7 of this Warrant, the "Warrant Shares") of common stock, $.001 par value (the "Common Stock"), of the Company at a price of eighty five cents ($.85) per Warrant Share (as adjusted from time to time as provided in Section 7, the "Exercise Price"), at any time and from time to time from and after the date thereof and through and including 5:00 p.m. New York City time on June 2, 2011 (the "Expiration Date"), and subject to the following terms and conditions: 1. Registration of Warrant. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Warrant Holder hereof from time to time. The Company may deem and treat the registered Warrant Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Warrant Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. Investment Representation. The Warrant Holder by accepting this Warrant represents that the Warrant Holder is acquiring this Warrant for its own account or the account of an affiliate that is an accredited investor which has been identified to and approved by (such approval not to be unreasonably withheld or delayed) for investment purposes and not with the view to any offering or distribution and that the Warrant Holder will not sell or otherwise dispose of this Warrant or the underlying Warrant Shares in violation of applicable securities laws. The Warrant Holder acknowledges that the certificates representing any Warrant Shares will bear a legend indicating that they have not been registered under the 1933 Act, and may not be sold by the Warrant Holder except pursuant to an effective registration statement or pursuant to an exemption from registration requirements of the 1933 Act and in accordance with federal and state securities laws. If this Warrant was acquired by the Warrant Holder pursuant to the exemption from the registration requirements of the 1933 Act afforded by Regulation S thereunder, the Warrant Holder acknowledges and covenants that this Warrant may not be exercised by or on behalf of a Person during the one year distribution compliance period (as defined in Regulation S) following the date hereof. "Person" means an individual, partnership, firm, limited liability company, trust, joint venture, association, corporation, or any other legal entity. 3. Validity of Warrant and Issue of Shares. The Company represents and warrants that this Warrant has been duly authorized and validly issued and warrants and agrees that all of Common Stock that may be issued upon the exercise of the rights represented by this Warrant will, when issued upon such exercise, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof other than those incurred by the Holder. The Company further warrants and agrees that during the Exercise Period, the Company will at all times have authorized and reserved a sufficient number of Common Stock to provide for the exercise of the rights represented by this Warrant. 4. Registration of Transfers and Exchange of Warrants. a. Subject to compliance with the federal and state securities laws, the Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 12. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Warrant Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a Warrant Holder of a Warrant. b. This Warrant is exchangeable, upon the surrender hereof by the Warrant Holder to the office of the Company specified in or pursuant to Section 9 for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 2 5. Exercise of Warrants. a. Upon surrender of this Warrant with the Form of Election to Purchase attached hereto duly completed and signed to the Company, at its address set forth in Section 12, and upon payment and delivery of the Exercise Price per Warrant Share multiplied by the number of Warrant Shares that the Warrant Holder intends to purchase hereunder, in lawful money of the United States of America, by wire transfer or by certified or official bank check or checks, to the Company, all as specified by the Warrant Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 7 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Warrant Holder and in such name or names as the Warrant Holder may designate (subject to the restrictions on transfer described in the legend set forth on the face of this Warrant), a certificate for the Warrant Shares issuable upon such exercise, with such restrictive legend as required by the 1933 Act. Any person so designated by the Warrant Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. b. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the Warrant Holder to be purchased. c. This Warrant shall be exercisable at any time and from time to time during the Exercise Period for such number of Warrant Shares as is indicated in the attached Form of Election To Purchase. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. d. (i) Notwithstanding anything contained herein to the contrary, but subject to Section 5(e) and Section 6, the holder of this Warrant may, at its election exercised in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the "Net Number" of shares of Common Stock determined according to the following formula (a "Cashless Exercise"): Net Number = (A x (B - C))/B (ii) For purposes of the foregoing formula: A= the total number shares with respect to which this Warrant is then being exercised. B= the last reported sale price (as reported by Bloomberg) of the Common Stock on the trading day immediately preceding the date of the Exercise Notice. C= the Warrant Exercise Price then in effect at the time of such exercise. e. The holder of this Warrant may not make a Cashless Exercise (i) during the six (6) months following the Original Issue Date and (ii) thereafter if the sale by the Holder of the Warrant Shares is covered by an effective registration statement. 3 6. Maximum Exercise. The Warrant Holder shall not be entitled to exercise this Warrant on a Date of Exercise in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Warrant Holder and its affiliates on the Date of Exercise, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this limitation is being made on an Date of Exercise, which would result in beneficial ownership by the Warrant Holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock on such date. This Section 6 may be not be waived or amended. As used in this Warrant, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. 7. Adjustment of Exercise Price and Number of Shares. The character of the shares of stock or other securities at the time issuable upon exercise of this Warrant and the Exercise Price therefore, are subject to adjustment upon the occurrence of the following events, and all such adjustments shall be cumulative: a. Adjustment for Stock Splits, Stock Dividends, Recapitalizations, Etc. The Exercise Price of this Warrant and the number of shares of Common Stock or other securities at the time issuable upon exercise of this Warrant shall be appropriately adjusted to reflect any stock dividend, stock split, stock distribution, combination of shares, reverse split, reclassification, recapitalization or other similar event affecting the number of outstanding shares of stock or securities. b. Adjustment for Reorganization, Consolidation, Merger, Etc. In case of any consolidation or merger of the Company with or into any other corporation, entity or person, or any other corporate reorganization, in which the Company shall not be the continuing or surviving entity of such consolidation, merger or reorganization (any such transaction being hereinafter referred to as a "Reorganization"), then, in each case, the holder of this Warrant, on exercise hereof at any time after the consummation or effective date of such Reorganization (the "Effective Date"), shall receive, in lieu of the shares of stock or other securities at any time issuable upon the exercise of the Warrant issuable on such exercise prior to the Effective Date, the stock and other securities and property (including cash) to which such holder would have been entitled upon the Effective Date if such holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in this Warrant). c. Certificate as to Adjustments. In case of any adjustment or readjustment in the price or kind of securities issuable on the exercise of this Warrant, the Company will promptly give written notice thereof to the holder of this Warrant in the form of a certificate, certified and confirmed by the Board of Directors of the Company, setting forth such adjustment or readjustment and showing in reasonable detail the facts upon which such adjustment or readjustment is based. d. Sales of Common Stock at less than the Exercise Price. From the date hereof until such time as Barron Partners LP holds no Securities, as defined in the Purchase Agreement, except for (i) Exempt Issuances, as defined in the Purchase Agreement, (ii) issuances covered by Sections 7(a), 7(b) and 7(e) hereof or (iii) an issuance of Common Stock upon exercise or upon conversion of warrants, options or other convertible securities for which an adjustment has already been made pursuant to this Section 7, as to all of which this Section 7(d) does not apply, if the Company closes on the sale or issuance of Common Stock at a price, or warrants, options, convertible debt or equity securities with a exercise price per share or exercise price per share which is less than the Exercise Price then in effect (such lower sales price, conversion or exercise price, as the case may be, being referred to as the "Lower Price"), the Exercise Price in effect from and after the date of such transaction shall be is 4 reduced to the Lower Price. For purpose of determining the exercise price of warrants, the price, if any, paid per share for the warrants shall be added to the exercise price of the warrants. e. Price Adjustments Based on Pre-Tax Income Per Share. i. In the event the Company's consolidated Pre-Tax Income, as defined in the Purchase Agreement, for the year ended December 31, 2006 is less than $.212 per share on a fully-diluted basis, then the Exercise Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Thus, if Net Income for the year ended December 31, 2006 is $.1272 per share on a fully-diluted basis, the Exercise Price shall be reduced by 40%. Such reduction shall be made at the time the Company files its Form 10-KSB for the year ended December 31, 2006, and shall apply to the Notes or all shares of the Series A Preferred Stock, as the case may be, which are outstanding on the date the Form 10-KSB is filed, or, if not filed on time, on the date that filing was required. ii. In the event the Company's consolidated Pre-Tax Income for the year ended December 31, 2007 is less than $.353 per share on a fully-diluted basis, then the Exercise Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Thus, if Pre-Tax Income for the year ended December 31, 2008 is $.2118 per share on a fully-diluted basis, the Exercise Price shall be reduced by 40%. Such reduction shall be made at the time the Company files its Form 10-KSB for the year ended December 31, 2007, and shall apply to the Notes or all shares of the Series A Preferred Stock, as the case may be, which are outstanding on the date the Form 10-KSB is filed, or, if not filed on time, on the date that filing was required. iii. For purpose of determining Net Income Per Share and Pre-Tax Income Per Share on a fully-diluted basis, all shares of Common Stock issuable upon conversion of convertible securities and upon exercise of warrants and options shall be deemed to be outstanding, regardless of whether (i) such shares are treated as outstanding for determining diluted earnings per share under GAAP, (ii) such securities are "in the money," or (iii) such shares may be issued as a result of the 4.9% Limitation. iv. An adjustment pursuant to Sections 7(d) or 7(e) of this Warrant shall not affect the number of shares of Common Stock issuable upon exercise of this Warrant. 8. Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares that shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrants Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this Section 8, be issuable on the exercise of this Warrant, the Company shall, at its option, (i) pay an amount in cash equal to the Exercise Price multiplied by such fraction or (ii) round the number of Warrant Shares issuable, up to the next whole number. 9. Sale or Merger of the Company. Upon a Merger Transaction, the restriction contained in Section 6 shall immediately be released and the Warrant Holder will have the right to exercise this Warrant concurrently with such Merger Transaction. For purposes of this Warrant, the term "Merger 5 Transaction" shall mean a consolidation or merger of the Company into another company or entity in which the Company is not the surviving entity or the sale of all or substantially all of the assets of the Company to another company or entity not controlled by the then existing stockholders of the Company. 10. Notice of Intent to Sell or Merge the Company. The Company will give Warrant Holder ten (10) business days notice before any Merger Transaction. 11. Issuance of Substitute Warrant. In the event of a merger, consolidation, recapitalization or reorganization of the Company or a reclassification of Company shares of stock, which results in an adjustment to the number of shares subject to this Warrant and/or the Exercise Price hereunder, the Company agrees to issue to the Warrant Holder a substitute Warrant reflecting the adjusted number of shares and/or Exercise Price upon the surrender of this Warrant to the Company. However, in the event that the Company does not issue a substitute warrant, the number and class of Warrant Shares or other securities and the Exercise Price shall be adjusted as provided in this Warrant, and this Warrant shall relate the adjusted number of Warrant Shares and Exercise Price. 12. Notice. All notices and other communications hereunder shall be in writing and shall be deemed to have been given (i) on the date they are delivered if delivered in person; (ii) on the date initially received if delivered by facsimile transmission followed by registered or certified mail confirmation; (iii) on the date delivered by an overnight courier service; or (iv) on the date of delivery after it is mailed by registered or certified mail, return receipt requested with postage and other fees prepaid as follows: If to the Company: ----------------- c/o Qingdao Sinogas General Machinery Corp. 45 Jinghua Road Qingdao, Shandong, China, 266042 Attn: Bo Huang, CEO Facsimile: (0532) 84851840 e-mail: QDZYTY@163.com With a copy to: -------------- Katsky Korins LLP 605 Third Avenue New York, New York 10158 Attention: Asher S. Levitsky P.C. Facsimile No.: (212) 716-3338 e-mail: alevitsky@katskykorins.com 6 If to the Warrant Holder: ------------------------ at the address or telecopier number and to the attention of the person shown on the Company's warrant register.: 13. Miscellaneous. a. This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only by a writing signed by the Company and the Warrant Holder. b. Nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Warrant Holder any legal or equitable right, remedy or cause of action under this Warrant; this Warrant shall be for the sole and exclusive benefit of the Company and the Warrant Holder. c. This Warrant shall be governed by, construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. d. The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. e. In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonably substitute therefore, and upon so agreeing, shall incorporate such substitute provision in this Warrant. f. The Warrant Holder shall not, by virtue hereof, be entitled to any voting or other rights of a stockholder of the Company, either at law or equity, and the rights of the Warrant Holder are limited to those expressed in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by the authorized officer as of the date first above stated. Date: FRANKLYN RESOURCES III, INC. By: ----------------------------------- Bo Huang, Chief Executive Officer 7 FORM OF ELECTION TO PURCHASE (To be executed by the Warrant Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To: Franklyn Resources III, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase ______________ shares of Common Stock ("Common Stock"), $.001 par value, of Franklyn Resources III, Inc. and encloses the warrant and $____ for each Warrant Share being purchased or an aggregate of $________________ in cash or certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of: __________________________________________ __________________________________________ __________________________________________ (Please print name and address) ____________________________________________________________ (Please insert Social Security or Tax Identification Number) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: __________________________________________ __________________________________________ __________________________________________ (Please print name and address) Dated:______________________________ Name of Warrant Holder: (Print)______________________________ (By:)________________________________ (Name:)______________________________ (Title:)_____________________________ Signature must conform in all respects to name of Warrant Holder as specified on the face of the Warrant 8 EX-4.3 5 v045248_ex4-3.txt EXHIBIT 4.3 NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR THE SHARES OF COMMON STOCK HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SHARES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE 1933 ACT, OR (2) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS AND THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AS TO SUCH EXEMPTION. IN ADDITION, A SECURITIES PURCHASE AGREEMENT DATED AS OF JUNE 2, 2006 (THE "PURCHASE AGREEMENT"), A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, CONTAINS CERTAIN ADDITIONAL AGREEMENTS BETWEEN THE PARTIES WITH RESPECT TO THIS WARRANT. --------------------------------------- FRANKLYN RESOURCES III, INC. COMMON STOCK PURCHASE WARRANT "B" Number of Shares: 5,314,286 Holder: Barron Partners LP c/o Barron Capital Advisors LLC Original Issue Date: June 2, 2006 Managing Partner Attn: Andrew Barron Worden 730 Fifth Avenue, 9th Floor Expiration Date: June 2, 2011 New York NY 10019 tel 212-659-7790 Exercise Price per Share: $1.20 fax 646-607-2223 Franklyn Resources III, Inc., a Nevada corporation (the "COMPANY"), hereby certifies that, for value received, BARRON PARTNERS LP, or its registered assigns (the "WARRANT HOLDER"), is entitled, subject to the terms set forth below, to purchase from the Company up to five million eight hundred twenty eight thousand five hundred seventy one (5,828,571) shares (as adjusted from time to time as provided in Section 7 of this Warrant, the "WARRANT SHARES") of common stock, $.001 par value (the "COMMON STOCK"), of the Company at a price of one and 20/100 dollars ($1.20) per Warrant Share (as adjusted from time to time as provided in Section 7, the "EXERCISE PRICE"), at any time and from time to time from and after the date thereof and through and including 5:00 p.m. New York City time on June 2, 2011 (the "Expiration Date"), and subject to the following terms and conditions: 1. REGISTRATION OF WARRANT. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "WARRANT REGISTER"), in the name of the record Warrant Holder hereof from time to time. The Company may deem and treat the registered Warrant Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any 1 2. distribution to the Warrant Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 3. INVESTMENT REPRESENTATION. The Warrant Holder by accepting this Warrant represents that the Warrant Holder is acquiring this Warrant for its own account or the account of an affiliate that is an accredited investor which has been identified to and approved by (such approval not to be unreasonably withheld or delayed) for investment purposes and not with the view to any offering or distribution and that the Warrant Holder will not sell or otherwise dispose of this Warrant or the underlying Warrant Shares in violation of applicable securities laws. The Warrant Holder acknowledges that the certificates representing any Warrant Shares will bear a legend indicating that they have not been registered under the 1933 Act, and may not be sold by the Warrant Holder except pursuant to an effective registration statement or pursuant to an exemption from registration requirements of the 1933 Act and in accordance with federal and state securities laws. If this Warrant was acquired by the Warrant Holder pursuant to the exemption from the registration requirements of the 1933 Act afforded by Regulation S thereunder, the Warrant Holder acknowledges and covenants that this Warrant may not be exercised by or on behalf of a Person during the one year distribution compliance period (as defined in Regulation S) following the date hereof. "PERSON" means an individual, partnership, firm, limited liability company, trust, joint venture, association, corporation, or any other legal entity. 4. VALIDITY OF WARRANT AND ISSUE OF SHARES. The Company represents and warrants that this Warrant has been duly authorized and validly issued and warrants and agrees that all of Common Stock that may be issued upon the exercise of the rights represented by this Warrant will, when issued upon such exercise, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof other than those incurred by the Holder. The Company further warrants and agrees that during the Exercise Period, the Company will at all times have authorized and reserved a sufficient number of Common Stock to provide for the exercise of the rights represented by this Warrant. 5. REGISTRATION OF TRANSFERS AND EXCHANGE OF WARRANTS. a. Subject to compliance with the federal and state securities laws, the Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 12. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "NEW WARRANT"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Warrant Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a Warrant Holder of a Warrant. b. This Warrant is exchangeable, upon the surrender hereof by the Warrant Holder to the office of the Company specified in or pursuant to Section 9 for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 2 c. EXERCISE OF WARRANTS. d. Upon surrender of this Warrant with the Form of Election to Purchase attached hereto duly completed and signed to the Company, at its address set forth in Section 12, and upon payment and delivery of the Exercise Price per Warrant Share multiplied by the number of Warrant Shares that the Warrant Holder intends to purchase hereunder, in lawful money of the United States of America, by wire transfer or by certified or official bank check or checks, to the Company, all as specified by the Warrant Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 7 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Warrant Holder and in such name or names as the Warrant Holder may designate (subject to the restrictions on transfer described in the legend set forth on the face of this Warrant), a certificate for the Warrant Shares issuable upon such exercise, with such restrictive legend as required by the 1933 Act. Any person so designated by the Warrant Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. e. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the Warrant Holder to be purchased. f. This Warrant shall be exercisable at any time and from time to time during the Exercise Period for such number of Warrant Shares as is indicated in the attached Form of Election To Purchase. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. g. (i) Notwithstanding anything contained herein to the contrary, but subject to Section 5(e) and Section 6, the holder of this Warrant may, at its election exercised in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the "NET NUMBER" of shares of Common Stock determined according to the following formula (a "CASHLESS EXERCISE"): Net Number = (A x (B - C))/B (ii) For purposes of the foregoing formula: A= the total number shares with respect to which this Warrant is then being exercised. B= the last reported sale price (as reported by Bloomberg) of the Common Stock on the trading day immediately preceding the date of the Exercise Notice. C= the Warrant Exercise Price then in effect at the time of such exercise. h. The holder of this Warrant may not make a Cashless Exercise (i) during the six (6) months following the Original Issue Date and (ii) thereafter if the sale by the Holder of the Warrant Shares is covered by an effective registration statement. 3 i. MAXIMUM EXERCISE. The Warrant Holder shall not be entitled to exercise this Warrant on a Date of Exercise in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Warrant Holder and its affiliates on the Date of Exercise, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this limitation is being made on an Date of Exercise, which would result in beneficial ownership by the Warrant Holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock on such date. This Section 6 may be not be waived or amended. As used in this Warrant, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. 6. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The character of the shares of stock or other securities at the time issuable upon exercise of this Warrant and the Exercise Price therefore, are subject to adjustment upon the occurrence of the following events, and all such adjustments shall be cumulative: a. ADJUSTMENT FOR STOCK SPLITS, STOCK DIVIDENDS, RECAPITALIZATIONS, ETC. The Exercise Price of this Warrant and the number of shares of Common Stock or other securities at the time issuable upon exercise of this Warrant shall be appropriately adjusted to reflect any stock dividend, stock split, stock distribution, combination of shares, reverse split, reclassification, recapitalization or other similar event affecting the number of outstanding shares of stock or securities. b. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case of any consolidation or merger of the Company with or into any other corporation, entity or person, or any other corporate reorganization, in which the Company shall not be the continuing or surviving entity of such consolidation, merger or reorganization (any such transaction being hereinafter referred to as a "REORGANIZATION"), then, in each case, the holder of this Warrant, on exercise hereof at any time after the consummation or effective date of such Reorganization (the "EFFECTIVE DATE"), shall receive, in lieu of the shares of stock or other securities at any time issuable upon the exercise of the Warrant issuable on such exercise prior to the Effective Date, the stock and other securities and property (including cash) to which such holder would have been entitled upon the Effective Date if such holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in this Warrant). c. CERTIFICATE AS TO ADJUSTMENTS. In case of any adjustment or readjustment in the price or kind of securities issuable on the exercise of this Warrant, the Company will promptly give written notice thereof to the holder of this Warrant in the form of a certificate, certified and confirmed by the Board of Directors of the Company, setting forth such adjustment or readjustment and showing in reasonable detail the facts upon which such adjustment or readjustment is based. d. SALES OF COMMON STOCK AT LESS THAN THE EXERCISE PRICE. From the date hereof until such time as Barron Partners LP holds no Securities, as defined in the Purchase Agreement, except for (i) Exempt Issuances, as defined in the Purchase Agreement, (ii) issuances covered by Sections 7(a), 7(b) and 7(e) hereof or (iii) an issuance of Common Stock upon exercise or upon conversion of warrants, options or other convertible securities for which an adjustment has already been made pursuant to this Section 7, as to all of which this Section 7(d) does not apply, if the Company closes on the sale or issuance of Common Stock at a price, or warrants, options, convertible debt or equity securities with a exercise price per share or exercise price per share which is less than the Exercise Price then in effect the Exercise Price shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the 4 e. numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares and the number of shares of Common Stock which the aggregate consideration received or receivable for the issuance of such additional shares would purchase at the Exercise Price then in effect, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after the issuance of such additional shares (including the exercise or conversion of all options, warrants and other convertible securities). Such adjustment shall be made successively whenever such an issuance is made. An adjustment pursuant to this Section 7(d) shall not result in any change in the number of shares of Common Stock issuable upon exercise of this Warrant. f. PRICE ADJUSTMENTS BASED ON PRE-TAX INCOME PER SHARE. i. In the event the Company's consolidated Pre-Tax Income, as defined in the Purchase Agreement, for the year ended December 31, 2006 is less than $.212 per share on a fully-diluted basis, then the Exercise Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Thus, if Net Income for the year ended December 31, 2006 is $.1272 per share on a fully-diluted basis, the Exercise Price shall be reduced by 40%. Such reduction shall be made at the time the Company files its Form 10-KSB for the year ended December 31, 2006, and shall apply to the Notes or all shares of the Series A Preferred Stock, as the case may be, which are outstanding on the date the Form 10-KSB is filed, or, if not filed on time, on the date that filing was required. ii. In the event the Company's consolidated Pre-Tax Income for the year ended December 31, 2007 is less than $.353 per share on a fully-diluted basis, then the Exercise Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Thus, if Pre-Tax Income for the year ended December 31, 2008 is $.2118 per share on a fully-diluted basis, the Exercise Price shall be reduced by 40%. Such reduction shall be made at the time the Company files its Form 10-KSB for the year ended December 31, 2007, and shall apply to the Notes or all shares of the Series A Preferred Stock, as the case may be, which are outstanding on the date the Form 10-KSB is filed, or, if not filed on time, on the date that filing was required. iii. For purpose of determining Net Income Per Share and Pre-Tax Income Per Share on a fully-diluted basis, all shares of Common Stock issuable upon conversion of convertible securities and upon exercise of warrants and options shall be deemed to be outstanding, regardless of whether (i) such shares are treated as outstanding for determining diluted earnings per share under GAAP, (ii) such securities are "in the money," or (iii) such shares may be issued as a result of the 4.9% Limitation. iv. An adjustment pursuant to Sections 7(d) or 7(e) of this Warrant shall not affect the number of shares of Common Stock issuable upon exercise of this Warrant. 7. FRACTIONAL SHARES. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares that shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrants Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant 5 8. Share would, except for the provisions of this Section 8, be issuable on the exercise of this Warrant, the Company shall, at its option, (i) pay an amount in cash equal to the Exercise Price multiplied by such fraction or (ii) round the number of Warrant Shares issuable, up to the next whole number. 9. SALE OR MERGER OF THE COMPANY. Upon a Merger Transaction, the restriction contained in Section 6 shall immediately be released and the Warrant Holder will have the right to exercise this Warrant concurrently with such Merger Transaction. For purposes of this Warrant, the term "Merger Transaction" shall mean a consolidation or merger of the Company into another company or entity in which the Company is not the surviving entity or the sale of all or substantially all of the assets of the Company to another company or entity not controlled by the then existing stockholders of the Company. 10. NOTICE OF INTENT TO SELL OR MERGE THE COMPANY. The Company will give Warrant Holder ten (10) business days notice before any Merger Transaction. 11. ISSUANCE OF SUBSTITUTE WARRANT. In the event of a merger, consolidation, recapitalization or reorganization of the Company or a reclassification of Company shares of stock, which results in an adjustment to the number of shares subject to this Warrant and/or the Exercise Price hereunder, the Company agrees to issue to the Warrant Holder a substitute Warrant reflecting the adjusted number of shares and/or Exercise Price upon the surrender of this Warrant to the Company. However, in the event that the Company does not issue a substitute warrant, the number and class of Warrant Shares or other securities and the Exercise Price shall be adjusted as provided in this Warrant, and this Warrant shall relate the adjusted number of Warrant Shares and Exercise Price. 12. NOTICE. All notices and other communications hereunder shall be in writing and shall be deemed to have been given (i) on the date they are delivered if delivered in person; (ii) on the date initially received if delivered by facsimile transmission followed by registered or certified mail confirmation; (iii) on the date delivered by an overnight courier service; or (iv) on the date of delivery after it is mailed by registered or certified mail, return receipt requested with postage and other fees prepaid as follows: If to the Company: ----------------- c/o Qingdao Sinogas General Machinery Corp. 45 Jinghua Road Qingdao, Shandong, China, 266042 Attn: Bo Huang, CEO Facsimile: (0532) 84851840 e-mail: QDZYTY@163.com With a copy to: -------------- Katsky Korins LLP 605 Third Avenue New York, New York 10158 Attention: Asher S. Levitsky P.C. Facsimile No.: (212) 716-3338 e-mail: alevitsky@katskykorins.com 6 If to the Warrant Holder: ------------------------ at the address or telecopier number and to the attention of the person shown on the Company's warrant register.: 13. MISCELLANEOUS. a. This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only by a writing signed by the Company and the Warrant Holder. b. Nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Warrant Holder any legal or equitable right, remedy or cause of action under this Warrant; this Warrant shall be for the sole and exclusive benefit of the Company and the Warrant Holder. c. This Warrant shall be governed by, construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. d. The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. e. In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonably substitute therefore, and upon so agreeing, shall incorporate such substitute provision in this Warrant. f. The Warrant Holder shall not, by virtue hereof, be entitled to any voting or other rights of a stockholder of the Company, either at law or equity, and the rights of the Warrant Holder are limited to those expressed in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by the authorized officer as of the date first above stated. Date: FRANKLYN RESOURCES III, INC. By: ----------------------------------- Bo Huang, Chief Executive Officer 7 FORM OF ELECTION TO PURCHASE (To be executed by the Warrant Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To: FRANKLYN RESOURCES III, INC.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase ______________ shares of Common Stock ("Common Stock"), $.001 par value, of Franklyn Resources III, Inc. and encloses the warrant and $____ for each Warrant Share being purchased or an aggregate of $________________ in cash or certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of: __________________________________________ __________________________________________ __________________________________________ (Please print name and address) ___________________________________________________________ (Please insert Social Security or Tax Identification Number) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: __________________________________________ __________________________________________ __________________________________________ (Please print name and address) Dated:_____________________ Name of Warrant Holder: (Print)______________________________ (By:)________________________________ (Name:)______________________________ (Title:)_____________________________ Signature must conform in all respects to name of Warrant Holder as specified on the face of the Warrant 8 EX-4.4 6 v045248_ex4-4.txt EXHIBIT 4.4 NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR THE SHARES OF COMMON STOCK HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SHARES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE 1933 ACT, OR (2) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS AND THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AS TO SUCH EXEMPTION. IN ADDITION, A SECURITIES PURCHASE AGREEMENT DATED AS OF JUNE 2, 2006 (THE "PURCHASE AGREEMENT"), A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE, CONTAINS CERTAIN ADDITIONAL AGREEMENTS BETWEEN THE PARTIES WITH RESPECT TO THIS WARRANT. --------------------------------------- FRANKLYN RESOURCES III, INC. COMMON STOCK PURCHASE WARRANT "C" Number of Shares: 5,314,286 Holder: Barron Partners LP c/o Barron Capital Advisors LLC Original Issue Date: June 2, 2006 Managing Partner Attn: Andrew Barron Worden 730 Fifth Avenue, 9th Floor Expiration Date: December 31, 2006 New York NY 10019 tel 212-659-7790 Exercise Price per Share: $1.75 fax 646-607-2223 Franklyn Resources III, Inc., a Nevada corporation (the "COMPANY"), hereby certifies that, for value received, BARRON PARTNERS LP, or its registered assigns (the "WARRANT HOLDER"), is entitled, subject to the terms set forth below, to purchase from the Company up to five million eight hundred twenty eight thousand five hundred seventy one (5,828,571) shares (as adjusted from time to time as provided in Section 7 of this Warrant, the "WARRANT SHARES") of common stock, $.001 par value (the "COMMON STOCK"), of the Company at a price of one and 75/100 dollars ($1.75) per Warrant Share (as adjusted from time to time as provided in Section 7, the "EXERCISE PRICE"), at any time and from time to time from and after the date thereof and through and including 5:00 p.m. New York City time on December 31, 2006 (the "Expiration Date"), and subject to the following terms and conditions: 1. REGISTRATION OF WARRANT. The Company shall register this Warrant upon records to be maintained by the Company for that purpose (the "WARRANT REGISTER"), in the name of the record Warrant Holder hereof from time to time. The Company may deem and treat the registered Warrant Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Warrant Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. 2. INVESTMENT REPRESENTATION. The Warrant Holder by accepting this Warrant represents that the Warrant Holder is acquiring this Warrant for its own account or the account of an affiliate that is an accredited investor which has been identified to and approved by (such approval not to be unreasonably withheld or delayed) for investment purposes and not with the view to any offering or distribution and that the Warrant Holder will not sell or otherwise dispose of this Warrant or the underlying Warrant Shares in violation of applicable securities laws. The Warrant Holder acknowledges that the certificates representing any Warrant Shares will bear a legend indicating that they have not been registered under the 1933 Act, and may not be sold by the Warrant Holder except pursuant to an effective registration statement or pursuant to an exemption from registration requirements of the 1933 Act and in accordance with federal and state securities laws. If this Warrant was acquired by the Warrant Holder pursuant to the exemption from the registration requirements of the 1933 Act afforded by Regulation S thereunder, the Warrant Holder acknowledges and covenants that this Warrant may not be exercised by or on behalf of a Person during the one year distribution compliance period (as defined in Regulation S) following the date hereof. "PERSON" means an individual, partnership, firm, limited liability company, trust, joint venture, association, corporation, or any other legal entity. 3. VALIDITY OF WARRANT AND ISSUE OF SHARES. The Company represents and warrants that this Warrant has been duly authorized and validly issued and warrants and agrees that all of Common Stock that may be issued upon the exercise of the rights represented by this Warrant will, when issued upon such exercise, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof other than those incurred by the Holder. The Company further warrants and agrees that during the Exercise Period, the Company will at all times have authorized and reserved a sufficient number of Common Stock to provide for the exercise of the rights represented by this Warrant. 4. REGISTRATION OF TRANSFERS AND EXCHANGE OF WARRANTS. a. Subject to compliance with the federal and state securities laws, the Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to Section 12. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "NEW WARRANT"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Warrant Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance of such transferee of all of the rights and obligations of a Warrant Holder of a Warrant. b. This Warrant is exchangeable, upon the surrender hereof by the Warrant Holder to the office of the Company specified in or pursuant to Section 9 for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. 2 c. EXERCISE OF WARRANTS. d. Upon surrender of this Warrant with the Form of Election to Purchase attached hereto duly completed and signed to the Company, at its address set forth in Section 12, and upon payment and delivery of the Exercise Price per Warrant Share multiplied by the number of Warrant Shares that the Warrant Holder intends to purchase hereunder, in lawful money of the United States of America, by wire transfer or by certified or official bank check or checks, to the Company, all as specified by the Warrant Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 7 business days after the Date of Exercise (as defined herein)) issue or cause to be issued and cause to be delivered to or upon the written order of the Warrant Holder and in such name or names as the Warrant Holder may designate (subject to the restrictions on transfer described in the legend set forth on the face of this Warrant), a certificate for the Warrant Shares issuable upon such exercise, with such restrictive legend as required by the 1933 Act. Any person so designated by the Warrant Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. e. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the Warrant Holder to be purchased. f. This Warrant shall be exercisable at any time and from time to time during the Exercise Period for such number of Warrant Shares as is indicated in the attached Form of Election To Purchase. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. g. (i) Notwithstanding anything contained herein to the contrary, but subject to Section 5(e) and Section 6, the holder of this Warrant may, at its election exercised in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the Aggregate Exercise Price, elect instead to receive upon such exercise the "NET NUMBER" of shares of Common Stock determined according to the following formula (a "CASHLESS EXERCISE"): Net Number = (A x (B - C))/B (ii) For purposes of the foregoing formula: A= the total number shares with respect to which this Warrant is then being exercised. B= the last reported sale price (as reported by Bloomberg) of the Common Stock on the trading day immediately preceding the date of the Exercise Notice. C= the Warrant Exercise Price then in effect at the time of such exercise. h. The holder of this Warrant may not make a Cashless Exercise (i) during the six (6) months following the Original Issue Date and (ii) thereafter if the sale by the Holder of the Warrant Shares is covered by an effective registration statement. 3 i. MAXIMUM EXERCISE. The Warrant Holder shall not be entitled to exercise this Warrant on a Date of Exercise in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Warrant Holder and its affiliates on the Date of Exercise, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this limitation is being made on an Date of Exercise, which would result in beneficial ownership by the Warrant Holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock on such date. This Section 6 may be not be waived or amended. As used in this Warrant, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. 5. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The character of the shares of stock or other securities at the time issuable upon exercise of this Warrant and the Exercise Price therefore, are subject to adjustment upon the occurrence of the following events, and all such adjustments shall be cumulative: a. ADJUSTMENT FOR STOCK SPLITS, STOCK DIVIDENDS, RECAPITALIZATIONS, ETC. The Exercise Price of this Warrant and the number of shares of Common Stock or other securities at the time issuable upon exercise of this Warrant shall be appropriately adjusted to reflect any stock dividend, stock split, stock distribution, combination of shares, reverse split, reclassification, recapitalization or other similar event affecting the number of outstanding shares of stock or securities. b. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case of any consolidation or merger of the Company with or into any other corporation, entity or person, or any other corporate reorganization, in which the Company shall not be the continuing or surviving entity of such consolidation, merger or reorganization (any such transaction being hereinafter referred to as a "REORGANIZATION"), then, in each case, the holder of this Warrant, on exercise hereof at any time after the consummation or effective date of such Reorganization (the "EFFECTIVE DATE"), shall receive, in lieu of the shares of stock or other securities at any time issuable upon the exercise of the Warrant issuable on such exercise prior to the Effective Date, the stock and other securities and property (including cash) to which such holder would have been entitled upon the Effective Date if such holder had exercised this Warrant immediately prior thereto (all subject to further adjustment as provided in this Warrant). c. CERTIFICATE AS TO ADJUSTMENTS. In case of any adjustment or readjustment in the price or kind of securities issuable on the exercise of this Warrant, the Company will promptly give written notice thereof to the holder of this Warrant in the form of a certificate, certified and confirmed by the Board of Directors of the Company, setting forth such adjustment or readjustment and showing in reasonable detail the facts upon which such adjustment or readjustment is based. d. SALES OF COMMON STOCK AT LESS THAN THE EXERCISE PRICE. From the date hereof until such time as Barron Partners LP holds no Securities, as defined in the Purchase Agreement, except for (i) Exempt Issuances, as defined in the Purchase Agreement, (ii) issuances covered by Sections 7(a), 7(b) and 7(e) hereof or (iii) an issuance of Common Stock upon exercise or upon conversion of warrants, options or other convertible securities for which an adjustment has already been made pursuant to this Section 7, as to all of which this Section 7(d) does not apply, if the Company closes on the sale or issuance of Common Stock at a price, or warrants, options, convertible debt or equity securities with a exercise price per share or exercise price per share which is less than the Exercise Price then in effect the Exercise Price shall be adjusted immediately thereafter so that it shall equal the price determined by multiplying the Exercise Price in effect immediately prior thereto by a fraction, the 4 e. numerator of which shall be the sum of the number of shares of Common Stock outstanding immediately prior to the issuance of such additional shares and the number of shares of Common Stock which the aggregate consideration received or receivable for the issuance of such additional shares would purchase at the Exercise Price then in effect, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after the issuance of such additional shares (including the exercise or conversion of all options, warrants and other convertible securities). Such adjustment shall be made successively whenever such an issuance is made. An adjustment pursuant to this Section 7(d) shall not result in any change in the number of shares of Common Stock issuable upon exercise of this Warrant. f. PRICE ADJUSTMENTS BASED ON PRE-TAX INCOME PER SHARE. i. In the event the Company's consolidated Pre-Tax Income, as defined in the Purchase Agreement, for the year ended December 31, 2006 is less than $.212 per share on a fully-diluted basis, then the Exercise Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Thus, if Net Income for the year ended December 31, 2006 is $.1272 per share on a fully-diluted basis, the Exercise Price shall be reduced by 40%. Such reduction shall be made at the time the Company files its Form 10-KSB for the year ended December 31, 2006, and shall apply to the Notes or all shares of the Series A Preferred Stock, as the case may be, which are outstanding on the date the Form 10-KSB is filed, or, if not filed on time, on the date that filing was required. ii. In the event the Company's consolidated Pre-Tax Income for the year ended December 31, 2007 is less than $.353 per share on a fully-diluted basis, then the Exercise Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Thus, if Pre-Tax Income for the year ended December 31, 2008 is $.2118 per share on a fully-diluted basis, the Exercise Price shall be reduced by 40%. Such reduction shall be made at the time the Company files its Form 10-KSB for the year ended December 31, 2007, and shall apply to the Notes or all shares of the Series A Preferred Stock, as the case may be, which are outstanding on the date the Form 10-KSB is filed, or, if not filed on time, on the date that filing was required. iii. For purpose of determining Net Income Per Share and Pre-Tax Income Per Share on a fully-diluted basis, all shares of Common Stock issuable upon conversion of convertible securities and upon exercise of warrants and options shall be deemed to be outstanding, regardless of whether (i) such shares are treated as outstanding for determining diluted earnings per share under GAAP, (ii) such securities are "in the money," or (iii) such shares may be issued as a result of the 4.9% Limitation. iv. An adjustment pursuant to Sections 7(d) or 7(e) of this Warrant shall not affect the number of shares of Common Stock issuable upon exercise of this Warrant. 6. FRACTIONAL SHARES. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares that shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrants Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant 5 7. Share would, except for the provisions of this Section 8, be issuable on the exercise of this Warrant, the Company shall, at its option, (i) pay an amount in cash equal to the Exercise Price multiplied by such fraction or (ii) round the number of Warrant Shares issuable, up to the next whole number. 8. SALE OR MERGER OF THE COMPANY. Upon a Merger Transaction, the restriction contained in Section 6 shall immediately be released and the Warrant Holder will have the right to exercise this Warrant concurrently with such Merger Transaction. For purposes of this Warrant, the term "Merger Transaction" shall mean a consolidation or merger of the Company into another company or entity in which the Company is not the surviving entity or the sale of all or substantially all of the assets of the Company to another company or entity not controlled by the then existing stockholders of the Company. 9. NOTICE OF INTENT TO SELL OR MERGE THE COMPANY. The Company will give Warrant Holder ten (10) business days notice before any Merger Transaction. 10. ISSUANCE OF SUBSTITUTE WARRANT. In the event of a merger, consolidation, recapitalization or reorganization of the Company or a reclassification of Company shares of stock, which results in an adjustment to the number of shares subject to this Warrant and/or the Exercise Price hereunder, the Company agrees to issue to the Warrant Holder a substitute Warrant reflecting the adjusted number of shares and/or Exercise Price upon the surrender of this Warrant to the Company. However, in the event that the Company does not issue a substitute warrant, the number and class of Warrant Shares or other securities and the Exercise Price shall be adjusted as provided in this Warrant, and this Warrant shall relate the adjusted number of Warrant Shares and Exercise Price. 11. NOTICE. All notices and other communications hereunder shall be in writing and shall be deemed to have been given (i) on the date they are delivered if delivered in person; (ii) on the date initially received if delivered by facsimile transmission followed by registered or certified mail confirmation; (iii) on the date delivered by an overnight courier service; or (iv) on the date of delivery after it is mailed by registered or certified mail, return receipt requested with postage and other fees prepaid as follows: If to the Company: ----------------- c/o Qingdao Sinogas General Machinery Corp. 45 Jinghua Road Qingdao, Shandong, China, 266042 Attn: Bo Huang, CEO Facsimile: (0532) 84851840 e-mail: QDZYTY@163.com With a copy to: -------------- Katsky Korins LLP 605 Third Avenue New York, New York 10158 Attention: Asher S. Levitsky P.C. Facsimile No.: (212) 716-3338 e-mail: alevitsky@katskykorins.com 6 If to the Warrant Holder: ------------------------ at the address or telecopier number and to the attention of the person shown on the Company's warrant register.: 12. MISCELLANEOUS. a. This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only by a writing signed by the Company and the Warrant Holder. b. Nothing in this Warrant shall be construed to give to any person or corporation other than the Company and the Warrant Holder any legal or equitable right, remedy or cause of action under this Warrant; this Warrant shall be for the sole and exclusive benefit of the Company and the Warrant Holder. c. This Warrant shall be governed by, construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. d. The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. e. In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonably substitute therefore, and upon so agreeing, shall incorporate such substitute provision in this Warrant. f. The Warrant Holder shall not, by virtue hereof, be entitled to any voting or other rights of a stockholder of the Company, either at law or equity, and the rights of the Warrant Holder are limited to those expressed in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by the authorized officer as of the date first above stated. Date: FRANKLYN RESOURCES III, INC. By: ------------------------------------ Bo Huang, Chief Executive Officer 7 FORM OF ELECTION TO PURCHASE (To be executed by the Warrant Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To: FRANKLYN RESOURCES III, INC.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase ______________ shares of Common Stock ("Common Stock"), $.001 par value, of Franklyn Resources III, Inc. and encloses the warrant and $____ for each Warrant Share being purchased or an aggregate of $________________ in cash or certified or official bank check or checks, which sum represents the aggregate Exercise Price (as defined in the Warrant) together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of: __________________________________________ __________________________________________ __________________________________________ (Please print name and address) ___________________________________________________________ (Please insert Social Security or Tax Identification Number) If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: __________________________________________ __________________________________________ __________________________________________ (Please print name and address) Dated:_________________ Name of Warrant Holder: (Print)_______________________________ (By:)_________________________________ (Name:)_______________________________ (Title:)______________________________ Signature must conform in all respects to name of Warrant Holder as specified on the face of the Warrant 8 EX-99.1 7 v045248_ex99-1.txt Exhibit 99.1 SECURITIES PURCHASE AGREEMENT BETWEEN FRANKLYN RESOURCES III, INC. AND BARRON PARTNERS LP, JCAR FUNDS LTD. STEVE MAZUR AND RAY RIVERS DATED JUNE 2, 2006 SECURITIES PURCHASE AGREEMENT This SECURITIES PURCHASE AGREEMENT (the "Agreement") is made and entered into as of the 2nd day of May, 2006 between Franklyn Resources III, Inc., a corporation organized and existing under the laws of the State of Nevada (the "Company") and Barron Partners LP, a Delaware limited partnership ("Barron"), and the other investors named in Schedule A to this Agreement, Barron and the other investors being collectively referred to as the "Investors" and each, individually, an "Investor." RECITALS WHEREAS, the Investors wish to purchase from the Company, upon the terms and subject to the conditions of this Agreement, for the Purchase Price as hereinafter defined, (a) the Company's convertible subordinated promissory notes (the "Notes") in the principal amount of three million five hundred thousand dollars ($3,500,000) the Notes to be in the form attached hereto as Exhibit A, (b) three hundred sixty nine thousand (369,000) shares (the "Initial Shares") of Common Stock, and (c) Common Stock Purchase Warrants (the "Warrants") to purchase up to six million (6,000,000) shares of Common Stock of the Company at an exercise price of eighty five cents ($.85) per share, six million (6,000,000) shares of Common Stock of the Company at an exercise price of one and 20/100 dollars ($1.20) per share and six million (6,000,000) shares of Common Stock of the Company at an exercise price of one and 75/100 dollars ($1.75) per share. The Note will be convertible into shares of Series A Preferred Stock or Common Stock, as such terms are hereinafter defined, in the manner set forth in the Notes; and WHEREAS, pursuant to a separate agreement, but as part of the transaction whereby the Investor is purchasing the Notes, the Initial Shares and Warrants, Skywide Capital Management Limited, a British Virgin Island company, and Eastpride Capital Limited, a British Virgin Island company, as the sole stockholders of Sinoenergy Holding Limited, a British Virgin Island company ("Sinoenergy"), which is the sole stockholder of Qingdau Sinogas General Machinery Corporation, a Chinese corporation ("Sinogas"), are acquiring fourteen million two hundred fifteen thousand three hundred eighty five (14,215,385) shares of Common Stock in exchange for all of the outstanding common stock or other equity interests in Sinoenergy, with the result that Sinoenergy is a wholly-owned subsidiary of the Company and Sinogas is a wholly-owned subsidiary of Sinoenergy; and WHEREAS, the parties intend to memorialize the purchase and sale of the Notes, the Initial Common Stock and the Warrants. NOW, THEREFORE, in consideration of the mutual covenants and premises contained herein, and for other good and valuable consideration, the receipt and adequacy of which are hereby conclusively acknowledged, the parties hereto, intending to be legally bound, agree as follows: ARTICLE I INCORPORATION BY REFERENCE AND DEFINITIONS 1.1. Incorporation by Reference. The foregoing recitals and the Exhibits and Schedules attached hereto and referred to herein, are hereby acknowledged to be true and accurate, and are incorporated herein by this reference. 1.2. Supersedes Other Agreements. This Agreement, to the extent that it is inconsistent with any other instrument or understanding among the parties, shall supersede such instrument or understanding to the fullest extent permitted by law. A copy of this Agreement shall be filed at the Company's principal office. 1.3. Certain Definitions. For purposes of this Agreement, the following capitalized terms shall have the following meanings (all capitalized terms used in this Agreement that are not defined in this Article 1 shall have the meanings set forth elsewhere in this Agreement): 1.3.1. "4.9% Limitation" has the meaning set forth in Section 2.1.3 of this Agreement. 1.3.2. "1933 Act" means the Securities Act of 1933, as amended. 1.3.3. "1934 Act" means the Securities Exchange Act of 1934, as amended. 1.3.4. "Affiliate" means a Person or Persons directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with the Person(s) in question. The term "control," as used in the immediately preceding sentence, means, with respect to a Person that is a corporation, the right to the exercise, directly or indirectly, of more than 50% of the voting rights attributable to the shares of such controlled corporation and, with respect to a Person that is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such controlled Person. 1.3.5. "Articles" means the Articles of Incorporation of the Company, as the same may be amended from time to time. 1.3.6. "Bylaws" means the bylaws of the Company, as the same may be amended from time to time. 1.3.7. "Certificate of Designation" means the certificate of the rights, preferences and privileges, subject to the limitations, with respect to the Series A Preferred Stock, pursuant to Article Fourth of the Restated Articles. The Certificate of Designation shall be in substantially the form of Exhibit B to this Agreement, subject to the provision of Section 6.5 of this Agreement. SECURITIES PURCHASE AGREEMENT PAGE 2 1.3.8. "Closing" means the consummation of the transactions contemplated by this Agreement and the Exchange of Securities, all of which transactions shall be consummated contemporaneously with the Closing. 1.3.9. "Closing Date" means the date on which the Closing occurs, which be not later than May 31, 2006. 1.3.10. "Common Stock" means the Company's common stock, which is presently designated as the common stock, par value $.001 per share. 1.3.11. "Company's Governing Documents" means the Articles and Bylaws. 1.3.12. "Convertible Securities" means the Notes and the Series A Preferred Stock. 1.3.13. "EBITDA" means consolidated earnings before interest, taxes, depreciation and amortization, determined in accordance with U.S. GAAP. 1.3.14. "Escrow Agreement" means the Escrow Agreement among the Company, the Investors and Katsky Korins LLP, as Escrow Agent, attached hereto as Exhibit C it being acknowledged that the Escrow Agent is counsel for the Company. 1.3.15. "Exchange of Securities" means the issuance of shares of Common Stock in exchange for the outstanding securities of Sinoenergy, as described in the second recital. 1.3.16. "Exempt Issuance" means the issuance of (a) shares of Common Stock or options to employees, officers, directors of and consultants (other than consultants whose services relate to the raising of funds) of the Company pursuant to the Company's 2006 long-term incentive plan and any other stock or option plan that was or may be adopted by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose, (b) securities upon the exercise of or conversion of any securities issued hereunder and pursuant to the Registration Rights Agreement, the Notes, the Warrants and the Certificate of Designation and any other options, warrants or convertible securities which are outstanding on after completion of the Closing and the effectiveness of the Exchange of Securities, and (c) securities issued pursuant to acquisitions, licensing agreements, or other strategic transactions, provided any such issuance shall only be to a Person which is, itself or through its subsidiaries, an operating company in a business which the Company's board of directors believes is beneficial to the Company and in which the Company receives benefits in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary business is investing in securities. SECURITIES PURCHASE AGREEMENT PAGE 3 1.3.17. "GAAP" means United States generally accepted accounting principles consistently applied. 1.3.18. "Initial Shares" shall have the meaning set forth in the first recital. 1.3.19. "Material Adverse Effect" means any adverse effect on the business, operations, properties or financial condition of the Company that is material and adverse to the Company and its subsidiaries, taken as a whole and/or any condition, circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to perform any of its material obligations under this Agreement or the Registration Rights Agreement or to perform its obligations under any other material agreement. 1.3.20. "Net Income" means net income determined in accordance with GAAP plus (a) any charges relating to the transaction contemplated by this Agreement and the Registration Rights Agreement, and (b) any other non-recurring items, including the issuance of warrants which are not issued under a stock option or other equity-based incentive plan. 1.3.21. "Nevada Act" means Section 78 of the Nevada Revised Statutes, as amended. 1.3.22. "Person" means an individual, partnership, firm, limited liability company, trust, joint venture, association, corporation, or any other legal entity. 1.3.23. "Pre-Tax Income" means income before income taxes determined in accordance with GAAP plus (a) any charges relating to the transaction contemplated by this Agreement and the Registration Rights Agreement, and (b) any other non-recurring items, including the issuance of warrants which are not issued under a stock option or other equity-based incentive plan. 1.3.24. "Purchase Price" means the three million five hundred thousand dollars ($3,500,000) to be paid by the Investors to the Company for the Notes, the Initial Shares and the Warrants 1.3.25. "Registration Rights Agreement" means the registration rights agreement between the Investors and the Company in substantially the form of Exhibit D to this Agreement. 1.3.26. "Registration Statement" means the registration statement under the 1933 Act to be filed with the Securities and Exchange Commission for the registration of the Shares pursuant to the Registration Rights Agreement. SECURITIES PURCHASE AGREEMENT PAGE 4 1.3.27. "Restated Articles" means the restated articles of organization in substantially the form of Exhibit E to this Agreement. 1.3.28. "Securities" means the Notes, the shares of Series A Preferred Stock, the Warrants and the Shares. 1.3.29. "SEC" means the Securities and Exchange Commission. 1.3.30. "SEC Documents" means, at any given time, the Company's latest Form 10-K or Form 10-KSB and all Forms 10-Q or 10-QSB and 8-K and all proxy statements or information statements filed between the date the Form 10-K or Form 10-KSB was filed and the date as to which a determination is being made until such time as the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement. 1.3.31. "Series A Preferred Stock" means the shares of Series A Preferred Stock having the rights, preferences and privileges and subject to the limitations set forth in the Certificate of Designation. 1.3.32. "Shares" means, collectively, the (a) the Initial Shares and (b) the shares of Common Stock of the Company issued or issuable (i) upon conversion of the Notes or the Series A Preferred Stock or (ii) upon exercise of the Warrants. 1.3.33. "Subsequent Financing" means any offer and sale of shares of the Company's preferred stock, par value $.0001 per share, or debt that, in either case, is initially convertible into shares of Common Stock or otherwise senior or superior to the Series A Preferred Stock. 1.3.34. "Total Shares" means the Initial Shares plus the total number of shares of Common Stock as are issuable upon conversion of the Notes, such number to be determined as if the Notes are never converted into shares of Series A Preferred Stock. 1.3.35. "Transaction Documents" means this Agreement, all Schedules and Exhibits attached hereto, the Certificate of Designation, the Warrants, the Registration Rights Agreement and all other documents and instruments to be executed and delivered by the parties in order to consummate the transactions contemplated hereby. 1.3.36. "Warrants" means the Common Stock Purchase Warrants in substantially the form of Exhibit F-1, F-2 and F-3 to this Agreement. 1.3.37. All references in this Agreement to "herein" or words of like effect, when referring to preamble, recitals, article and section numbers, schedules and exhibits shall refer to this Agreement unless otherwise stated. SECURITIES PURCHASE AGREEMENT PAGE 5 ARTICLE II SALE AND PURCHASE OF NOTE AND WARRANTS; PURCHASE PRICE 2.1. Sale of Note and Issuance of Warrants. 2.1.1. Upon the terms and subject to the conditions set forth herein, and in accordance with applicable law, the Company agrees to sell to the Investors, and the each Investor severally agrees to purchase from the Company, on the Closing Date the Notes, the Initial Shares and the Warrants as set forth after such Investor's name on Schedule A to this Agreement for that portion of the Purchase Price as is set forth on said Schedule A. The Purchase Price shall be paid by the Investors, severally, to the Company on the Closing Date by a wire transfer of the Purchase Price into escrow to be held by the escrow agent pursuant to the terms of the Escrow Agreement. The Company shall cause the Notes and the Warrants to be issued to the Investors upon the release of the Purchase Price to the Company by the escrow agent pursuant to the terms of the Escrow Agreement. 2.1.2. As set forth more fully in the Notes: (a) Principal and interest on the Notes shall be automatically converted into such number of shares of Series A Preferred Stock as is determined by dividing the principal amount of the Notes by the Conversion Price, as set forth in the Notes, which shall initially be sixty five cents ($.65) upon the filing by the Company of (i) the Restated Articles and (ii) the Certificate of Designation. (b) If the Restated Articles and the Certificate of Designation shall not have been filed at the time the Notes is converted, the Notes shall be convertible into Common Stock at the Conversion Rate set forth in the Notes. 2.1.3. Notwithstanding any other provision of this Agreement, except as expressly provided in the Notes, the Certificate of Designation or the Warrants, no Investor shall be entitled to convert the Notes or the Series A Preferred Stock into shares of Common Stock or to exercise the Warrants to the extent that such conversion or exercise would result in beneficial ownership by such Investor and its Affiliates of more than 4.9% of the then outstanding number of shares of Common Stock on such date. For the purposes of this Agreement beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. The limitation set forth in this Section 2.1.3 is referred to as the "4.9% Limitation." SECURITIES PURCHASE AGREEMENT PAGE 6 2.1.4. Upon execution and delivery of this Agreement and the Company's receipt of the Purchase Price from the Escrow Agent pursuant to the terms of the Escrow Agreement, the Company shall issue to the Investor the Warrants to purchase the number of shares of Common Stock as is set forth in Schedule A to this Agreement at exercise prices as stated in the Warrants, all pursuant to the terms and conditions of the Warrants and subject to 4.9% Limitation. 2.2. Purchase Price. The Purchase Price payable by each Investor shall be delivered by such Investor in the form of wire transfers in United States dollars from the Investor to the escrow agent pursuant to the Escrow Agreement on the Closing Date. 2.3. Acquisition of Sinoenergy Stock. The Company shall have acquired all of the outstanding capital stock of Sinoenergy pursuant to the Exchange of Securities, and all of the stock and other equity interest of Sinogas shall be owned by Sinoenergy. No Person shall have any right, title or interest in, or any right or option to acquire, any shares of any class of capital stock of Sinoenergy or Sinogas. 2.4. Ownership of Real Property. Sinogas has acquired, subject to formal government approval, title to real property (the "Real Property") acquired from Beijing Sanhuan Technology Development Co. Ltd., knows as Trycle. ARTICLE III CLOSING DATE AND DELIVERIES AT CLOSING 3.1. Closing Date. The Closing of the transactions contemplated by this Agreement shall be held at the offices of counsel for the Company, at 1:00 P.M. local time, on the Closing Date or on such other date and time and at such other place as may be mutually agreed by the parties, including Closing by facsimile with originals to follow. 3.2. Deliveries by the Company. In addition to and without limiting any other provision of this Agreement, the Company agrees to deliver, or cause to be delivered, to the escrow agent under the Escrow Agreement, the following: (a) At or prior to Closing, an executed Agreement with all exhibits and schedules attached hereto. (b) At the Closing, the executed Notes in the names of the Investors. SECURITIES PURCHASE AGREEMENT PAGE 7 (c) At the Closing, a stock certificate for the Initial Shares. (d) At or prior to the Closing, executed Warrants in the name of the Investors. (e) The executed Registration Rights Agreement. (f) Certifications in form and substance acceptable to the Company and the Investors from any and all brokers or agents involved in the transactions contemplated hereby as to the amount of commission or compensation payable to such broker or agent as a result of the consummation of the transactions contemplated hereby and from the Company or Investors, as appropriate, to the effect that reasonable reserves for any other commissions or compensation that may be claimed by any broker or agent have been set aside. (g) Evidence of approval of the board of directors of the Company of (i) the Transaction Documents and the transactions contemplated hereby and (ii) the Restated Articles, which shall be subject to stockholder approval. (h) Evidence of the agreement of the holders of not less than a majority of the share of Common Stock outstanding after the Exchange of Securities to approve the Restated Articles. (i) Evidence that the Company has complied with the provisions of Sections 6.10, 6.11 and 6.12 of this Agreement on or prior to the Closing Date. (j) Good standing certificates of the Company issued by the Secretary of State of Nevada. (k) An opinion from the Company's special counsel concerning the Transaction Documents and the transactions contemplated hereby in form and substance reasonably acceptable to Investors. (l) A letter from Sinogas' Chinese counsel concerning the Sinogas and the transactions contemplated hereby in form and substance reasonably acceptable to Investors. (m) The executed Escrow Agreement. (n) Copies of all executive employment agreements, all past and present financing documentation or other documentation where stock could potentially be issued or issued as payment, all past and present litigation documents and historical financials, not previously provided to Investors. (o) Such other documents or certificates as shall be reasonably requested by Barron on behalf of the Investor. SECURITIES PURCHASE AGREEMENT PAGE 8 3.3. Deliveries by Investors. In addition to and without limiting any other provision of this Agreement, the Investor agrees to deliver, or cause to be delivered, to the escrow agent under the Escrow Agreement, the following: (a) A deposit in the amount of the Purchase Price; (b) The executed Agreement with all Exhibits and Schedules attached hereto; (c) The executed Registration Rights Agreement; (d) The executed Escrow Agreement; and (e) Such other documents or certificates as shall be reasonably requested by the Company or its counsel. In the event any document (other than the Notes and Warrants) provided to the other party in Sections 3.2 and 3.3 herein are provided by facsimile, the party shall forward an original document to the other party within seven (7) business days. 3.4. Further Assurances. The Company and the Investors shall, upon request, on or after the Closing Date, cooperate with each other (specifically, the Company shall cooperate with the Investors, and the Investors shall cooperate with the Company) by furnishing any additional information, executing and delivering any additional documents and/or other instruments and doing any and all such things as may be reasonably required by the parties or their counsel to consummate or otherwise implement the transactions contemplated by this Agreement. 3.5. Waiver. The Investors may waive any of the requirements of Section 3.2 of this Agreement or any of its rights under the Escrow Agreement, and the Company at its discretion may waive any of its rights of Section 3.3 of this Agreement or any of its rights under the Escrow Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to the Investors as of the date hereof and as of Closing (which warranties and representations shall survive the Closing regardless of what examinations, inspections, audits and other investigations the Investors have heretofore made or may hereinafter make with respect to such warranties and representations) as follows: SECURITIES PURCHASE AGREEMENT PAGE 9 4.1. Organization and Qualification. 4.1.1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, and Sinogas is a Chinese equity joint venture, which is similar to a limited liability company, and each of the Company and Sinogas has the requisite corporate power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and is duly qualified to do business in any other jurisdiction by virtue of the nature of the businesses conducted by it or the ownership or leasing of its properties, except where the failure to be so qualified will not, when taken together with all other such failures, have a Material Adverse Effect on the business, operations, properties, assets, financial condition or results of operation of the Company and its subsidiaries taken as a whole. Sinogas is authorized to be a wholly-owned foreign enterprise, knows as a "WOFE," under the laws of the People Republic of China, and the Exchange of Securities does not violate any provisions of Sinogas' organizational documents or the laws of the People's Republic of China. 4.1.2. Sinogas is wholly-owned by Sinoenergy, and Sinoenergy is wholly-owned by the Company. Except for the stock in Sinoenergy which is owned by the Company and the stock of Sinogas which is owned by Sinoenergy, no person has any right, title or interest in any equity, debt or other securities of any kind of either Sinogas or Sinoenergy. 4.2. Governing Documents. The complete and correct copies of the Company's Governing Documents, as in effect on the Closing Date, has been delivered to the Investors. 4.3. Capitalization. 4.3.1. The authorized and outstanding capital stock of the Company as of the date of this Agreement and as adjusted to reflect issuances pursuant to the Exchange of Securities and as contemplated by this Agreement is set forth in Schedule 4.3.1 to this Agreement. Schedule 4.3.1 contains all shares and derivatives currently and potentially outstanding. The Company hereby represents that any and all shares and current potentially dilutive events have been included in Schedule 4.3.1, including shares issuable pursuant to employment agreements, acquisition, consulting agreements, debts, payments, financing or business relationships that could be paid in equity, derivatives or resulting in additional equity issuances. 4.3.2. All outstanding shares of capital stock have been duly authorized and are validly issued, and are fully paid and non-assessable and free from preemptive rights. All shares of capital stock described above to be issued have been duly authorized and when issued, will be validly issued, fully paid and non-assessable and free from preemptive rights. SECURITIES PURCHASE AGREEMENT PAGE 10 4.3.3. Except pursuant to this Agreement and as set forth in Schedule 4.3.1 hereto, and as set forth in the Company's SEC Documents, filed with the SEC, as of the date hereof and as of the Closing Date, there are not now outstanding options, warrants, rights to subscribe for, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, shares of any class of capital stock of the Company, or agreements, understandings or arrangements to which the Company is a party, or by which the Company is or may be bound, to issue additional shares of its capital stock or options, warrants, scrip or rights to subscribe for, calls or commitment of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, any shares of any class of its capital stock. The Company agrees to inform the Investors in writing of any additional warrants granted prior to the Closing Date. 4.3.4. The Company on the Closing Date (i) will have full right, power, and authority to sell, assign, transfer, and deliver, by reason of record and beneficial ownership, to the Investors, the Notes, free and clear of all liens, charges, claims, options, pledges, restrictions, and encumbrances whatsoever; and (ii) upon conversion of the Notes or exercise of the Warrants, the Investors will acquire title to the Shares issuable upon such conversion or exercise, free and clear of all liens, charges, claims, options, pledges, restrictions, and encumbrances whatsoever, except as otherwise provided in this Agreement and except for any of the foregoing which results from actions or omissions on the part of the Investors. 4.4. Authority. 4.4.1. The Company has all requisite corporate power and authority to execute and deliver this Agreement, the Notes, the Initial Shares and the Warrants, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement by the Company and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company is necessary to authorize this Agreement or to consummate the transactions contemplated hereby except as disclosed in this Agreement; provided, however, that stockholder approval is required for the Company to adopt the Restated Articles. This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms; provided, however, that no representation is made with respect to the ability of either Investor to convert the Notes or, following the filing of the Restated Articles and the Certificate of Designation, the Series A Preferred Stock or exercise any Warrant if and to the extent that the Conversion Price of the Notes or the Series A Preferred Stock, as defined in the Notes or the Certificate of Designation, or the number of Shares issuable upon exercise of the Warrants would result in the issuance of a number of shares of Common Stock which is greater than the amount by which the authorized Common Stock exceeds the sum of the outstanding Common Stock and the shares of Common Stock reserved for issuance pursuant to outstanding agreements and outstanding options, warrants, rights, convertible securities and other securities upon the exercise or conversion of which or pursuant to the terms of which additional shares of Common Stock may be issuable (the foregoing proviso being referred to as the "Authorized Stock Proviso"). SECURITIES PURCHASE AGREEMENT PAGE 11 4.4.2. The Company's board of directors has adopted the Restated Articles and the Certificate of Designation, subject to stockholder approval of the Restated Articles, as required by the Nevada Act. Pursuant to NRS 78.320, the holders of shares of Common Stock issued pursuant to the Exchange of Securities have agreed to execute a consent of stockholders approving the Restated Articles, which consent shall be given twenty (20) days after the date the Company mails an information statement pursuant to Section 14(c) of the Exchange Act to its stockholders. The Company will file an information statement with the SEC as soon as practical after the Closing Date, but not later than ten days after the date the Form 10-KSB for the fiscal year ended March 31, 2006 is required to be filed with the SEC. 4.4.3. The Initial Shares are, and shares of Series A Preferred Stock issuable upon conversion of the Notes and the Shares issuable upon conversion of the Notes and the Series A Preferred Stock and upon exercise of the Warrants will be, when so issued, duly and validly authorized and issued, fully paid and non-assessable and not issued in violation of any preemptive rights or rights of first refusal. 4.4.4. Upon the filing with the Secretary of State of the State of Nevada of the Restated Articles and the Certificate of Designation, the shares of Series A Preferred Stock issued upon conversion of the Notes will be duly and validly authorized and issued, fully paid and non-assessable.. 4.5. No Conflict; Required Filings and Consents. The execution and delivery of this Agreement by the Company does not, and the performance by the Company of its obligations hereunder will not: (i) conflict with or violate the Company's Governing Documents or the governing instruments Sinogas; (ii) conflict with, breach or violate any federal, state, foreign or local law, statute, ordinance, rule, regulation, order, judgment or decree (collectively, "Laws") in effect as of the date of this Agreement and applicable to the Company or Sinoenergy or Sinogas; or (iii) result in any breach of, constitute a default (or an event that with notice or lapse of time or both would become a default) under, give to any other entity any right of termination, amendment, acceleration or cancellation of, require payment under, or result in the creation of a lien or encumbrance on any of the properties or assets of the Company or Sinoenergy or Sinogas pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or Sinoenergy or Sinogas is a party or by the Company or Sinoenergy or Sinogas or any of their respective properties or assets is bound other than violations, conflicts, breaches, defaults, terminations, accelerations, creations of liens, or incumbency that would not, in the aggregate, have a Material Adverse Effect except to the extent that stockholder approval may be required as a result of the Authorized Stock Proviso, in which event, the Company will seek stockholder approval to an increase in the authorized Common Stock sufficient to enable the Company to be in compliance with this Section 4.5. SECURITIES PURCHASE AGREEMENT PAGE 12 4.6. Report and Financial Statements. 4.6.1. The Company has delivered to the Investors the audited balance sheet of Sinogas as of December 31, 2005 and the audited statements of operations, stockholders equity and cash flows for the years ended December 31, 2005 and 2004, and the unaudited balance sheet as of March 31, 2006 and unaudited statements of operations and cash flows for the three months ended March 31, 2006 and 2005 and stockholders' equity for the three months ended March 31, 2006, in each cash including notes to the financial statements (collectively, the "Financial Statements"). Each of the balance sheets contained in such Financial Statements (including the related notes and schedules thereto) fairly presented the financial position of Sinogas, as of its date, and each of the statements of operations, stockholders' equity and cash flows in such Financial Statements (including any related notes and schedules thereto) fairly presents, changes in stockholders' equity and changes in cash flows, as the case may be, of Sinogas, for the periods to which they relate, in each case in accordance with GAAP, except in each case as may be noted therein, subject to normal year-end audit adjustments in the case of unaudited statements. The books and records of the Company have been, and are being, maintained in all material respects in accordance with GAAP and any other applicable legal and accounting requirements and reflect only actual transactions. Schwartz Levitsky Feldman LLP, who audited the audited financial statements, is independent within the meaning of the regulations of the SEC. 4.6.2. The Company has provided the Investors with a copy of any management letter issued by Schwartz Levitsky Feldman LLP in connection with its audit of Sinogas's audited Financial Statements for 2004 if such firm issued a management letter. The Company has addressed, to the satisfaction of Schwartz Levitsky Feldman LLP any deficiencies reflected in the management letter. 4.7. Compliance with Applicable Laws. The Company is not in violation of, or, to the knowledge of the Company, is under investigation with respect to or has been given notice or has been charged with the violation of any Laws, except for violations which individually or in the aggregate do not have a Material Adverse Effect. 4.8. Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or Commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. 4.9. SEC Documents. The Investors acknowledge that the Company is a publicly held company and has made available to the Investors true and complete copies of any requested SEC Documents. The Company has registered its Common Stock pursuant to Section 12(g) of the 1934 Act. The Company has not provided to the Investors any information that, according to applicable law, rule or regulation, should have been disclosed publicly prior to the date hereof by the Company, but which has not been so disclosed. SECURITIES PURCHASE AGREEMENT PAGE 13 4.10. Litigation. To the knowledge of the Company, no litigation, claim, or other proceeding before any court or governmental agency is pending or to the knowledge of the Company, threatened against the Company, Sinoenergy or Sinogas, the prosecution or outcome of which, if adversely determined, is likely to have a Material Adverse Effect. 4.11. Exemption from Registration. Subject to the accuracy of the Investors' representations in Article V, except as required pursuant to the Registration Rights Agreement, the sale of the Securities by the Company to the Investors will not require registration under the 1933 Act. When validly converted in accordance with the terms of the Series A Preferred Stock, and upon exercise of the Warrants in accordance with their terms, the Shares underlying the Series A Preferred Stock and the Warrants will be duly and validly issued, fully paid, and non-assessable. The Company is issuing the Notes, the Initial Shares and, upon conversion of the Notes, the Series A Preferred Stock, and the Warrants in accordance with and in reliance upon the exemption from securities registration afforded, inter alia, by Rule 506 under Regulation D as promulgated by the SEC under the 1933 Act, and/or Section 4(2) of the 1933 Act; provided, however, that certain filings and registrations may be required under state securities "blue sky" laws depending upon the residency of the Investors. 4.12. No General Solicitation or Advertising in Regard to this Transaction. Neither the Company nor any of its Affiliates nor, to the knowledge of the Company, any Person acting on its or their behalf (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D as promulgated by the SEC under the 1933 Act) or general advertising with respect to the sale of the Series A Preferred Stock or Warrants, or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Series A Preferred Stock or Warrants, under the 1933 Act, except as required herein. 4.13. No Material Adverse Effect. Since September 30, 2005, no event or circumstance resulting in a Material Adverse Effect has occurred or exists with respect to Sinenergy or Sinogas. To the knowledge of the Company, no material supplier or customer has given notice, oral or written, that it intends to cease or reduce the volume of its business with Sinogas from historical levels. 4.14. Material Non-Public Information. The Company has not disclosed to either Investor any material non-public information that (i) if disclosed, would reasonably be expected to have a material effect on the price of the Common Stock or (ii) according to applicable law, rule or regulation, should have been disclosed publicly by the Company prior to the date hereof but which has not been so disclosed; provided, however, that the Company has disclosed to either Investor matters relating to the Company's acquisition of Sinogas and the financing of such acquisition. SECURITIES PURCHASE AGREEMENT PAGE 14 4.15. Internal Controls And Procedures. To the knowledge of the Company, Sinogas maintains books and records and internal accounting controls which provide reasonable assurance that (I) all transactions to which Sinogas or any subsidiary is a party or by which its properties are bound have been executed with management's authorization; (ii) the recorded accounting of Sinogas' assets is compared with existing assets at regular intervals; (iii) access to Sinogas' assets is permitted only in accordance with management's authorization; and (iv) all transactions to which Sinogas or any subsidiary is a party or by which its properties are bound are recorded as necessary to permit preparation of the financial statements of the Company in accordance with standards of the Public Company Accounting Oversight Board; it being understood that neither the Company nor Sinogas has not conducted an internal controls audit and that no such audit has been required under applicable law. 4.16. Full Disclosure. No representation or warranty made by the Company in this Agreement and no certificate or document furnished or to be furnished to the Investors pursuant to this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein, taken as a whole, not misleading. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE INVESTOR The Investors, severally, represent and warrant to the Company that: 5.1. Organization and Standing of the Investor. 5.1.1. Such Investor was not formed for the purpose of investing solely in the Notes, Series A Preferred Stock, the Warrants or the shares of Common Stock which are the subject of this Agreement. Such Investor has the requisite power and authority to enter into and perform this Agreement and to purchase the securities being sold to it hereunder. The execution, delivery and performance of this Agreement by such Investor and the consummation by such Investor of the transactions contemplated hereby have been duly authorized by all necessary partnership action where appropriate. 5.1.2. The state in which any offer to purchase Preferred Stock hereunder was made or accepted by such Investor is the state shown as such Investor's address. SECURITIES PURCHASE AGREEMENT PAGE 15 5.2. Authorization and Power. This Agreement and the Registration Rights Agreement have been duly executed and delivered by such Investor and at the Closing shall constitute valid and binding obligations of such Investor enforceable against such Investor in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. 5.3. No Conflicts. The execution, delivery and performance of this Agreement and the consummation by such Investor of the transactions contemplated hereby or relating hereto do not and will not (i) result in a violation of such Investor's charter documents or bylaws where appropriate or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of any agreement, indenture or instrument to which such Investor is a party, or result in a violation of any law, rule, or regulation, or any order, judgment or decree of any court or governmental agency applicable to such Investor or its properties (except for such conflicts, defaults and violations as would not, individually or in the aggregate, have a Material Adverse Effect on such Investor). The Investor is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of such Investor's obligations under this Agreement or to purchase the securities from the Company in accordance with the terms hereof, provided that for purposes of the representation made in this sentence, such Investor is assuming and relying upon the accuracy of the relevant representations and agreements of the Company herein. 5.4. Financial Risks. Such Investor acknowledges that such Investor is able to bear the financial risks associated with an investment in the securities being purchased by such Investor from the Company and that it has been given full access to such records of the Company and the subsidiaries and to the officers of the Company and the subsidiaries as it has deemed necessary or appropriate to conduct its due diligence investigation. The Investor is capable of evaluating the risks and merits of an investment in the securities being purchased by such Investor from the Company by virtue of its experience as an investor and its knowledge, experience, and sophistication in financial and business matters and such Investor is capable of bearing the entire loss of its investment in the securities being purchased by such Investor from the Company. SECURITIES PURCHASE AGREEMENT PAGE 16 5.5. Accredited Investor. The Investor is (i) an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated under the 1933 Act by reason of Rule 501(a)(3) and (6), (ii) experienced in making investments of the kind described in this Agreement and the related documents, (iii) able, by reason of the business and financial experience of its officers (if an entity) and professional advisors (who are not affiliated with or compensated in any way by the Company or any of its affiliates or selling agents), to protect its own interests in connection with the transactions described in this Agreement, and the related documents, and (iv) able to afford the entire loss of its investment in the securities being purchased by such Investor from the Company. The Investor is acquiring the Securities for investment and not with a view to the sale or distribution thereof and understands that such Securities are restricted securities, as defined in the 1933 Act, and may not be sold or otherwise distributed except pursuant to an effective registration statement or an exemption from the registration requirements of the 1933 Act and that the certificates for such securities shares and Warrants will bear an investment legend. 5.6. Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of such Investor. 5.7. Knowledge of Company. The Investor and its advisors, if any, have been, upon request, furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the securities being purchased by such Investor from the Company. The Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company and have received complete and satisfactory answers to any such inquiries. 5.8. Risk Factors. The Investor understands that the investment by such Investor in the Securities being purchased by such Investor from the Company involves a high degree of risk. The Investor understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the securities being purchased by such Investor from the Company. The Investor warrants that it is able to bear the complete loss of its investment in the securities being purchased by it from the Company. In acquiring the Securities, such Investor is not relying upon any projections of the future financial condition, results of operations or cash flows relating to the Company. The Investor acknowledges and agrees that (a) it has had the opportunity to obtain, and it has reviewed and discussed with the Company, to the extent that it deems necessary, information concerning the Company, including risks relating to the Company, Sinogas and their respective financial statements, and that (b) in entering into and performing this Agreement, such Investor has not relied on any oral representations made by the Company or any of its agents, representatives or advisors. 5.9. Full Disclosure. No representation or warranty made by such Investor in this Agreement and no certificate or document furnished or to be furnished to the Company pursuant to this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. Except as set forth or referred to in this Agreement, (a) such Investor does not have any agreement or understanding with any person relating to acquiring, holding, voting or disposing of any equity securities of the Company. and (b) during the past five years there has not occurred any event listed in Item 401(f) of Regulation S-K or any investigation relating to any such event with respect to such Investor or any of its managing partners. SECURITIES PURCHASE AGREEMENT PAGE 17 ARTICLE VI COVENANTS OF THE COMPANY 6.1. Registration Rights. The Company shall cause the Registration Rights Agreement to remain in full force and effect and shall comply in all material respects with the terms thereof. 6.2. Reservation of Common Stock. As of the date hereof, the Company has reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, shares of Common Stock for the purpose of enabling the Company to issue the Shares underlying the Notes or the Series A Preferred Stock, as the case may be, and the Warrants; provided, however, that if, as a result of the Authorized Stock Proviso, there are not sufficient shares reserved as required in this Section 6.2, the Company shall, within thirty (30) days after the Company becomes aware of such deficiency, prepare and file with the Commission a proxy statement pursuant to which the Company will seek stockholder approval for an increase in the authorized Common Stock sufficient to enable the Company to be in compliance with this Section 6.2. Each Investor agrees to vote in favor of such proposal. 6.3. Compliance with Laws. The Company hereby agrees to comply in all material respects with the Company's reporting, filing and other obligations under the federal securities laws. 6.4. Exchange Act Registration. The Company will use its best efforts to comply in all respects with its reporting and filing obligations under the 1934 Act, and will not take any action or file any document (whether or not permitted by the 1934 Act or the rules thereunder) to terminate or suspend any such registration or to terminate or suspend its reporting and filing obligations under the 1934 until the Investors have disposed of all of their Shares. 6.5. Corporate Existence; Conflicting Agreements. The Company will take all steps necessary to preserve and continue the corporate existence of the Company. The Company shall not enter into any agreement, the terms of which agreement would restrict or impair the right or ability of the Company to perform any of its obligations under this Agreement or any of the other agreements attached as exhibits hereto. Notwithstanding the foregoing, nothing in this Agreement shall preclude the Company from re-incorporating in Delaware provided that (a) the rights of such Investor under the Notes are not impaired in any manner and (b) the terms of the Certificate of Designation shall be reflected in a certificate of designation filed pursuant to the Delaware General Corporation Law which is the same as the Certificate of Designation except for changes necessary to conform to Delaware law, none of which shall impair the rights of the holders of the Series A Preferred Stock. In the event of such reincorporation, all references in this Agreement and the Notes to the Certificate of Designation shall relate to the certificate of incorporation of the Delaware corporation and the certificate of designation filed pursuant thereto. SECURITIES PURCHASE AGREEMENT PAGE 18 6.6. Series A Preferred Stock. Until the earliest of (a) three years from the Closing or (b) such date as the Investor shall have converted the Notes or the Series A Preferred Stock into not less than 90% of the Total Shares sold the underlying Shares or (c) such date as the Investor shall have transferred the Notes or the Series A Preferred Stock which are convertible into an aggregate of not less than 90% of the Total Shares, the Company will not issue any preferred stock of with the exception of Series A Preferred Stock issued to the Investor as provided in this Agreement and the Registration Rights Agreement. 6.7. Convertible Debt. On or prior to the Closing Date, the Company will cause to be cancelled all convertible debt in the Company. Until the earliest of (a) three years from the Closing or (b) such date as the Investor shall have converted the Notes or the Series A Preferred Stock into not less than 90% of the Total Shares sold the underlying Shares or (c) such date as the Investor shall have transferred the Notes or the Series A Preferred Stock which are convertible into an aggregate of not less than 90% of the Total Shares, the Company will not issue any convertible debt. 6.8. Debt Limitation. The Company agrees that, for two years after Closing, neither it nor its consolidated subsidiaries, shall enter into any new borrowings to the extent that the principal amount of such borrowings outstanding at the end of a calendar quarter is more than three times the sum of the EBITDA from continuing operations over the four quarters ending on such date. 6.9. Reset Equity Deals. On or prior to the Closing Date, the Company will cause to be cancelled any and all reset features related to any shares outstanding that could result in additional shares being issued. For a period of three years from the Closing the Company will not enter into any transactions that have any reset features that could result in additional shares being issued. For purposes of this Section 6.9, a reset provision for a convertible security or derivative security shall mean a provision (a) whereby the issuance of securities at a lower price or having a lower conversion or exercise price will result in the conversion or exercise price of the security being reduced to the lower price or lower conversion or exercise price or more shares being issued, as the case may be, or (b) which provide that the conversion or exercise price is based on the market price at the time of conversion or exercise or (c) any other device which results in an adjustment to the exercise price or conversion price of the securities other than stock dividends, stock splits, stock distributions, combination of shares, reverse splits, and other recapitalizations, as long as they effect all stockholders appropriately. SECURITIES PURCHASE AGREEMENT PAGE 19 6.10. Independent Directors. 6.10.1. The Company shall have caused the appointment of the majority of the board of directors to be independent directors, as defined by the rules of the Nasdaq Stock Market, not later than the Closing Date. 6.10.2. If, at any time subsequent to the Closing Date until the earlier of (a) three years from the Closing or (b) such date as the Investors shall have converted not less than 90% of the Convertible Securities and sold the underlying Shares or (c) such date as the Investors shall have transferred not less than 90% of the Convertible Securities or (d) such date as the total number or principal amount of Convertible Securities which the Investors shall have either transferred or converted and sold the underlying Shares shall represent not less than 90% of Shares issuable upon conversion of the Convertible Securities issued to the Investors, the board of directors shall not be composed of a majority of independent directors: 6.10.2.1. for a reason other than for an Excused Reason, the Company shall have 60 days to take such steps as are necessary so that a majority of the Company's directors are independent directors, and 6.10.2.2. for an Excused Reason, the Company shall have 75 days from the date that the Company becomes aware of the event (or the last event if there are more than one such event) giving rise to the Excused Reason, to take such steps as are necessary so that a majority of the Company's directors are independent directors. 6.10.3. The term "Excused Reason" shall mean the death or resignation of an independent director or the occurrence of an event whereby an independent director ceases to be independent. 6.10.4. If, during the period referred to in Section 6.10.2 of this Agreement, the Company shall have failed to have a board of directors composed of a majority of independent directors after the date by which such situation was to have been cured pursuant to Section 6.10.2.1 or Section 6.10.2.2 of this Agreement, whichever shall apply, the Company shall pay to the Investors, as liquidated damages and not as a penalty, an amount equal to twelve percent (12%) per annum of the Purchase Price of the then outstanding shares of Series A Preferred Stock or principal amount of the Notes, as the case may be, payable monthly in cash or Series A Preferred Stock at the option of the Investors, based on the number of days that such condition exists beyond the applicable grace period; provided, however, that if the Restated Articles shall not have been filed, the Company may issue a Note in lieu of shares of Series A Preferred Stock pursuant to this Section 6.10 and Section 6.11 of this Agreement. The parties agree that the only damages payable for a violation of such provisions shall be such liquidated damages. Nothing shall preclude the Investors from pursuing or obtaining specific performance or other equitable relief with respect to this Agreement. The parties hereto agree that the liquidated damages provided for in this Section 6.10.4 constitute a reasonable estimate of the damages that may be incurred by the Investors by reason of the failure of the Company to have a majority of directors as independent directors. SECURITIES PURCHASE AGREEMENT PAGE 20 6.10.5. In no event shall the total payments made pursuant to this Section 6.10 and Section 6.11, whether in cash or Series A Preferred Stock exceed in the aggregate twelve percent (12%) of the Purchase Price of the shares of Series A Preferred Stock or principal amount of the Notes, as the case may be, that are outstanding as of the date on which a computation is being made. 6.11. Independent Directors on Audit and Compensation Committees. No later than the Closing Date, the Company will have an audit committee comprised solely of not less than three independent directors and a compensation committee comprised of not less than three directors, a majority of whom are independent directors. If at any time after the subsequent to the Closing Date, independent directors do not comprise all of the members of the audit committee and a majority of the members of the compensation committee within the grace periods provided in Section 6.10, the Company shall pay to the Investors, as liquidated damages and not as a penalty, an amount equal to twelve percent (12%) per annum of the Purchase Price of the then outstanding Series A Preferred Stock or principal amount of the Notes, as the case may be, payable monthly in cash or Series A Preferred Stock at the option of the Investors, such payment shall be based on the number of days that such condition exists. The parties agree that the only damages payable for a violation of the terms of this Agreement with respect to which liquidated damages are expressly provided shall be such liquidated damages. Nothing shall preclude the Investors from pursuing other remedies or obtaining specific performance or other equitable relief with respect to this Agreement. Notwithstanding the foregoing, no liquidated damages shall be payable pursuant to this Section 6.11 during any period for which liquidated damages are payable pursuant to Section 6.10. 6.12. Chief Financial Officer. Not later than the Closing Date, the Company will have elected a chief financial officer who is familiar with both the conduct of business in China and the SEC's rules and regulations relating to accounting, financial statements and accounting controls. 6.13. Use of Proceeds. The Company will use the net proceeds from the sale of the Notes, the Initial Shares and the Warrants (excluding amounts paid by the Company for legal and administrative fees and other expenses of the transaction) for working capital. 6.14. Right of First Refusal 6.14.1. In the event that the Company seeks to raise additional funds through a private placement of its securities (a "Proposed Financing"), other than Exempt Issuances, each Investor shall have the right to participate in any subsequent funding by the Company of the offering price on a pro rata basis, based on the percentage that (a) the number of such Investor's Total Shares, without regard to the 4.9% Limitation, bears to (b) the total number of shares of Common Stock outstanding plus the number of Shares issuable upon conversion of the Notes or Series A Preferred Stock, as the case may be, and any other series of convertible preferred stock or debt securities, without regard to the 4.9% Limitations any other limitations on exercise such other convertible preferred stock or debt securities. This Section 6.14 shall apply to each such offering based on the total purchase price of the securities being offered by the Company. SECURITIES PURCHASE AGREEMENT PAGE 21 6.14.2. The terms on which the Investors shall purchase securities pursuant to Proposed Financing shall be the same as such securities are purchased by other investors. The Company shall give the Investors the opportunity to participate in the offering by giving the Investors not less than ten (10) days notice setting forth the terms of the Proposed Financing. In the event that the terms of the Proposed Financing are changed in a manner which is more favorable to the potential investor, the Company shall provide the Investors, at the same time as the notice is provided to the other potential investors, with a new ten (10) day notice setting forth the revised terms that are provided to the other potential investors. 6.14.3. In the event that the Investors does not exercise its right to participate in the Proposed Financing within the time limits set forth in Section 6.14.2 of this Agreement, the Company may sell the securities in the Proposed Financing at a price and on terms which are no more favorable to the investors than the terms provided to the Investors. If the Company subsequently changes the price or terms so that the price is more favorable to the investors or so the terms are more favorable to the investors, the Company shall provide the Investors with the opportunity to purchase the securities on the revised terms in the manner set forth in Section 6.14.2 of this Agreement. 6.15. Price Adjustment. From the date hereof until such time as the Investors holds no Securities, except for Exempt Issuances, as to which this Section 6.15 does not apply, if the Company closes on the sale or issuance of Common Stock at a price, or warrants, options, convertible debt or equity securities with a exercise price per share or exercise price per share which is less than the Conversion Price then in effect (such lower sales price, conversion or exercise price, as the case may be, being referred to as the "Lower Price"), the Conversion Price in effect from and after the date of such transaction shall be reduced to the Lower Price. For purpose of determining the exercise price of warrants issued by the Company, the price, if any, paid per share for the warrants shall be added to the exercise price of the warrants. A similar provision shall be included in the Warrants; provided, however, that the adjustment for the Warrants with exercise prices of $1.20 and $1.75 per share shall have a formula reduction. SECURITIES PURCHASE AGREEMENT PAGE 22 6.16. Price Adjustments Based on Pre-Tax Income Per Share. 6.16.1. The Certificate of Designation shall contain the following provisions, and similar provisions shall be included in the Warrants. 6.16.2. In the event the Company's consolidated Pre-Tax Income for the year ended December 31, 2006 is less than $.212 per share on a fully-diluted basis, then the Conversion Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Thus, if Net Income for the year ended December 31, 2006 is $.1272 per share on a fully-diluted basis, the Conversion Price shall be reduced by 40%. Such reduction shall be made at the time the Company files its Form 10-KSB for the year ended December 31, 2006, and shall apply to the Notes or all shares of the Series A Preferred Stock, as the case may be, which are outstanding on the date the Form 10-KSB is filed, or, if not filed on time, on the date that filing was required. 6.16.3. In the event the Company's consolidated Pre-Tax Income for the year ended December 31, 2007 is less than $.353 per share on a fully-diluted basis, then the Conversion Price shall be reduced by the percentage shortfall, up to a maximum of 40%. Thus, if Pre-Tax Income for the year ended December 31, 2008 is $.2118 per share on a fully-diluted basis, the Conversion Price shall be reduced by 40%. Such reduction shall be made at the time the Company files its Form 10-KSB for the year ended December 31, 2007, and shall apply to the Notes or all shares of the Series A Preferred Stock, as the case may be, which are outstanding on the date the Form 10-KSB is filed, or, if not filed on time, on the date that filing was required. 6.16.4. For purpose of determining Net Income Per Share and Pre-Tax Income Per Share on a fully-diluted basis, all shares of Common Stock issuable upon conversion of convertible securities and upon exercise of warrants and options shall be deemed to be outstanding, regardless of whether (i) such shares are treated as outstanding for determining diluted earnings per share under GAAP, (ii) such securities are "in the money," or (iii) such shares may be issued as a result of the 4.9% Limitation. 6.17. Insider Selling. The earliest any Restricted Stockholders can start selling their shares of Common Stock in the public market shall be eighteen months from the Closing Date. Restricted Stockholders shall include all persons who are officers and directors of the Company and all present holders of equity interests in Sinogas. Andrew Barron Worden and the Investors shall not be considered Restricted Stockholders. The restrictions in this Section 6.17 shall not apply to shares issued pursuant to a stock option or long-term incentive plans which may be approved by the Compensation Committee provided that such committee is comprises of a majority of independent directors. The Company may include in the registration statement filed pursuant to the Registration Rights Agreement all of the shares of Common Stock which are outstanding immediately prior to the Closing, none of which shall be owned by Affiliates of the Company, Sinoenergy or Sinogas. Notwithstanding the forgoing, Eastpride Capital Limited can sell fifty percent (50%) of its shares of Common Stock in the public market during the one (1) year period commencing twelve (12) months from the Closing Date and the remaining shares of Common Stock commencing twenty four (24) months from the Closing Date. SECURITIES PURCHASE AGREEMENT PAGE 23 6.18. Employment and Consulting Contracts. For three years after the Closing, Company must have a unanimous approval from the Compensation Committee of the Board of Directors having reached a conclusion that any awards other than salary are usual, appropriate and reasonable for any officer, director or consultants whose compensation is more than $100,000 per annum. This Section 6.18 does not apply to attorneys, accountants and other persons who provide professional services to the Company. 6.19. Subsequent Equity Sales. From the date hereof until such time as the Investors hold no more than 5% of the Shares (determined as if the Series A Preferred Stock were fully converted and the Warrants fully exercised), the Company shall be prohibited from effecting or entering into an agreement to effect any Subsequent Financing involving a "Variable Rate Transaction" or an "MFN Transaction" (each as defined below). The term "Variable Rate Transaction" shall mean a transaction in which the Company issues or sells (i) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock. The term "MFN Transaction" shall mean a transaction in which the Company issues or sells any securities in a capital raising transaction or series of related transactions which grants to an investor the right to receive additional shares based upon future transactions of the Company on terms which are more favorable to the Investors than the terms initially provided to the investor in its initial securities purchase agreement with the Company. The Investors shall be entitled to obtain injunctive relief against the Company to preclude any such issuance, which remedy shall be in addition to any right to collect damages. Notwithstanding the foregoing, this Section 6.19 shall not apply in respect of an Exempt Issuance, except that no Variable Rate Transaction or MFN Transaction shall be an Exempt Issuance. 6.20. Approval of Restated Articles. The Company shall adopt the Restated Articles and the file the Restated Articles and the Certificate of Designation not later than one hundred twenty (120) from the Closing Date. 6.21. Stock Splits. All forward and reverse stock splits shall effect all equity and derivative holders proportionately. SECURITIES PURCHASE AGREEMENT PAGE 24 6.22. Payment of Due Diligence Expenses. At Closing the Escrow Agent shall disperse to the Barron Fifty Thousand Dollars ($50,000.00) for due diligence, legal and any other expenses which the Investors may incur in connection with this Agreement. 6.23. Title to Real Property. The Company shall, and shall cause Sinogas to, obtain all necessary government approvals to the transfer of the Real Property into the name of Sinogas. 6.24. Restriction on Certain Payments. The Company has advised the Investors that Sinogas has incurred liabilities of RMB 56,000,000, in connection with the purchase of the Real Property, of which approximately RMB 26,000,000 (the "Restricted Amount") is owed to officers, directors or other affiliates of the Company, including Beijing Sanhuan Technology Development Co. Ltd. The RMB 30,000,000 which may be paid as hereinafter provided is referred to as the "Payable Amount." The Company shall not, and shall cause Sinogas not to, pay any of Restricted Amount to Sinogas' officers, directors or other affiliates until the earlier of (i) such time as the Real Property is sold, and then only from the net proceeds of sale or (ii) such time as all of the Shares shall have been sold in the public market. The Company shall not, and shall cause Sinogas not to, make any payment in respect to Payable Amount except as follows: Consolidated net income for the Company shall be determined on a quarterly basis, in accordance with GAAP as reflected in the Company's filings with the SEC. For each quarter, the amount payable with respect to the Payable Amount shall not exceed fifty percent (50%) of the Company's net income and shall be payable not earlier than the second business day after the applicable quarterly or annual report is filed with the SEC. Notwithstanding the foregoing, in no event shall any payment may made on account of the purchase of the Real Property prior to the date that Sinogas and the seller shall have received all government approvals necessary for the transfer of the Real Property to Sinogas. ARTICLE VII COVENANTS OF THE INVESTORS 7.1. Compliance with Law. Each Investor covenants that its trading activities with respect to shares of the Company's Common Stock will be in compliance with all applicable state and federal securities laws, rules and regulations and rules and regulations of any public market on which the Company's Common Stock is listed. 7.2. Transfer Restrictions. Each Investor acknowledges that (1) the Notes, the Initial Shares and Warrants and shares of Series A Preferred Stock and Common Stock issuable upon conversion of the Notes and Series A Preferred Stock or upon exercise of the Warrants have not been registered under the 1933 Act, and may not be transferred unless (A) subsequently registered thereunder or (B) the Investor shall have delivered to the Company an opinion of counsel, which counsel and opinion shall be reasonably satisfactory to the Company, to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; and (2) any sale of the Securities made in reliance on Rule 144 promulgated under the 1933 Act may be made only in accordance with the terms of said Rule, to the extent that such Rule is applicable. SECURITIES PURCHASE AGREEMENT PAGE 25 7.3. Restrictive Legend. Each Investor acknowledges and agrees that the Securities and the Shares shall bear a restrictive legend and a stop-transfer order may be placed against transfer of any such Securities except that the requirement for a restrictive legend shall not apply to Shares sold pursuant to a current and effective registration statement or a sale pursuant Rule 144 or any successor rule: 7.4. Restated Articles. Each Investor hereby agrees to vote any shares of capital stock that the Investor may own directly or beneficially, for the adoption of the Restated Articles. 7.5. Limitation on Amendment. No Investor shall take any action to modify the 4.9% Limitation in this Agreement, the Notes, the Certificate of Designation or the Warrants. ARTICLE VIII CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS The obligation of the Company to consummate the transactions contemplated hereby shall be subject to the fulfillment, on or prior to Closing Date, of the following conditions: 8.1. No Termination. This Agreement shall not have been terminated pursuant to Article X hereof. 8.2. Representations True and Correct. The representations and warranties of the Investor contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as if made on as of the Closing Date. 8.3. Compliance with Covenants. The Investor shall have performed and complied in all material respects with all covenants, agreements, and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing Date. 8.4. No Adverse Proceedings. On the Closing Date, no action or proceeding shall be pending by any public authority or individual or entity before any court or administrative body to restrain, enjoin, or otherwise prevent the consummation of this Agreement or the transactions contemplated hereby or to recover any damages or obtain other relief as a result of the transactions proposed hereby. SECURITIES PURCHASE AGREEMENT PAGE 26 ARTICLE IX CONDITIONS PRECEDENT TO INVESTORS' OBLIGATIONS The obligation of the Investors to consummate the transactions contemplated hereby shall be subject to the fulfillment, on or prior to Closing Date unless specified otherwise, of the following conditions: 9.1. No Termination. This Agreement shall not have been terminated pursuant to Article X hereof. 9.2. Representations True and Correct. The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as if made on as of the Closing Date. 9.3. Compliance with Covenants. The Company shall have performed and complied in all material respects with all covenants, agreements, and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing Date. 9.4. No Adverse Proceedings. On the Closing Date, no action or proceeding shall be pending by any public authority or individual or entity before any court or administrative body to restrain, enjoin, or otherwise prevent the consummation of this Agreement or the transactions contemplated hereby or to recover any damages or obtain other relief as a result of the transactions proposed hereby. 9.5. Exchange of Securities Completed. The Exchange of Securities shall have been completed on or prior to the Closing Date, and the Company shall be the sole equity owner of Sinoenergy and Sinoenergy shall be the sole equity owner of Sinogas. ARTICLE X TERMINATION, AMENDMENT AND WAIVER 10.1. Termination. This Agreement may be terminated at any time prior to the Closing Date 10.1.1. by mutual written consent of the Investors and the Company; 10.1.2. by the Company upon a material breach of any representation, warranty, covenant or agreement on the part of the Investors set forth in this Agreement, or by the Investors upon a material breach of any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement, or by either party if (a) the representations or warranties of the other party, taken together, shall fail to be true and correct in all material respects or (b) if the conditions to closing set forth in Article VIII or Article IX of this Agreement set forth in Article VIII or Article IX hereof shall not be satisfied, and such breach or failure shall, if capable of cure, not have been cured within five (5) business days after receipt by the party in breach of a notice from the non-breaching party setting forth in detail the nature of such breach. SECURITIES PURCHASE AGREEMENT PAGE 27 10.2. Effect of Termination. Except as otherwise provided herein, in the event of the termination of this Agreement pursuant to Section 10.1 hereof, there shall be no liability on the part of the Company or the Investors or any of their respective officers, directors, agents or other representatives and all rights and obligations of any party hereto shall cease. 10.3. Amendment. This Agreement may be amended by the parties hereto any time prior to the Closing Date by an instrument in writing signed by the parties hereto; provided, however that the 4.9% Limitation may not be amended or waived. 10.4. Waiver. At any time prior to the Closing Date, the Company or the Investors, as appropriate, may: (a) extend the time for the performance of any of the obligations or other acts of other party or; (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto which have been made to it or them; or (c) waive compliance with any of the agreements or conditions contained herein for its or their benefit other than the 4.9% Limitation which may not be waived. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound hereby. ARTICLE XI GENERAL PROVISIONS 11.1. Transaction Costs. Except as otherwise provided herein, each of the parties shall pay all of his or its costs and expenses (including attorney fees and other legal costs and expenses and accountants' fees and other accounting costs and expenses) incurred by that party in connection with this Agreement; provided, the Company shall pay the Investors for its expenses as provided in Section 6.22. 11.2. Indemnification. The Investor agrees to indemnify, defend and hold the Company (following the Closing Date) and its officers and directors harmless against and in respect of any and all claims, demands, losses, costs, expenses, obligations, liabilities or damages, including interest, penalties and reasonable attorney's fees, that it shall incur or suffer, which arise out of or result from any breach of this Agreement by the Investors or failure by the Investors to perform with respect to the representations, warranties or covenants contained in this Agreement or in any exhibit or other instrument furnished or to be furnished under this Agreement. The Company agrees to indemnify, defend and hold the Investors (following the Closing Date) harmless against and in respect of any and all claims, demands, losses, costs, expenses, obligations, liabilities or damages, including interest, penalties and reasonable attorney's fees, that it shall incur or suffer, which arise out of, result from or relate to any breach of this Agreement or failure by the Company to perform with respect to the representations, warranties or covenants contained in this Agreement or in any exhibit or other instrument furnished or to be furnished under this Agreement. In no event shall the Company or the Investors be entitled to recover consequential or punitive damages resulting from a breach or violation of this Agreement nor shall any party have any liability hereunder in the event of gross negligence or willful misconduct of the indemnified party. In the event of the failure of the Company to issue the Series A Preferred Stock and Warrants in violation of the provisions of this Agreement, the Investors, as their sole remedy, shall be entitled to pursue a remedy of specific performance upon tender into the Court an amount equal to the Purchase Price hereunder. The indemnification by the Investors shall be limited to $50,000.00. This Section 11.2 shall not relate to indemnification under the Registration Rights Agreement. SECURITIES PURCHASE AGREEMENT PAGE 28 11.3. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11.4. Entire Agreement. This Agreement (together with the Schedule, Exhibits, Warrants and documents referred to herein) constitute the entire agreement of the parties and supersede all prior agreements and undertakings, both written and oral, between the parties, or any of them, with respect to the subject matter hereof. 11.5. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been given (i) on the date they are delivered if delivered in person; (ii) on the date initially received if delivered by facsimile transmission or e-mail provided that any notice by facsimile or e-mail shall only be effective if receipt is acknowledged by the recipient; or (iv) on the on the date of delivery as shown on the return receipt, if mailed by registered or certified mail, return receipt requested with postage and other fees prepaid as follows: If to the Company or Sinogas: c/o Qingdao Sinogas General Machinery Corp. 45 Jinghua Road Qingdao, Shandong, China, 266042 Attn: Bo Huang, CEO Facsimile: (0532) 84851840 e-mail: QDZYTY@163.com With a copy to: Katsky Korins LLP 605 Third Avenue New York, New York 10158 Attention: Asher S. Levitsky P.C. Facsimile No.: (212) 716-3338 e-mail: alevitsky@katskykorins.com If to the Investors: at their respective addresses set forth in Schedule A SECURITIES PURCHASE AGREEMENT PAGE 29 11.6. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any such term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. 11.7. Binding Effect. All the terms and provisions of this Agreement whether so expressed or not, shall be binding upon, inure to the benefit of, and be enforceable by the parties and their respective administrators, executors, legal representatives, heirs, successors and assignees. 11.8. Preparation of Agreement. This Agreement shall not be construed more strongly against any party regardless of who is responsible for its preparation. The parties acknowledge each contributed and is equally responsible for its preparation. In resolving any dispute regarding, or construing any provision in, this Agreement, there shall be no presumption made or inference drawn because of the drafting history of the Agreement, or because of the inclusion of a provision not contained in a prior draft or the deletion or modification of a provision contained in a prior draft. 11.9. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to applicable principles of conflicts of law. 11.10. Jurisdiction. If any action is brought among the parties with respect to this Agreement or otherwise, by way of a claim or counterclaim, the parties agree that in any such action, and on all issues, the parties irrevocably waive their right to a trial by jury. Exclusive jurisdiction and venue for any such action shall be the federal and state courts situated in the City, County and State of New York. In the event suit or action is brought by any party under this Agreement to enforce any of its terms, or in any appeal therefrom, it is agreed that the prevailing party shall be entitled to reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or appellate court if such party prevails on substantially all issues in dispute. SECURITIES PURCHASE AGREEMENT PAGE 30 11.11. Preparation and Filing of SEC filings. The Investors shall reasonably assist and cooperate with the Company in the preparation of all filings with the SEC after the Closing Date due after the Closing Date. 11.12. Further Assurances, Cooperation. Each party shall, upon reasonable request by the other party, execute and deliver any additional documents necessary or desirable to complete the transactions herein pursuant to and in the manner contemplated by this Agreement. The parties hereto agree to cooperate and use their respective best efforts to consummate the transactions contemplated by this Agreement. 11.13. Survival. The representations, warranties, covenants and agreements made herein shall survive the Closing of the transaction contemplated hereby. 11.14. Third Parties. Except as disclosed in this Agreement, nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than the parties hereto and their respective administrators, executors, legal representatives, heirs, successors and assignees. Nothing in this Agreement is intended to relieve or discharge the obligation or liability of any third persons to any party to this Agreement, nor shall any provision give any third persons any right of subrogation or action over or against any party to this Agreement. 11.15. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty, covenant or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. 11.16. Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. A facsimile transmission of this signed Agreement shall be legal and binding on the party who delivered the Agreement by facsimile transmission; provided, that such party shall promptly deliver the signed Agreement by overnight courier services. [SIGNATURES ON FOLLOWING PAGE] SECURITIES PURCHASE AGREEMENT PAGE 31 IN WITNESS WHEREOF, the Investors and the Company have as of the date first written above executed this Agreement. THE COMPANY: FRANKLYN RESOURCES III, INC. By: --------------------------------- Bo Huang, Chief Executive Officer INVESTORS: BARRON PARTNERS LP By: Barron Capital Advisors, LLC, its General Partner By: --------------------------------- Andrew Barron Worden President 730 Fifth Avenue, 9th Floor New York NY 10019 JCAR Funds Ltd. By: --------------------------------- Jon R.Carnes, CEO - ---------------------------------- Steve Mazur - ---------------------------------- Ray Rivers 33 Schedule A
NUMBER OF SHARES OF COMMON STOCK INTO WHICH NOTE NUMBER OF SHARES AND/OR PREFERRED UNDERLYING "A", "B" NAME AND ADDRESS AMOUNT OF INVESTMENT INITIAL SHARES STOCK IS CONVERTIBLE AND "C" WARRANTS - ---------------- -------------------- -------------- -------------------- ----------------------------- Barron Partners LP $3,100,000 326,829 4,769,231 5,314,286/5,314,286/5,314,286 730 Fifth Avenue 9th Floor New York, New York 10019 Attn: Andrew Barron Worden e-mail: abw@barronpartners.com mcj@barronpartners.com JCAR Funds Ltd. 200,000 21,086 307,692 342,857/342,857/342,857 Attn: Jon R. Carnes Steve Mazur 100,000 10,543 153,846 171,429/171,429/171,429 Ray Rivers 100,000 10,543 153,846 171,429/171,429/171,429
Schedule 4.3.1 - Capitalization Exhibit A Form of Note Exhibit B Form of Certificate of Designation Exhibit C Escrow Agreement Exhibit D Registration Rights Agreement Exhibit E Restated Articles Exhibit F-1 $.85 Warrants Exhibit F-2 $1.20 Warrant Exhibit F-3 $1.75 Warrant EX-99.2 8 v045248_ex99-2.txt Exhibit 99.2 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of 2nd day of June, 2006, by and among Franklyn Resources III, Inc., a corporation organized and existing under the laws of the State of Nevada (the "Company"), and Barron Partners L.P., a Delaware limited partnership, and the other investors who execute this Agreement. (collectively, the "Investor"). Unless defined otherwise, capitalized terms herein shall have the identical meaning as in the Preferred Stock Purchase Agreement, of even date herewith (the "Purchase Agreement"), by and among the Company and the Investor. PRELIMINARY STATEMENT WHEREAS, pursuant to the Purchase Agreement, the Investor is purchasing Preferred Stock and Warrants, which entitle the Investor to receive Shares of the Company upon conversion or exercise thereof; and WHEREAS, the ability of the Investor to sell its Shares of Common Stock is subject to certain restrictions under the 1933 Act; and WHEREAS, as a condition to purchase of Preferred Stock and Warrants pursuant to the Purchase Agreement, the Company has agreed to provide the Investor with a mechanism that will permit the Investor, subject to a market stand-off agreement, to sell the Shares in the future. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements, and subject to the terms and conditions herein contained, the parties hereto hereby agree as follows: ARTICLE I INCORPORATION BY REFERENCE, SUPERSEDER 1.1. Incorporation by Reference. The foregoing recitals and the Exhibits attached hereto and referred to herein, are hereby acknowledged to be true and accurate, and are incorporated herein by this reference. 1.2. Superseder. This Agreement, to the extent that it is inconsistent with any other instrument or understanding among the parties governing the affairs of the Company, shall supersede such instrument or understanding to the fullest extent permitted by law. A copy of this Agreement shall be filed at the Company's principal office. ARTICLE II DEMAND REGISTRATION RIGHTS 2.1. Registrable Securities. The term "Registrable Securities" shall means and include the Shares of the Company underlying the Note and the Preferred Stock and Warrants issued pursuant to the Purchase Agreement or on conversion of the Note. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when (a) they have been effectively registered under the 1933 Act and disposed of in accordance with the registration statement covering them, (b) they are or may be freely traded without registration pursuant to Rule 144 under the 1933 Act (or any similar provisions that are then in effect), or (c) they have been otherwise transferred and new certificates for them not bearing a restrictive legend have been issued by the Company and the Company shall not have "stop transfer" instructions against them. "Shares" shall mean, collectively, the shares of Common Stock of the Company issuable upon conversion of the Preferred Stock and those shares of Common Stock of the Company issuable to the Investor upon exercise of the Warrants. 2.2. Registration of Registrable Securities. The Company shall prepare and file within sixty (60) days following the date hereof (the "Filing Date") a registration statement (the "Registration Statement") covering the sale of such number of shares of the Registrable Securities as the Investor shall elect by written notice to the Company, and absent such election, covering the sale of all of the shares of the Registrable Securities. The Company shall use its best efforts to cause the Registration Statement to be declared effective by the SEC on the first to occur of (i) 120 days following the Filing Date with respect to the Registration Statement, (ii) ten (10) days following the receipt of a "No Review" or similar letter from the SEC or (iii) the third (3rd) business day following the day the Company receives notice from the SEC that the SEC has determined that the Registration Statement eligible to be declared effective without further comments by the SEC (the "Required Effectiveness Date"). Nothing contained herein shall be deemed to limit the number of Registrable Securities to be registered by the Company hereunder. As a result, should the Registration Statement not relate to the maximum number of Registrable Securities acquired by (or potentially acquirable by) the holders of the Shares of the Company issued to the Investor pursuant to the Purchase Agreement and the Warrants, other than as a result of the election by the holder thereof not to have Shares included in the Registration Statement, the Company shall be required to promptly file a separate registration statement (utilizing Rule 462 promulgated under the 1933 Act, if applicable) relating to such Registrable Securities which then remain unregistered. The provisions of this Agreement shall relate to any such separate registration statement as if it were an amendment to the Registration Statement. 2.3. Demand Registration. Subject to the limitations of Section 2.2, at any time and from time to time, the Investor may request the registration under the 1933 Act of all or part of the Registrable Securities then outstanding (a "Demand Registration"). Subject to the conditions of Section 3, the Company shall use its commercially reasonable best efforts to file such registration statement under the 1933 Act as promptly as practicable after the date any such request is received by the Company and to cause such registration statement to be declared effective. The Company shall notify the Investor promptly when any such registration statement has been declared effective. If more than eighty percent (80%) of the Shares issuable under the Purchase Agreement have been registered or sold, the Company's obligations under this Article II shall terminate. 2.4. Registration Statement Form. Registrations under Section 2.2 and Section 2.3 shall be on the appropriate registration form of the SEC as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition specified in the Registration Statement; provided, however, such intended method of disposition shall not include an underwritten offering of the Registrable Securities. 2.5. Expenses. The Company will pay all Registration Expenses in connection with any registration required by under Sections 2.2 and Section 2.3 herein. Registration Expenses shall mean all expenses incident to the Company's performance of or compliance with its obligations under this Agreement, including, without limitation, all registration, filing, listing, stock exchange and NASD fees, all fees and expenses of complying with state securities or blue sky laws (including fees, disbursements and other charges of counsel for the underwriters only in connection with blue sky filings), all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees, disbursements and other charges of counsel for the Company and of its independent public accountants, including the expenses incurred in connection with "cold comfort" letters required by or incident to such performance and compliance, any fees and disbursements of underwriters customarily paid by the issuer of securities, but excluding from the definition of Expenses underwriting and discounts and brokerage commissions and applicable transfer taxes, if any, or legal and other expenses incurred by any sellers, which discounts, commissions, transfer taxes and legal and other expenses shall be borne by the seller or sellers of Registrable Securities in all cases. -2- 2.6. Effective Registration Statement. A registration requested pursuant to Sections 2.2 and Section 2.3 shall not be deemed to have been effected, other than for an Excused Reason, as hereinafter defined, (i) unless a registration statement with respect thereto has become effective, provided that a registration which does not become effective after the Company filed a registration statement with respect thereto solely by reason of the refusal to proceed of any holder of Registrable Securities (other than a refusal to proceed based upon the advice of counsel in the form of a letter signed by such counsel and provided to the Company relating to a disclosure matter unrelated to such holder) shall be deemed to have been effected by the Company, (ii) if, after it has become effective, such registration becomes subject to any stop order, injunction or other order or extraordinary requirement of the SEC or other governmental agency or court for any reason and such stop order or other action continues in effect for five trading days or (iii) if, after it has become effective, such registration ceases to be effective for more than the allowable Black-Out Periods, as hereinafter defined. An Excused Reason shall include, without limitation, acts of God, closure of the SEC. 2.7. Plan of Distribution. The Company hereby agrees that the Registration Statement shall include a plan of distribution section reasonably acceptable to the Investor; provided, however, such plan of distribution section shall be modified by the Company so as to not provide for the disposition of the Registrable Securities on the basis of an underwritten offering. 2.8. Liquidated Damages. (i) In the event (a) the Company does not file the Registration Statement covering the Registrable Securities by the Filing Date as required by Section 2.2 herein, or (b) the Registration Statement filed pursuant to Section 2.2 herein is not declared effective by the Required Effectiveness Date as provided in said Section 2.2, or (c) if the Registrable Securities are registered pursuant to an effective Registration Statement and such Registration Statement or other Registration Statement(s) demanded by Investor including the Registrable Securities is not effective in the period from the Required Effective Date through two years following the date hereof other than for a Black-out Period, the Company shall, for each such day (x) after the Filing Date that the Company shall not have filed the Registration Statement, (y) after the Required Effectiveness Date that the Registration Statement shall not have been declared effective, or (z) during which the Registration Statement is not effective as required by clause (c) of this Section 2.8(i), issue to the Investor, as liquidated damages and not as a penalty, 1,770 shares of Preferred Stock for any such day (based on a 365 day working calendar year), such issuance shall be made no later than the tenth business day of the calendar month next succeeding the month in which such day occurs; provided, however, that if the Registration Statement does not cover, or registration has not been requested for, the Registrable Securities issuable upon conversion of all of the shares of Preferred Stock that were issued by the Company, the liquidated damages per day shall be the percentage of 1,770 shares that the number of Registrable Securities then subject to, or proposed to be include in, the Registration Statement bears to the total number Registrable Securities issued or issuable upon conversion of all of the Preferred Stock that were initially issued to the Investor. However, in no event shall the Company be required to pay any liquidated damages under this Section 2.8 in an amount exceeding 950,000 shares of Preferred Stock in the aggregate (as adjusted pursuant to the terms of the Certificate of Designation). (ii) Notwithstanding the provisions of Section 2.8(i): (a) In the event that the Company shall fail to file the Registration Statement by the Filing Date but the Registration Statement shall have been declared effective by the Required Effectiveness Date, then no liquidated damages shall be payable with respect to the failure to file by the Filing Date. The Company may defer the issuance of any such shares of Preferred Stock until the first date after the Required Effectiveness Date that the Company is required to pay liquidated damages pursuant to Section 2.8(i). (b) Any liquidated damages payable as a result of the failure to file the Registration Statement by the Filing Date shall be credited against liquidated damages payable as a result of the failure of the Registration Statement to be declared effective by the Required Effectiveness Date. -3- (c) No fractional shares shall be issued. Any fractional shares which would otherwise be issued on any date on which Preferred Stock is to be issued pursuant to Section 2.8(i) of this Agreement, shall be carried forward; provided, however, that if, at the expiration of the period during which liquidated damages is payable there remains a fractional shall which has not been applied to liquidated damages, the Company shall have no further obligation to issue such fractional share. (iii) In no event shall the Company be required to pay any liquidated damages in the event that the failure of the registration statement to be declared effective on the Required Effective Date results in whole or in part from either (a) the failure of any Investor to provide information relating to the Investor and its proposed method of sale or any other information concerning the Investor that is required to be included in the registration statement or (b) any delays resulting from questions raised by the SEC or any other regulatory agency, market or exchange concerning the Investor or the affiliates of the Investor. (iv) The parties hereto agree that the liquidated damages provided for in this Section 2.8 constitute a reasonable estimate of the damages that may be incurred by the Investor by reason of the failure of the Registration Statement(s) to be filed or declared effective in accordance with the provisions hereof. (v) The obligation of the Company terminates when the Investor no longer holds more than ten percent (10%) of the Registrable Securities, based on the number of Registrable Securities initially issuable pursuant to the Purchase Agreement and any shares issued due to adjustments in these transaction documents and the Warrants. ARTICLE III INCIDENTAL REGISTRATION RIGHTS 3.1. Right To Include ("Piggy-Back") Registrable Securities. Provided that the Registrable Securities have not been registered, if at any time after the date hereof but before the second anniversary of the date hereof, the Company proposes to register any of its securities under the 1933 Act (other than by a registration in connection with an acquisition in a manner which would not permit registration of Registrable Securities for sale to the public, on Form S-8, or any successor form thereto, on Form S-4, or any successor form thereto and other than pursuant to Section 2), on an underwritten basis (either best-efforts or firm-commitment), then, the Company will each such time give prompt written notice to all holders of Registrable Securities of its intention to do so and of such holders of Registrable Securities' rights under this Section 3.1. Upon the written request of any such holders of Registrable Securities made within ten (10) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such holders of Registrable Securities and the intended method of disposition thereof), the Company will, subject to the terms of this Agreement, use its commercially reasonable best efforts to effect the registration under the 1933 Act of the Registrable Securities, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of such Registrable Securities so to be registered, by inclusion of such Registrable Securities in the registration statement which covers the securities which the Company proposes to register, provided that if, at any time after written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason either not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each holders of Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of this obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registrable Securities entitled to do so to request that such registration be effected as a registration under Section 2, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. No registration effected under this Section 3.1 shall relieve the Company of its obligation to effect any registration upon request under Section 2 except to the extent that any Registrable Securities are registered pursuant to such registration statement. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 3.1. -4- 3.2. Priority In Incidental Registrations. If the managing underwriter of the underwritten offering contemplated by this Section 3 shall inform the Company and holders of the Registrable Securities requesting such registration by letter of its belief that the number of securities requested to be included in such registration exceeds the number which can be sold in such offering, then the Company will include in such registration, to the extent of the number which the Company is so advised can be sold in such offering, (i) first securities proposed by the Company to be sold for its own account, and (ii) second to holders of securities having demand registration rights and exercising such rights in connection with such registration statement, (iii) third Registrable Securities and securities of other selling security holders (including Insiders, as defined in the Purchase Agreement) who requested to be included in such registration on a pari passu basis. ARTICLE IV REGISTRATION PROCEDURES 4.1. Registration Procedures. If and whenever the Company is required to effect the registration of any Registrable Securities under the 1933 Act as provided in Section 2.2 and, as applicable, 2.3, the Company shall, as expeditiously as possible: (i) prepare and file with the SEC the Registration Statement, or amendments thereto, to effect such registration (including such audited financial statements as may be required by the 1933 Act or the rules and regulations promulgated thereunder) and thereafter use its commercially reasonable best efforts to cause such registration statement to be declared effective by the SEC, as soon as practicable, but in any event no later than the Required Effectiveness Date (with respect to a registration pursuant to Section 2.2); provided, however, that before filing such registration statement or any amendments thereto, the Company will furnish to the counsel selected by the holders of Registrable Securities which are to be included in such registration, copies of all such documents proposed to be filed; (ii) with respect to any registration statement pursuant to Section 2.2 or Section 2.3, prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities covered by such registration statement until the earlier to occur of thirty six (36) months after the date of this Agreement (subject to the right of the Company to suspend the effectiveness thereof for not more than 15 consecutive Trading Days or an aggregate of 20 Trading Days during each year (each a "Black-Out Period")) or such time as all of the securities which are the subject of such registration statement cease to be Registrable Securities (such period, in each case, the "Registration Maintenance Period"). The Company must notify the Investor within twenty four (24) hours prior to any Black-Out Period; (iii) furnish to each holder of Registrable Securities covered by such registration statement such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the 1933 Act, in conformity with the requirements of the 1933 Act, and such other documents, as such holder of Registrable Securities and underwriter, if any, may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by such holder of Registrable Securities; -5- (iv) use its commercially reasonable best efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under such other U.S. federal or state securities laws or U.S. state blue sky laws as any U.S. holder of Registrable Securities thereof shall reasonably request, to keep such registrations or qualifications in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary to enable such holder of Registrable Securities to consummate the disposition in such jurisdictions of the securities owned by such holder of Registrable Securities, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iv) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (v) use its commercially reasonable best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the U.S. holder of Registrable Securities thereof to consummate the disposition of such Registrable Securities; (vi) furnish to each holder of Registrable Securities a signed counterpart, addressed to such holder of Registrable Securities, and the underwriters, if any, of an opinion of counsel for the Company, dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), such opinion to be in the form filed as Exhibit 5 to the registration statement, and (vii) notify the Investor and its counsel promptly and confirm such advice in writing promptly after the Company has knowledge thereof: (a) when the Registration Statement, the prospectus or any prospectus supplement related thereto or post-effective amendment to the Registration Statement has been filed, and, with respect to the Registration Statement or any post-effective amendment thereto, when the same has become effective; (b) of any request by the SEC for amendments or supplements to the Registration Statement or the prospectus or for additional information; (c) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings by any Person for that purpose; and (d) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation or threat of any proceeding for such purpose; (viii) notify each holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material facts required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of any such holder of Registrable Securities promptly prepare and furnish to such holder of Registrable Securities a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; -6- (ix) use its commercially reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (x) otherwise use its commercially reasonable best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder; (xi) enter into such agreements and take such other actions as the Investor shall reasonably request in writing (at the expense of the requesting or benefiting Investor) in order to expedite or facilitate the disposition of such Registrable Securities; and (xii) use its commercially reasonable best efforts to list all Registrable Securities covered by such registration statement on any securities exchange on which any of the Registrable Securities are then listed. The Company may require each holder of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such holder of Registrable Securities and the distribution of such securities as the Company may from time to time reasonably request in writing, including (a) furnish the information as to any shares of Common Stock or other securities of the Company owned by the holder, the holder's proposed plan of distribution, any relationship between the holder and the Company and any other information which the Company reasonably requests in connection with the preparation of the registration statement and update such information immediately upon the occurrence of any events or condition which make the information concerning the Seller inaccurate in any material respect; (b) not sell any Registrable Securities pursuant to the registration statement except in the manner set forth in the Registration Statement; (c) comply with the prospectus delivery requirements and the provisions of Regulation M of the SEC pursuant to the 1933 Act to the extent that such regulation is applicable to the holder; (d) not sell or otherwise transfer or distribute any Registrable Securities if the holder possesses any material nonpublic information concerning the Company. 4.2. The Company will not file any registration statement pursuant to Section 2.2 or Section 2.3, or amendment thereto or any prospectus or any supplement thereto to which the Investor shall reasonably object, provided that the Company may file such documents in a form required by law or upon the advice of its counsel. 4.3. The Company represents and warrants to each holder of Registrable Securities that it has obtained all necessary waivers, consents and authorizations necessary to execute this Agreement and consummate the transactions contemplated hereby other than such waivers, consents and/or authorizations specifically contemplated by the Purchase Agreement. -7- 4.4. Each holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in subdivision (viii) of Section 4.1, such Holder will forthwith discontinue such holder of Registrable Securities' disposition of Registrable Securities pursuant to the Registration Statement relating to such Registrable Securities until such holder of Registrable Securities' receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (viii) of Section 4.1 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. ARTICLE V UNDERWRITTEN OFFERINGS 5.1. Incidental Underwritten Offerings. If the Company at any time proposes to register any of its securities under the 1933 Act as contemplated by Section 3.1 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registrable Securities as provided in Section 3.1 and subject to the provisions of Section 3.2, use its commercially reasonable best efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by such holder among the securities to be distributed by such underwriters. In no event shall any Investor be deemed an underwriter for purposes of this Agreement. This Article V shall not apply to any Registrable Securities theretofore registered pursuant to Article II of this Agreement. 5.2. Participation In Underwritten Offerings. No holder of Registrable Securities may participate in any underwritten offering under Section 3.1 unless such holder of Registrable Securities (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved, subject to the terms and conditions hereof, by the holders of a majority of Registrable Securities to be included in such underwritten offering and (ii) completes and executes all questionnaires, indemnities, underwriting agreements and other documents (other than powers of attorney) required under the terms of such underwriting arrangements. Notwithstanding the foregoing, no underwriting agreement (or other agreement in connection with such offering) shall require any holder of Registrable Securities to make a representation or warranty to or agreements with the Company or the underwriters other than representations and warranties contained in a writing furnished by such holder of Registrable Securities expressly for use in the related registration statement or representations, warranties or agreements regarding such holder of Registrable Securities, such holder's Registrable Securities and such holder's intended method of distribution and any other representation required by law. 5.3. Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement under the 1933 Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the reasonable opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the 1933 Act. -8- ARTICLE VI INDEMNIFICATION 6.1. Indemnification by the Company. In the event of any registration of any securities of the Company under the 1933 Act, the Company will, and hereby does agree to indemnify and hold harmless the holder of any Registrable Securities covered by such registration statement, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such holder or any such underwriter within the meaning of the 1933 Act against any losses, claims, damages or liabilities, joint or several, to which such holder or any such director or officer or underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the 1933 Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such holder and each such director, officer, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability, (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company by such holder or underwriter stating that it is for use in the preparation thereof and, provided further that the Company shall not be liable to any Person who participates as an underwriter in the offering or sale of Registrable Securities or to any other Person, if any, who controls such underwriter within the meaning of the 1933 Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, within the time required by the 1933 Act to the Person asserting the existence of an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus or an amendment or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by such holder. 6.2. Indemnification by the Investor. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to this Agreement, that the Company shall have received an undertaking satisfactory to it from the prospective holder of such Registrable Securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 6.1) the Company, each director of the Company, each officer of the Company and each other Person, if any, who controls the Company within the meaning of the 1933 Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such holder of Registrable Securities specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Any such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by the Investor. The indemnification by the Investor shall be limited to Fifty Thousand ($50,000) Dollars. -9- 6.3. Notices Of Claims, Etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in Sections 6.1 and Section 6.2, such indemnified party will, if claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under Sections 6.1 and Section 6.2, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such reasonable judgment of counsel to the indemnified party, a conflict of interest, as hereinafter defined, between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability, or a covenant not to sue, in respect to such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. If the defendants in any action covered by this Section 6.3 include both the indemnified party and the indemnifying party and counsel for the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party (collectively, a "conflict of interest"), the indemnified parties, as a group, shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party. Such counsel shall be selected by the holders of a majority of the shares of Common Stock having an indemnity claim against the Company, whether pursuant to this Agreement or any other agreements which provide such or similar indemnity. 6.4. Other Indemnification. Indemnification similar to that specified in Sections 6.1 and Section 6.2 (with appropriate modifications) shall be given by the Company and each holder of Registrable Securities (but only if and to the extent required pursuant to the terms herein) with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority, other than the 1933 Act. 6.5. Indemnification Payments. The indemnification required by Sections 6.1 and Section 6.2 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 6.6. Contribution. (i) If the indemnification provided for in Sections 6.1 and Section 6.2 is unavailable to an indemnified party in respect of any expense, loss, claim, damage or liability referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such expense, loss, claim, damage or liability (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the holder of Registrable Securities or underwriter, as the case may be, on the other from the distribution of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the holder of Registrable Securities or underwriter, as the case may be, on the other in connection with the statements or omissions which resulted in such expense, loss, damage or liability, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the holder of Registrable Securities or underwriter, as the case may be, on the other in connection with the distribution of the Registrable Securities shall be deemed to be in the same proportion as the total net proceeds received by the Company from the initial sale of the Registrable Securities by the Company to the purchasers bear to the gain, if any, realized by all selling holders participating in such offering or the underwriting discounts and commissions received by the underwriter, as the case may be. The relative fault of the Company on the one hand and of the holder of Registrable Securities or underwriter, as the case may be, on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company, by the holder of Registrable Securities or by the underwriter and the parties' relative intent, knowledge, access to information supplied by the Company, by the holder of Registrable Securities or by the underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, provided that the foregoing contribution agreement shall not inure to the benefit of any indemnified party if indemnification would be unavailable to such indemnified party by reason of the provisions contained herein, and in no event shall the obligation of any indemnifying party to contribute under this Section 6.6 exceed the amount that such indemnifying party would have been obligated to pay by way of indemnification if the indemnification provided for hereunder had been available under the circumstances. -10- (ii) The Company and the holders of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 6.6 were determined by pro rata allocation (even if the holders of Registrable Securities and any underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth herein, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. (iii) Notwithstanding the provisions of this Section 6.6, no holder of Registrable Securities or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any such holder, the net proceeds received by such holder from the sale of Registrable Securities in the applicable Registration Statement or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. ARTICLE VII RULE 144 7.1. Rule 144. The Company shall use its commercially reasonable efforts to file in a timely manner the reports required to be filed by the Company under the 1933 Act and the 1934 Act (including but not limited to the reports under Sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c) of Rule 144 adopted by the SEC under the 1933 Act) and the rules and regulations adopted by the SEC thereunder (or, if the Company is not required to file such reports, will, upon the request of any holder of Registrable Securities, make publicly available other information) and will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the 1933 Act within the limitation of the exemptions provided by (a) Rule 144 under the 1933 Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any holder of Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with the requirements of this Section 7.1. -11- ARTICLE VIII MISCELLANEOUS 8.1. Amendments And Waivers. This Agreement may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the holder or holders of fifty-one percent (51%) or more of the sum of the shares of (i) Registrable Securities issued at such time, plus (ii) Registrable Securities issuable upon exercise or conversion of the Securities then constituting derivative securities (if such Securities were not fully exercised or converted in full as of the date such consent if sought without regard to the 4.9% Limitation, as defined in the Purchase Agreement). Each holder of any Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 8.1, whether or not such Registrable Securities shall have been marked to indicate such consent. 8.2. Nominees For Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof shall be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number of percentage of shares of Registrable Securities held by a holder or holders of Registrable Securities contemplated by this Agreement. The Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership or such Registrable Securities. 8.3. Notices. Except as otherwise provided in this Agreement, all notices, requests and other communications to any Person provided for hereunder shall be in writing and shall be given to such Person (a) in the case of a party hereto other than the Company, addressed to such party in the manner set forth in the Purchase Agreement or at such other address as such party shall have furnished to the Company in writing, or (b) in the case of any other holder of Registrable Securities, at the address that such holder shall have furnished to the Company in writing, or, until any such other holder so furnishes to the Company an address, then to and at the address of the last holder of such Registrable Securities who has furnished an address to the Company, or (c) in the case of the Company, at the address set forth on the signature page hereto, to the attention of its President, or at such other address, or to the attention of such other officer, as the Company shall have furnished to each holder of Registrable Securities at the time outstanding. Each such notice, request or other communication shall be effective (i) upon receipt after such communication is deposited in the mail with first class postage prepaid, addressed as aforesaid or (ii) if given by any other means (including, without limitation, by fax or air courier), when delivered at the address specified above, provided that any such notice, request or communication shall not be effective until received, and provided, further, that notice by fax shall not be deemed received unless receipt is acknowledged. 8.4. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent holder of any Registrable Securities. Each of the Holders of the Registrable Securities agrees, by accepting any portion of the Registrable Securities after the date hereof, to the provisions of this Agreement including, without limitation, appointment of a representative (the "Investor's Representative") to act on behalf of such Holder pursuant to the terms hereof which such actions shall be made in the good faith discretion of the Investor's Representative and be binding on all persons for all purposes. 8.5. Descriptive Headings. The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 8.6. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to applicable principles of conflicts of law. -12- 8.7. Jurisdiction. If any action is brought among the parties with respect to this Agreement or otherwise, by way of a claim or counterclaim, the parties agree that in any such action, and on all issues, the parties irrevocably waive their right to a trial by jury. Exclusive jurisdiction and venue for any such action shall be the State or Federal Courts serving the City, County and State of New York. In the event suit or action is brought by any party under this Agreement to enforce any of its terms, or in any appeal therefrom, it is agreed that the prevailing party shall be entitled to reasonable attorneys fees to be fixed by the arbitrator, trial court, and/or appellate court if such party prevails on substantially all disputed matters. 8.8. Entire Agreement. This Agreement, together with the Purchase Agreement, embodies the entire agreement and understanding between the Company and each other party hereto relating to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. 8.9. Severability. If any provision of this Agreement, or the application of such provisions to any Person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such provision to Persons or circumstances other than those to which it is held invalid, shall not be affected thereby. 8.10. Binding Effect. All the terms and provisions of this Agreement whether so expressed or not, shall be binding upon, inure to the benefit of, and be enforceable by the parties and their respective administrators, executors, legal representatives, heirs, successors and assignees. 8.11. Preparation of AgreementError! Bookmark not defined.. This Agreement shall not be construed more strongly against any party regardless of who is responsible for its preparation. The parties acknowledge each contributed and is equally responsible for its preparation. 8.12. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty, covenant or agreement herein, nor shall nay single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. 8.13. Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. [SIGNATURES ON FOLLOWING PAGE] -13- IN WITNESS WHEREOF, the Investor and the Company have as of the date first written above executed this Agreement. FRANKLYN RESOURCES III, INC. By: --------------------------------- Bo Huang, Chief Executive Officer INVESTOR BARRON PARTNERS LP By: Barron Capital Advisors, LLC, its General Partners By: --------------------------------- Andrew Barron Worden President 730 Fifth Avenue, 9th Floor New York NY 10019 JCAR FUNDS LTD. By: --------------------------------- Jon R. Carnes, CEO - --------------------------------- Steve Mazur - --------------------------------- Ray Rivers -14- EX-99.3 9 v045248_ex99-3.txt Exhibit 99.3 Registration Rights Provisions These Registration Rights Provisions constitute an integral part of the Stock Exchange Agreement (the "Agreement") dated June 2, 2006, by and among the Stockholders named therein, and Franklyn Resources III, Inc. 1. Definitions. Unless otherwise defined herein, capitalized terms used herein shall have the following meanings: "Affiliate" of a Person means any Person that controls, is under common control with, or is controlled by, such Person. For purposes of this definition, "control" means the ability of one Person to direct the management and policies of another Person. "Agreement" shall have the meaning set forth in the introduction to these Registration Rights Provisions. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to be closed. "Commission" means the Securities and Exchange Commission. "Common Stock" shall mean the common stock, par value $.0001 of the Company. "Company" shall mean Franklyn Resources III, Inc., a Nevada corporation. "Exchange" means the principal stock exchange or market on which the Company's Common Stock is traded, if any. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, or any similar or successor statute. "Excusable Reason" means the occurrence of negotiations with respect to a material agreement prior to either the announcement of the execution of the agreement or the termination of the negotiations with respect to such proposed agreement and other similar material corporate events to which the Company is a party or expects to be a party if, in the reasonable judgment of the Company, disclosure of the negotiations or other event would be adverse to the best interests of the Company provided that the Company is continuing to treat such negotiations as confidential and provided further that the period during which the Company is precluded from filing the registration statement (or suspended the use of an effective registration statement) as a result thereof has not exceeded ninety (90) days and provided further that the Company shall not be permitted to avoid filing a registration statement (or to suspend the use of an effective registration statement) for an Excusable Reason more than twice in any one-year period. "Expenses" means all expenses incident to the Company's performance of or compliance with its obligations under these Registration Rights Provisions, including, without limitation, all registration, filing, listing, stock exchange and NASD fees, all fees and expenses of complying with state securities or blue sky laws (including fees, disbursements and other charges of counsel for the underwriters only in connection with blue sky filings), all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees, disbursements and other charges of counsel for the Company and of its independent public accountants, including the expenses incurred in connection with "cold comfort" letters required by or incident to such performance and compliance, any fees and disbursements of underwriters customarily paid by the issuer of securities, but excluding from the definition of Expenses underwriting discounts and commissions and applicable transfer taxes, if any, or legal and other expenses incurred by any sellers, which discounts, commissions, transfer taxes and legal and other expenses shall be borne by the seller or sellers of Registrable Common Stock in all cases. "Holder" shall mean any of the Stockholders and any Transferee who has rights of a Holder pursuant to Section 12 of these Registration Rights Provisions. "NASD" means the National Association of Securities Dealers, Inc. and NASD Regulation, Inc. "Nasdaq" means the Nasdaq Stock Market and includes The Nasdaq National Market and The Nasdaq SmallCap Market. "Person" means any individual, corporation, partnership, limited liability company, firm, joint venture, association, joint stock company, trust, unincorporated organization, governmental or regulatory body or subdivision thereof or other entity. "Public Offering" means a public offering and sale of Registrable Common Stock pursuant to an effective registration statement under the Securities Act. "Registrable Common Stock" means the shares of Common Stock issued pursuant to the Agreement, but only for so long as registration pursuant to the Securities Act is required for public sale without regard to volume limitations pursuant to Rule 144(k), and as adjusted to reflect any merger, consolidation, recapitalization, reclassification, split-up, stock dividend, rights offering or reverse stock split made, declared or effected with respect to the Registrable Common Stock. "Requesting Holders" has the meaning set forth in Section 3 of these Registration Rights Provisions. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar or successor statute. "Selling Holders" means the Holders of Registrable Common Stock requested to be registered pursuant to Section 2(a) of these Registration Rights Provisions. "Shelf Registration" means a shelf registration statement pursuant to Rule 415 promulgated under the Securities Act. "Transfer" means any transfer, sale, assignment, pledge, hypothecation or other disposition of any interest. "Transferor" and "Transferee" have correlative meanings. Any terms which are defined in the Agreement and not separately defined in these Registration Rights Provisions shall have the same meanings in these Registration Rights Provisions as in the Agreement. 2 All references to laws, rules and forms shall relate to the laws, rules and forms as in effect on the date of the Agreement and shall include any amendments thereto and any subsequent successor laws, rules and forms. 2. Securities Act Registration on Request. (a) At any time after November 30, 2007, any Holder or Holders holding at least thirty five percent (35%) of the Registrable Common Stock which is then outstanding or are otherwise included in the Holder's request, may make a written request (the "Initiating Request") to the Company for the registration with the Commission under the Securities Act of all or part of such Holder's Registrable Common Stock; provided, however, that if such Initiating Request is not for all of the total number of Registrable Common Stock which could be registered by the Initiating Holder, then the Initiating Request shall cover not less than thirty five percent (35%) of the total number of the then-outstanding shares of Registrable Common Stock. Upon the receipt of any Initiating Request for registration pursuant to this Section 2(a), the Company promptly shall notify in writing all other Holders of the Registrable Common Stock of the receipt of such request and will use its commercially reasonable efforts to effect, at the earliest possible date, such registration under the Securities Act, including a Shelf Registration (if then eligible), of (i) the Registrable Common Stock which the Company has been so requested to register by such Initiating Holder, and (ii) all other Registrable Common Stock which the Company has been requested to register by any other Holders by written request given to the Company within 30 days after the giving of written notice by the Company to such other Holders of the Initiating Request, all to the extent necessary to permit the disposition (in accordance with Section 2(b) of these Registration Rights Provisions) of the Registrable Common Stock so to be registered; provided, that any Holder whose Registrable Common Stock was to be included in any such registration, by written notice to the Company, may withdraw such request, and the Company shall not be required to effect any registration pursuant to this Section 2(a) if either (x) the Initiating Holder or (y) the Holders of more than 40% of the shares of Registrable Common Stock withdraw the request for inclusion. The sale of Registrable Common Stock pursuant to this Section 2(a) shall not be pursuant to an underwritten public offering without the prior written consent of the Company. The Holders shall have one registration right pursuant to this Section 2. Notwithstanding the foregoing, prior to December 1, 2008, without the consent of the Company, unless the shares are sold to an underwriter acceptable to the Company, no Holder may sell, pursuant to any registration statement filed pursuant to these Registration Rights Provisions in any 30 day period, more than the greater of one percent (1%) of the outstanding Common Stock or the average weekly trading volume prior for the four weeks prior to the week in which the sale occurs, with any shares sold by any Holder being excluded in determining sales volume, provided, however, that for purposes of this sentence, all shares of Common Stock which are issuable upon conversion of the Company's Series A Convertible Preferred Stock shall be deemed to be treated as outstanding shares of Common Stock, even if there are restrictions on the issuance of such shares. (b) Registration under Section 2(a) of these Registration Rights Provisions shall be on such appropriate registration form prescribed by the Commission under the Securities Act as shall be selected by the Company and as shall permit the disposition of the Registrable Common Stock pursuant to the method of disposition determined by the Selling Holders; provided, however, that if the Company is eligible to use a registration statement on Form S-3, the Company shall use such form. 3 (c) The Holders of Registrable Common Stock to be included in a registration statement may, at any time on written notice to the Company, terminate a request for registration made pursuant to this Section 2. (d) The Company shall use its commercially reasonable efforts to keep any Shelf Registration effective for nine (9) months from the effective date of the registration statement or until such earlier date as all of the Registrable Common Stock covered by the registration statement shall have been sold. (e) No registration effected under this Section 2 shall relieve the Company of its obligation to permit the registration of Registrable Common Stock pursuant to Section 3 of these Registration Rights Provisions. (f) As a condition to the inclusion of a Holder's Registrable Common Stock in a registration statement pursuant to Sections 2(a) and 3 of these Registration Rights Provisions, each Holder shall: (i) furnish the information and indemnification as set forth in these Registration Rights Provisions and update such information immediately upon the occurrence of any events or condition which make the information concerning the Holder inaccurate in any material respect; (ii) not sell any Registrable Common Stock pursuant to the registration statement except in the manner set forth in the registration statement; (iii) comply with the prospectus delivery requirements and the provisions of Regulation M of the Commission pursuant to the Securities Act; (iv) not sell or otherwise transfer or distribute any Registrable Common Stock shares if the Holder possesses any material nonpublic information concerning the Company; and (v) not sell or otherwise transfer any Registrable Common Stock pursuant to a registration statement upon receipt of advice from the Company that the registration statement is no longer current until the Holder is advised that the Registrable Common Stock may be sold pursuant to the registration statement; and (vi) provide any other information requested by the Commission, the NASD, any stock exchange or market on which the Common Stock is traded and any state securities commission. 3. Piggyback Registration. (a) If at any time after November 30, 2007, the Company proposes to register any of its securities under the Securities Act by registration on any forms other than Form S-4 or S-8, whether or not pursuant to registration rights granted to other holders of its securities and whether or not for sale for its own account, it shall give prompt written notice to all of the Holders of its intention to do so and of such Holders' rights (if any) under this Section 3, which notice, in any event, shall be given at least fifteen (15) days prior to such proposed registration. Upon the written request of any Holder receiving notice of such proposed registration that is a Holder of Registrable Common Stock (a "Requesting Holder") made within ten (10) days after the receipt of any such notice, the Company shall, subject to Section 6(b) of these Registration Rights Provisions, effect the registration under the Securities Act of all Registrable Common Stock which the Company has been so requested to register by the Requesting Holders thereof; provided, however, that this Section 3(a) shall not apply to Registrable Common Stock which has been registered pursuant to Section 2(a) of these Registration Rights Provisions and is subject to a current and effective registration statement. 4 (b) If at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each Requesting Holder and (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Common Stock in connection with such registration (but not from any obligation of the Company to pay the Expenses in connection therewith), without prejudice, however, to the rights of any Holder to include Registrable Common Stock in any future registration (or registrations) pursuant to this Section 3 or to cause such registration to be effected as a registration under Section 2(a) of these Registration Rights Provisions, as the case may be, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Common Stock, for the same period as the delay in registering such other securities. (c) If such registration involves an underwritten offering, the provision of Section 6 of these Registration Rights Provisions shall apply. 4. Expenses. the Company shall pay all Expenses in connection with any registration initiated pursuant to Section 2(a) or 3 of these Registration Rights Provisions, whether or not such registration shall become effective and whether or not all or any portion of the Registrable Common Stock originally requested to be included in such registration is ultimately included in such registration. Each Holder shall pay any underwriting discounts and commissions and applicable transfer taxes, if any, legal fees and other expenses incurred by such Holder. 5. Registration Procedures. (a) If and whenever the Company is required to effect any registration under the Securities Act as provided in Sections 2(a) and 3 of these Registration Rights Provisions, the Company shall, as expeditiously as possible: (i) Subject to Section 5(b) of these Registration Rights Provisions, prepare and file with the Commission (promptly and, in the case of any registration pursuant to Section 2(a), in any event within one hundred twenty (120) days unless the Initiating Request is made subsequent to first day of the eleventh month of any fiscal year and prior to the fifteenth day of the second month of the following year, in which event the registration statement shall be filed within thirty (30) days after the earlier of the date a Form 10-K or 10-KSB is required to be filed or the date of such filing) the requisite registration statement to effect such registration and thereafter use its commercially reasonable efforts to cause such registration statement to become effective; provided, however, that the Company may discontinue any registration of its securities that are not shares of Registrable Common Stock (and, under the circumstances specified in Section 3 of these Registration Rights Provisions, its securities that are shares of Registrable Common Stock) at any time prior to the effective date of the registration statement relating thereto. 5 (ii) Notify each seller of Registrable Common Stock and other securities covered by such registration statement at any time after an Initiating Request when an Excusable Reason shall have occurred. (iii) Notify each Selling Holder at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and subject to Section 5(a)(iv) of these Registration Rights Provisions and except during the time the Company may delay a registration for an Excusable Reason, prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Common Stock covered by such registration statement until such time as all of such Registrable Common Stock has been disposed of in accordance with the method of disposition set forth in such registration statement, subject to Section 2(e) of these Registration Rights Provisions. (iv) If requested by the holders of a majority of the Registrable Common Stock included or to be included in the registration statement being filed pursuant to Section 2(a) or 3 of these Registration Rights Provisions, before filing any registration statement or prospectus or any amendments or supplements thereto, furnish to and afford the Holders of the Registrable Common Stock, one firm of counsel for the Holders designated by the Holders of a majority of the Registrable Common Stock included or to be included in the registration statement (the "Holders Counsel"), and provides Holders Counsel a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed (at least ten (10) Business Days prior to such filing). The Company shall not file any registration statement or prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded an opportunity to review prior to the filing of such document, if the Holders of a majority of the shares of Registrable Common Stock covered by such registration statement, the Holders Counsel, or the managing underwriters, if any, shall reasonably object. Any registration statement, when declared effective by the Commission or when subsequently amended (by an amendment which is declared effective by the Commission) or any prospectus in the form included in the registration statement as declared effective by the Commission or when subsequently supplemented will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (v) Use its commercially reasonable efforts to obtain the prompt withdrawal of any order suspending the effectiveness of a registration statement, and in any event shall, within thirty (30) days of such cessation of effectiveness, use its commercially reasonable efforts to amend the registration statement in a manner reasonably expected to obtain the withdrawal of the order suspending the effectiveness thereof, (vi) Furnish to each seller of Registrable Common Stock covered by such registration statement such reasonable number of copies of such drafts and final conformed versions of such registration statement and of each such amendment and supplement thereto (in each case including, if requested, one copy of all exhibits and any documents incorporated by reference), such number of copies of such drafts and final versions of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request in writing. 6 (vii) Use its commercially reasonable efforts to register or qualify all Registrable Common Stock under such other securities or blue sky laws of such states or other jurisdictions of the United States of America as the sellers of Registrable Common Stock covered by such registration statement shall reasonably request in writing, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this Section 5(a)(vii) be obligated to be so qualified, to subject itself to taxation in such jurisdiction or to consent to general service of process in any such jurisdiction. (viii) Make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 promulgated thereunder, and furnish to each seller of Registrable Common Stock at least ten days prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus. (ix) Cause all such Registrable Common Stock covered by such registration statement to be listed on the Exchange, if any. (b) Each seller of Registrable Common Stock as to which any registration is being effected shall furnish the Company and the underwriters, if any, such information regarding such seller and the distribution of the securities covered by such registration statement as the Company may from time to time reasonably request in writing and as is required by applicable laws and regulations. (c) Each Holder agrees that as of the date that a final prospectus is made available to it for distribution to prospective purchasers of Registrable Common Stock it shall cease to distribute copies of any preliminary prospectus prepared in connection with the offer and sale of such Registrable Common Stock. Each Holder further agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Sections 5(a)(ii) and (iii) of these Registration Rights Provisions, such Holder shall forthwith discontinue such Holder's disposition of Registrable Common Stock pursuant to the registration statement relating to such Registrable Common Stock until such Holder's receipt of the copies of the supplemented or amended prospectus contemplated by said Sections 5(a)(ii) and (iii), and, if so directed by the Company, shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such Holder's possession of the prospectus relating to such Registrable Common Stock current at the time of receipt of such notice. 6. Underwritten Offerings. (a) If the Company proposes to register any of its securities under the Securities Act as contemplated by Section 3 of these Registration Rights Provisions and such securities are to be distributed by or through one or more underwriters, the Company shall, if requested by any Requesting Holders, request that such underwriters include all of the Registrable Common Stock to be offered and sold by such Requesting Holders among the securities of the Company to be distributed by such underwriters; provided, that, if the managing underwriter of such underwritten offering shall advise the Company in writing (with a copy to the Requesting Holders) that if all the Registrable Common Stock requested to be included in such registration (together with all other shares of Common Stock of other stockholders of the Company requested to be so included pursuant to "piggyback" rights granted to such stockholders) were so included, in its opinion, the number and type of securities proposed to be included in such registration would exceed the number and type of securities which could be sold in such offering within a price range acceptable to the Company, then the Company shall include in such registration, to the extent of the number and type of securities which the Company is advised by the managing underwriter can be sold in such offering, (i) first, securities that the Company proposes to issue and sell for its own account and (ii) second, securities held by any person exercising demand registration rights, and (iii) third, Registrable Common Stock requested to be registered by Requesting Holders pursuant to Section 3 of these Registration Rights Provisions and Common Stock of any other stockholders of the Company having such registration rights who request registration as aforesaid (other than stockholders referred to in clause (ii) of this Section 6(a)), pro rata, among such holders on the basis of the number of shares of Common Stock requested to be registered by all such holders. 7 (b) Any Requesting Holder may withdraw its request to have all or any portion of its Registrable Common Stock included in any such offering by notice to the Company within ten (10) Business Days after receipt of a copy of a notice from the managing underwriter pursuant to Section 6(a) of these Registration Rights Provisions. (c) The Holders of Registrable Common Stock to be distributed by underwriters in an underwritten offering contemplated by Section 6(a) of these Registration Rights Provisions, shall be parties to the underwriting agreement between the Company and such underwriters and any such Holder, at its option, may require that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such Holders. No such Holder shall be required to make any representations or warranties to or agreements with the Company or the underwriters except that each such Holder shall be required to make representations, warranties and agreements regarding such Holder, such Holder's Registrable Common Stock and such Holder's intended method of distribution. The Holders whose Registrable Common Stock is being sold to the underwriters shall appoint an attorney-in-fact who shall be authorized to negotiate with the underwriter on behalf of such Holders and to execute the underwriting agreement and related documentation on their behalf. (d) In connection with any underwritten public offering, regardless of whether the Holder is selling Registrable Common Stock pursuant to the registration statement, the Holder shall agree to such lock-up as may be requested by the managing underwriter provided that such lock-up is not for a period longer than the lock-up required of the Company's principal stockholders, officers and directors. 7. Preparation; Reasonable Investigation. (a) In connection with the preparation and filing of each registration statement under the Securities Act pursuant to these Registration Rights Provisions, the Company shall give each Holder of Registrable Common Stock registered under such registration statement, the underwriter, if any, and its respective counsel and accountants the reasonable opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and shall give each of them such reasonable access to its books and records and such reasonable opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the reasonable opinion of any such Holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 8 (b) Each Holder of Registrable Common Stock shall maintain the confidentiality of any confidential information received from or otherwise made available by the Company to such Holder of Registrable Common Stock and identified in writing by the Company as confidential and shall not make any sales or purchases of the Company's securities while in possession of material confidential information; provided, however, that any information relating to an Excusable Reason shall be deemed to be material confidential information regardless of whether it is expressly marked as confidential. Information that (i) is or becomes available to a Holder of Registrable Common Stock from a public source, (ii) is disclosed to a Holder of Registrable Common Stock by a third-party source who has the right to disclose such information shall not be deemed to be confidential information for purposes of these Registration Rights Provisions. Each Holder shall indemnify and hold harmless the Company, its officer, directors and counsel from and against any loss, liability, damage or expense which they may incur as a result of any breach of the provisions of this Section 7(b). 8. Indemnification. (a) In connection with any registration statement filed by the Company pursuant to Section 2(a) or 3 of these Registration Rights Provisions, the Company shall, and hereby agrees to, indemnify and hold harmless, each Holder and seller of any Registrable Common Stock covered by such registration statement and each other Person, if any, who controls such Holder or seller, and their respective directors, officers, partners, agents and Affiliates from and against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act, or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof), which are collectively referred to as "Losses," arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact made by the Company contained in the Registration Statement, or any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or any amendment thereof or supplement thereto, or in any blue sky application or other document executed by the Company specifically for that purpose (or based upon written information furnished by the Company) filed in any state or other jurisdiction in order to qualify any of the Securities or other Securities under the securities laws thereof (any such application, document or information being referred to as a "Blue Sky Application"); or (ii) the omission or alleged omission to state in any such Registration Statement, Preliminary Prospectus or Prospectus, or amendment thereof or supplement thereto, or Blue Sky Application a material fact required to be stated therein or necessary to make the statements made therein not misleading, and agrees to reimburse each such indemnified party for any legal or other expenses reasonably incurred by it in connection with investigating or defending against any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein or omitted therefrom in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Holder specifically for use in connection with the preparation thereof, and further provided, however, that the foregoing indemnity with respect to any untrue statement, alleged untrue statement, omission, or alleged omission contained in any Preliminary Prospectus shall not inure to the benefit of any Holder from whom the person asserting any such loss, claims any of, damage, or liability purchased any of the securities that are the subject thereof (or to the benefit of any person who controls such Holder or other Person), if a copy of the prospectus was not delivered to such person with or prior to the written confirmation of the sale of such security to such person. The indemnify provided for in this Section 8(a) shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party and shall survive any transfer of the Registrable Shares by the indemnified party. This indemnity agreement will be in addition to any liability that the Company may otherwise have. 9 (b) In connection with any registration statement filed by the Company pursuant to Section 2(a) or 3 of these Registration Rights Provisions in which a Holder has registered for sale Registrable Common Stock, each Holder or seller of Registrable Common Stock shall, and hereby agrees to, indemnify and hold harmless the Company and each of its directors, officers, employees and agents, each other Person, if any, who controls the Company and each other seller and such seller's directors, officers, stockholders, partners, employees, agents and affiliates from and against any and all Losses to which they or any of them may become subject under the Securities Act, the Exchange Act, or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or any amendment thereof or supplement thereto, or in a Blue Sky Application, or (ii) the omission or the alleged omission to state in any such Registration Statement, Preliminary Prospectus or Prospectus, amendment thereof or supplement thereto, or Blue Sky Application a material fact required to be stated therein or necessary to make the statements made therein not misleading, in each case to the extent, but only to the extent, that the same was made therein or omitted therefrom in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder specifically for use in the preparation thereof, and agrees to reimburse each such indemnified party for any legal or other expenses reasonably incurred by it in connection with investigating or defending against any such loss, claim, damage, liability or action. The indemnify provided for in this Section 8(a) shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party and shall survive any transfer of the Registrable Shares by the indemnified party. This indemnity agreement will be in addition to any liability that the Company may otherwise have. (c) Within five (5) business days after receipt by an indemnified party under Section 8(a) or (b) of these Registration Rights Provisions of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; the failure so to notify the indemnifying party shall relieve the indemnifying party from any liability under this Section 8 as to the particular item for which indemnification is then being sought, unless such indemnifying party has otherwise received actual notice of the action at least thirty (30) days before any answer or response is required by the indemnifying party in its defense of such action, but will not relieve it from any liability that it may have to any indemnified party otherwise than under this Section 8. If any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof; provided, that if the defendants in any such action include both the indemnified party and the indemnifying party and either (i) the indemnifying party or parties agree, or (ii) in the opinion of counsel for the indemnifying parties, representation of both the indemnifying party or parties and the indemnified party or parties by the same counsel is inappropriate under applicable standards of professional conduct because of actual or potential conflicting interests between them, then the indemnified party or parties shall have the right to select separate counsel to assume such legal defense and to otherwise participate in the defense of such action. The indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (x) the indemnified party shall have employed counsel in connection with the assumption of legal defenses in accordance with the proviso to the immediately preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel in each jurisdiction which counsel is approved by indemnified parties (whether pursuant to this Agreement or other agreements if the claim relates to the same or similar allegations) holding a majority of the shares as to which indemnification is claimed), (ii) the indemnifying party shall not have employed counsel to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall an indemnifying party be liable under this Section 8 for any settlement, effected without its written consent, which consent shall not be unreasonably withheld, of any claim or action against an indemnified party. 10 (d) If the indemnification provided for in this Section 8 shall for any reason be unavailable to an indemnified party under Section 8(a) and (b) of these Registration Rights Provisions in respect of any Losses, then, in lieu of the amount paid or payable under said Section 8(a) or (b), the indemnified party and the indemnifying party under said Section 8(a) or (b) shall contribute to the aggregate Losses (including legal or other expenses reasonably incurred in connection with investigating the same) (i) in such proportion as is appropriate to reflect the relative fault of the Company and the prospective sellers of Registrable Common Stock covered by the registration statement which resulted in such Loss or action in respect thereof, with respect to the statements, omissions or action which resulted in such Loss or action in respect thereof, as well as any other relevant equitable considerations, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and such prospective sellers, on the other hand, from their sale of Registrable Common Stock; provided, that, for purposes of this clause (ii), the relative benefits received by any prospective sellers shall be deemed not to exceed (and the amount to be contributed by any prospective seller shall not exceed) the amount received by such seller. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The obligations, if any, of the Selling Holders of Registrable Common Stock to contribute as provided in this Section 8(d) are several in proportion to the relative value of their respective Registrable Common Stock covered by such registration statement and not joint. In addition, no Person shall be obligated to contribute hereunder any amounts in payment for any settlement of any action or Losses effected without such Person's consent. 9. Registration Rights to Others. Nothing in these registration rights provisions shall restrict the Company from granting registration rights to others. 10. Restrictions on Sale. Each Stockholder agrees that he will not publicly transfer any of the shares of Registrable Common Stock during the eighteen (18) months following the closing date pursuant to the preferred stock purchase agreement dated June 2, 2006, by and among the Company, Barron Partners, LP, JCAR Ltd., Ray Rivers and Steve Mazur (the "Purchase Agreement"), or such shorter period as may be provided in the Purchase Agreement. Any person who acquired Common Stock from a Stockholder (other than pursuant to a registration statement or Rule 144) shall be subject to the provisions of this Section 10. 11. Amendments and Waivers. Any provision of these Registration Rights Provisions may be amended, modified or waived if, but only if, the written consent to such amendment, modification or waiver has been obtained from (i) except as provided in clause (ii) below, the Holder or Holders of at least 66 2/3% of the shares of Registrable Common Stock affected by such amendment, modification or waiver and (ii) in the case of any amendment, modification or waiver of any provision of Section 4 of these Registration Rights Provisions or this Section 11, or as to the percentages of Holders required for any amendment, modification or waiver, or any amendment, modification or waiver which adversely affects any right and/or obligation under these Registration Rights Provisions of any Holder, the written consent of each Holder so affected. 11 12. Assignment. The provisions of these Registration Rights Provisions shall be binding upon and inure to the benefit of the parties hereto, and, in the event of the death or incompetence of any Holder to their legal representatives, heirs, distributees or legatees, provided that the such Transferee shall agree in writing with the parties hereto prior to the assignment to be bound by these Registration Rights Provisions as if he or she were an original party hereto, whereupon such Transferee shall for all purposes be deemed to be a Holder under these Registration Rights Provisions. Except as provided above or otherwise permitted by these Registration Rights Provisions, neither these Registration Rights Provisions nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by any Holder without the prior written consent of the Company. 13. Miscellaneous. (a) Each of the parties hereto shall execute such documents and other papers and perform such further acts as may be reasonably required or desirable to carry out the provisions of these Registration Rights Provisions and the transactions contemplated hereby. (b) The headings in these Registration Rights Provisions are for convenience of reference only and shall not control or affect the meaning or construction of any provisions of these Registration Rights Provisions. (c) Notwithstanding any provision of these Registration Rights Provisions, neither the Company nor any other party hereto shall be required to take any action which would be in violation of any applicable federal or state securities law. The invalidity or unenforceability of any provision of these Registration Rights Provisions in any jurisdiction shall not affect the validity, legality or enforceability of any other provision of these Registration Rights Provisions in such jurisdiction or the validity, legality or enforceability of these Registration Rights Provisions, including any such provision, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law. 12 EX-99.4 10 v045248_ex99-4.txt Exhibit 99.4 This Agreement (the "Agreement") is made as of the 2nd day of June, 2006 by and between Franklyn Resources III, Inc., a Nevada corporation whose address is P. O. Box 461029, Glendale, Colorado 80246 (the "Issuer"), and the stockholders listed in Exhibit A to this Agreement (each a "Seller" and collectively, the "Sellers"). W I T N E S S E T H: WHEREAS, the Sellers are the owners of the shares of the Issuer's common stock, par value $.001 per share ("Common Stock"), set forth after their respective names on Exhibit A to this Agreement; and WHEREAS, the Seller desire to sell to the Issuer, and the Issuer desires to purchase from the Seller, an aggregate of 3,305,000 shares of Common Stock (the "Shares"), on and subject to the terms of this Agreement; WHEREFORE, the parties hereto hereby agree as follows: 1. Sale of the Shares. Subject to the terms and conditions of this Agreement, and in reliance upon the representations, warranties, covenants and agreements contained in this Agreement, each Seller shall, severally, sell the Shares to the Issuer set forth after such Seller's name on Exhibit A to this Agreement, and the Issuer shall purchase the Shares from the Seller for a total purchase price (the "Purchase Price") equal to $213,525, with each Seller receiving the amount set forth in said Exhibit A. 2. Closing. (a) The purchase and sales of the Shares shall take place at a closing (the "Closing"), to occur immediately following execution and delivery of this Agreement. (b) At the Closing: (i) The Sellers shall deliver to the Issuer certificates for the Shares, duly endorsed in form for transfer to the Issuer. (ii) The Issuer shall pay the purchase price for the Shares. (iii) The Issuer shall deliver evidence that, as of Closing, the Issuer has no direct, contingent or other obligations of any kind or any commitment or contractual obligations of any kind and description, and that all liabilities and obligations of any kind and description, whether immediate, direct, contingent or indirect, shall have been cancelled, with the result that the Issuer has, as of the Closing, no liabilities or obligations of any kind. (iv) The Issuer shall deliver or cause the Issuer's transfer agent to deliver a certified copy of the stock ledger of the Issuer listing every stockholder of record as of the most recent practicable date. (v) Counsel for the Issuer shall have given its opinion to the Issuer, which may be relied on by any subsequent purchasers of the Issuer's capital stock and their counsel, to the effect that all of the issued and outstanding capital stock has been duly and validly authorized and issued and is fully paid and non-assessable, was not issued in violation of any preemptive right or, to the best of such counsel's knowledge, right of first refusal or other right, and that the issuance of such capital stock was exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof . (vi) The Issuer shall deliver a good standing certificate issued by the Secretary of State of the State of Nevada and the articles of incorporation of the Issuer, certified by the Secretary of State of the State of Nevada. (c) Following the Closing, the Issuer will include, at the Issuer's expense, all of the presently outstanding shares of Common Stock in the first registration statement filed by this Issuer or any selling shareholder after the Closing; provided that the stockholders (i) provide to the Issuer with all information reasonably requested by the Issuer in connection therewith and (ii) agree to customary indemnification and contribution provisions acceptable to the Issuer as long as the Issuer similar agrees to such customary provisions. (d) The Seller understands that following the Closing, the Issuer may engage a different accounting firm. At and at any time after the Closing, the parties shall duly execute, acknowledge and deliver all such further assignments, conveyances, instruments and documents, and shall take such other action consistent with the terms of this Agreement to carry out the transactions contemplated by this Agreement. Without limiting the foregoing, the Issuer agrees that it shall cause its current management to execute such certificates, auditor representation letters and other representations ("Certifications") as the Issuer may reasonably request in order to enable the Issuer to prepare and file future reports with the Commission, including the Issuer's Report on Form 8-K relating to this Agreement, and shall take such steps as may be necessary to facilitate the Issuer's auditor's preparation of the financial statements and its report related thereto for the year ended December 31, 2005. Such Certifications shall specifically include a representation letter for the benefit of the Issuer's auditor in the form requested by its auditors. Any such Certifications shall treat only periods and events prior to Closing. 3. Representations and Warranties of the Issuer and Sellers. The Issuer and Sellers hereby jointly and severally make the following representations and warranties to each other and to any persons who acquire the Issuer's capital stock following the Closing in a transaction characterized as a reverse merger, provided, that such representations and warranties shall survive the Closing for a period of one (1) year and provided further that the Sellers make no representations or warranties other than with respect to itself and the Shares to be sold hereunder: (a) The Issuer is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. The Issuer has the corporate power to own its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified and in good standing would have a material adverse effect on the Issuer. Each Seller has the requisite power and authority to enter into this Agreement and to consummate the transactions contemplated hereby and otherwise to carry out his or her obligations hereunder. The Issuer is not in violation of any of the provisions of its certificate of incorporation or by-laws. No consent, approval or agreement of any individual or entity is required to be obtained by the Issuer in connection with the execution and performance by the Issuer of this Agreement or the execution and performance by the Issuer of any agreements, instruments or other obligations entered into in connection with this Agreement. The Issuer has no subsidiary, and it does 2 not have any equity investment or other interest, direct or indirect, in, or any outstanding loans, advances or guarantees to or on behalf of, any domestic or foreign individual or entity. (b) The Issuer has authorized capital stock consisting of 25,000,000 shares of Common Stock, of which 3,336,000 shares, including the Shares, are presently issued and outstanding. Each Seller owns the Shares listed after such Seller's name on Exhibit A to this Agreement, free and clear of all any and all liens, claims, encumbrances, preemptive rights, right of first refusal and adverse interests of any kind. (c) Neither the Issuer nor any Seller is a party to any agreement or understanding pursuant to which any securities of any class of capital stock are to be issued or created or transferred. The Issuer has not acquired any shares of Common Stock, and has no formal or informal agreements or understandings pursuant to which it can or will acquire any shares of Issuer Common Stock (other than this Agreement). Neither the Issuer nor any Seller nor any officer, director or 5% stockholder of the Issuer has any agreements, plans, understandings or proposals, whether formal or informal or whether oral or in writing, pursuant to which it or he granted or may have issued or granted any individual or entity any Convertible Security or any interest in the Issuer or the Issuer's earnings or profits, however defined. As used in this Agreement, the term "Convertible Securities" shall mean any options, rights, warrants, convertible debt, equity securities or other instrument or agreement upon the exercise or conversion of which or upon the exchange of which or pursuant to the terms of which additional shares of any class of capital stock of the Issuer may be issued. (d) There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the Issuer's Best Knowledge, threatened against the Issuer or any of its properties or any of its officers or directors (in their capacities as such). There is no judgment, decree or order against the Issuer that could prevent, enjoin, alter or delay any of the transactions contemplated by this Agreement. The term "Best Knowledge" of the Issuer shall mean and include (i) actual knowledge and (ii) that knowledge which a prudent businessperson would reasonably have obtained in the management of such Person's business affairs after making due inquiry and exercising the due diligence which a prudent businessperson should have made or exercised, as applicable, with respect thereto. Actual or imputed knowledge of any director or officer or Seller shall be deemed to be knowledge of the Issuer. (e) There are no material claims, actions, suits, proceedings, inquiries, labor disputes or investigations (whether or not purportedly on behalf of the Issuer) pending or, to the Issuer's Best Knowledge, threatened against the Issuer or any of its assets, at law or in equity or by or before any governmental entity or in arbitration or mediation. No bankruptcy, receivership or debtor relief proceedings are pending or, to the best of the Issuer's knowledge, threatened against the Issuer. (f) The Issuer has complied with, is not in violation of, and has not received any notices of violation with respect to, any federal, state, local or foreign Law, judgment, decree, injunction or order, applicable to it, the conduct of its business, or the ownership or operation of its business. References in this Agreement to "Laws" shall refer to any laws, rules or regulations of any federal, state or local government or any governmental or quasi-governmental agency, bureau, commission, instrumentality or judicial body (including, without limitation, any federal or state securities law, regulation, rule or administrative order). (g) The Issuer has properly filed, or will, not later than June 15, 2006, file all tax returns required to be filed and has paid all taxes shown thereon to be due. To the Best Knowledge of 3 the Issuer, all tax returns previously filed are true and correct in all material respects. The Stockholders shall bear the cost of any tax returns that have not been filed as of the date of this Agreement. (h) The Issuer has no outstanding liabilities or obligations to any party except as reflected on the Issuer's Form 10-QSB for the quarter ended March 31, 2006, other than charges since such date similar to those incurred in past periods and consistent with past practice, all of which will be discharged prior to or at the Closing so that, at the Closing, the Issuer will have no direct, contingent or other obligations of any kind or any commitment or contractual obligations of any kind and description. The Sellers shall jointly and severally indemnify the Issuer and hold the Issuer harmless from and against any loss, damage, liability or expense which the Issuer may sustain from any liabilities or obligations which it may sustain in the event of a breach of the representations, warranties and covenants contained in this Section 3(h). (i) All of the business and financial transactions of the Issuer have been fully and properly reflected in the books and records of the Issuer in all material respects and in accordance with generally accepted accounting principles consistently applied. (j) The Issuer is current with its reporting obligations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). None of the Issuer's filings made pursuant to the Exchange Act (collectively, the "Issuer SEC Documents") contain any misstatements of material fact or omit to state a material fact necessary to make the statements made therein not misleading. The Issuer SEC Documents, as of their respective dates, complied in all material respects with the requirements of the Exchange Act, and the rules and regulations of the Commission thereunder, and are available on the Commission's EDGAR system. The financial statements included in the Issuer SEC Documents present and reflect, in accordance with generally accepted accounting principles, consistent applied, the financial condition of the Issuer on the balance sheet dates and the results of its operations, cash flows and changes in stockholders' equity for the periods then ended in accordance with generally accepted accounting principles, consistently applied. The accountants who audited the Issuer's financial statements are independent, within the meaning of the Securities Act and are a member of the PCAOB. There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Issuer, from that set forth in the Issuer's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2006. (k) The execution and delivery of this Agreement by the Issuer and Seller and the consummation of the transactions contemplated by this Agreement will not result in any material violation of the Issuer's certificate of incorporation or by-laws, Seller's operating agreement or any applicable Law. (l) All representations, covenants and warranties of the Issuer and Sellers contained in this Agreement shall be true and correct on and as of the Closing Date with the same effect as though the same had been made on and as of such date. 4. Finder's Fee. Seller represents and warrants that no person is entitled to receive a finder's fee from Seller in connection with this Agreement as a result of any action taken by the Issuer or Seller pursuant to this Agreement, and agrees to indemnify and hold harmless the other party, its officers, directors and affiliates, in the event of a breach of the representation and warranty set forth in this Section 4. This representation and warranty shall survive the Closing. 4 5. Termination by Mutual Agreement. This Agreement may be terminated at any time by mutual consent of the parties hereto, provided that such consent to terminate is in writing and is signed by each of the parties hereto. 6. Miscellaneous. (a) Entire Agreement. This Agreement constitutes the entire agreement of the parties, superseding and terminating any and all prior or contemporaneous oral and written agreements, understandings or letters of intent between or among the parties with respect to the subject matter of this Agreement. No part of this Agreement may be modified or amended, nor may any right be waived, except by a written instrument which expressly refers to this Agreement, states that it is a modification or amendment of this Agreement and is signed by the parties to this Agreement, or, in the case of waiver, by the party granting the waiver. No course of conduct or dealing or trade usage or custom and no course of performance shall be relied on or referred to by any party to contradict, explain or supplement any provision of this Agreement, it being acknowledged by the parties to this Agreement that this Agreement is intended to be, and is, the complete and exclusive statement of the agreement with respect to its subject matter. Any waiver shall be limited to the express terms thereof and shall not be construed as a waiver of any other provisions or the same provisions at any other time or under any other circumstances. (b) Severability. If any section, term or provision of this Agreement shall to any extent be held or determined to be invalid or unenforceable, the remaining sections, terms and provisions shall nevertheless continue in full force and effect. (c) Notices. All notices provided for in this Agreement shall be in writing signed by the party giving such notice, and delivered personally or sent by overnight courier, mail or messenger against receipt thereof or sent by registered or certified mail, return receipt requested, or by facsimile transmission or similar means of communication if receipt is confirmed or if transmission of such notice is confirmed by mail as provided in this Section 6(c). Notices shall be deemed to have been received on the date of personal delivery or telecopy or attempted delivery. Notice shall be delivered to the parties at the following addresses: If to the Issuer: c/o Mr. Frank L. Kramer, President [address] With a copy to: Gary S. Joiner, Esq. [address] If to Seller: To the addresses set forth on Exhibit A to this Agreement 5 Either party may, by like notice, change the address, person or telecopier number to which notice shall be sent. (d) Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements executed and to be performed wholly within such State, without regard to any principles of conflicts of law. Each of the parties hereby irrevocably consents and agrees that any legal or equitable action or proceeding arising under or in connection with this Agreement shall be brought in the federal or state courts located in the County of New York in the State of New York, by execution and delivery of this Agreement, irrevocably submits to and accepts the jurisdiction of said courts, (iii) waives any defense that such court is not a convenient forum, and (iv) consent to any service of process made either (x) in the manner set forth in Section 10(c) of this Agreement (other than by telecopier), or (y) any other method of service permitted by law. (e) Waiver of Jury Trial. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN THE EVENT OF ANY SUIT, ACTION OR PROCEEDING TO ENFORCE THIS AGREEMENT OR ANY OTHER ACTION OR PROCEEDING WHICH MAY ARISE OUT OF OR IN ANY WAY BE CONNECTED WITH THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS. (f) Parties to Pay Own Expenses. Each of the parties to this Agreement shall be responsible and liable for its own expenses incurred in connection with the preparation of this Agreement, the consummation of the transactions contemplated by this Agreement and related expenses. (g) Successors. This Agreement shall be binding upon the parties and their respective heirs, executors, administrators, legal representatives, successors and assigns; provided, however, that neither party may assign this Agreement or any of its rights under this Agreement without the prior written consent of the other party. (h) Further Assurances. Each party to this Agreement agrees, without cost or expense to any other party, to deliver or cause to be delivered such other documents and instruments as may be reasonably requested by any other party to this Agreement in order to carry out more fully the provisions of, and to consummate the transaction contemplated by, this Agreement. (i) Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (j) No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties with the advice of counsel to express their mutual intent, and no rules of strict construction will be applied against any party. (k) Headings. The headings in the Sections of this Agreement are inserted for convenience only and shall not constitute a part of this Agreement. [Signatures on following page.] 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. FRANKLYN RESOURCES III, INC. By:___________________________________ Frank L. Kramer, President ______________________________________ Frank L. Kramer, President ______________________________________ Deborah Saalerno ______________________________________ John O'Shea ______________________________________ Lynn Suave ______________________________________ Mark Lubchenco ______________________________________ Marika Xirouhakis ______________________________________ Gary S. Joiner 7 Exhibit A Sellers Name and Address Number of Shares Purchase Price - ---------------- ---------------- -------------- Frank L. Kramer 1,000,000 $62,600 Deborah Salerno 1,000,000 62,600 John O'Shea 1,000,000 62,600 Lynn Suave 150,000 9,690 Mark Lubchenco 100,000 6,465 Gary S. Joiner 35,000 2,270 Marika Xirouhakis 20,000 7,300 --------- -------- 3,305,000 $213,525 ========= ======== 8 EX-99.5 11 v045248_ex99-5.txt Exhibit 99.5 FRANKLYN RESOURCES III, INC. 2006 Long-Term Incentive Plan 1. Purpose; Definitions. The purpose of the Franklyn Resources III, Inc. 2006 Long-Term Incentive Plan (the "Plan") is to enable Franklyn Resources III, Inc. (the "Company") to attract, retain and reward key employees of the Company and its Subsidiaries and Affiliates, and others who provide services to the Company and its Subsidiaries and Affiliates, and strengthen the mutuality of interests between such key employees and such other persons and the Company's stockholders, by offering such key employees and such other persons incentives and/or other equity interests or equity-based incentives in the Company, as well as performance-based incentives payable in cash. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Affiliate" means any corporation, partnership, limited liability company, joint venture or other entity, other than the Company and its Subsidiaries, that is designated by the Board as a participating employer under the Plan, provided that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity. (b) "Board" means the Board of Directors of the Company. (c) "Book Value" means, as of any given date, on a per share basis (i) the stockholders' equity in the Company as of the last day of the immediately preceding fiscal year as reflected in the Company's consolidated balance sheet, subject to such adjustments as the Committee shall specify at or after grant, divided by (ii) the number of then outstanding shares of Stock as of such year-end date, as adjusted by the Committee for subsequent events. (d) "Cause" means a felony conviction of a participant, or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, or breach of trust or other action by which the participant obtains personal gain at the expense of or to the detriment of the Company or conduct which results in civil or criminal liability or penalties, including penalties pursuant to a consent decree, order or agreement, on the part of the Company; provided, however, that if the participant has an Employment Agreement with the Company, a Subsidiary or Affiliate which includes a definition of "cause," then "cause" shall have the meaning as defined in such Employment Agreement. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (f) "Commission" means the Securities and Exchange Commission or any successor thereto. (g) "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. (h) "Company" means Franklyn Resources III, Inc., a Nevada corporation, or any successor corporation. (i) "Deferred Stock" means an award made pursuant to Section 8 of the Plan of the right to receive Stock at the end of a specified deferral period. (j) "Disability" means disability as determined under procedures established by the Committee for purposes of the Plan; provided that if the participant has an Employment Agreement with the Company, a Subsidiary or Affiliate which includes a definition of "disability," then "disability" shall have the meaning as defined in such Employment Agreement. 1 (k) "Early Retirement" means retirement, with the express consent for purposes of the Plan of the Company at or before the time of such retirement, from active employment with the Company and any Subsidiary or Affiliate pursuant to the early retirement provisions of the applicable pension plan of such entity. (l) "Employment Agreement" shall mean an employment or consulting agreement or other agreement pursuant to which the participant performs services for the Company or a Subsidiary or Affiliate. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended, from time to time, and any successor thereto. (n) "Fair Market Value" means, as of any given date, the market price of the Stock as determined by or in accordance with the policies established by the Committee in good faith; provided, that, in the case of an Incentive Stock Option, the Fair Market Value shall be determined in accordance with the Code and the Treasury regulations under the Code. (o) "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. (p) "Independent Director" shall mean a "non-employee director" as set forth in Rule 16b-3 of the Commission pursuant to the Exchange Act or any successor definition adopted by the Commission; provided that in the event that said rule (or successor rule) shall not have such a definition, the term Independent Director shall mean a director of the Company who is not otherwise employed by the Company or any Subsidiary or Affiliate; provided, however, an Independent Director shall also be an independent director as determined by the rules or regulations of the principal stock exchange or market on which the Stock is traded or, if the Stock is not listed or traded on such exchange, as defined under the rules of the Nasdaq Stock Market. (q) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. (r) "Normal Retirement" means retirement from active employment with the Company and any Subsidiary or Affiliate on or after age 65 or such other age as is designated by the Company, Subsidiary or Affiliate as the normal retirement age. (s) "Other Stock-Based Award" means an award under Section 10 of the Plan that is valued in whole or in part by reference to, or is otherwise based on, Stock. (t) "Plan" means this Franklyn Resources III, Inc. 2005 Long-Term Incentive Plan, as hereinafter amended from time to time. (u) "Restricted Stock" means an award of shares of Stock that is subject to restrictions under Section 7 of the Plan. (v) "Retirement" means Normal Retirement or Early Retirement. (w) "Stock" means the common stock, par value $.0001 per share, of the Company or any class of common stock into which such common stock may hereafter be converted or for which such common stock may be exchanged pursuant to the Company's certificate of incorporation or as part of a recapitalization, reorganization or similar transaction. (x) "Stock Appreciation Right" means the right pursuant to an award granted under Section 6 of the Plan to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such award or Stock Option (or such portion thereof) is surrendered, of the shares of Stock covered by such Stock Option (or such portion thereof), subject, where applicable, to the pricing provisions in Section 6(b)(ii) of the Plan and (ii) the aggregate exercise price of such Stock Option or base price with respect to such award (or the portion thereof which is surrendered). (y) "Stock Option" or "Option" means any option to purchase shares of Stock (including Restricted Stock and Deferred Stock, if the Committee so determines) granted pursuant to Section 5 of the Plan. (z) "Stock Purchase Right" means the right to purchase Stock pursuant to Section 9 of the Plan. 2 (aa) "Subsidiary" means any corporation or other business association, including a partnership (other than the Company) in an unbroken chain of corporations or other business associations beginning with the Company if each of the corporations or other business associations (other than the last corporation in the unbroken chain) owns equity interests (including stock or partnership interests) possessing 50% or more of the total combined voting power of all classes of equity in one of the other corporations or other business associations in the chain. The Board may elect to treat as a Subsidiary an entity in which the Company possesses less than 50% of the total combined voting power of all classes of equity if, under generally accepted accounting principles, the Company may include the financial statements of such entity as part of the Company's consolidated financial statements (other than as a minority interest or other single line item). In addition, the terms "Change in Control," "Potential Change in Control" and "Change in Control Price" shall have meanings set forth, respectively, in Sections 11(b), (c) and (d) of the Plan. 2. Administration. (a) The Plan shall be administered by a Committee of not less than two directors all of whom shall be Independent Directors, who shall be appointed by the Board and who shall serve at the pleasure of the Board. If and to the extent that no Committee exists which has the authority to administer the Plan, the functions of the Committee specified in the Plan shall be exercised by the Board. (b) The Committee shall have full authority to grant, pursuant to the terms of the Plan, to officers and other persons eligible under Section 4 of the Plan, provided that Independent Directors shall not be eligible for options or other benefits pursuant to the Plan other than as provided in Sections 4(b) and 4(c) of the Plan: Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards. In particular, the Committee shall have the authority: (i) to select the officers and other eligible persons to whom Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards may from time to time be granted pursuant to the Plan; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards, or any combination thereof, are to be granted pursuant to the Plan, to one or more eligible persons; (iii) to determine the number of shares to be covered by each such award granted pursuant to the Plan; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted under the Plan, including, but not limited to, the share price or exercise price and any restriction or limitation, or any vesting, acceleration or waiver of forfeiture restrictions regarding any Stock Option or other award and/or the shares of Stock relating thereto, based in each case on such factors as the Committee shall, in its sole discretion, determine; (v) to determine whether, to what extent and under what circumstances a Stock Option may be settled in cash, Restricted Stock and/or Deferred Stock under Section 5(b)(x) or (xi) of the Plan, as applicable, instead of Stock; (vi) to determine whether, to what extent and under what circumstances Option grants and/or other awards under the Plan and/or other cash awards made by the Company are to be made, and operate, on a tandem basis with other awards under the Plan and/or cash awards made outside of the Plan in a manner whereby the exercise of one award precludes, in whole or in part, the exercise of another award, or on an additive basis; (vii) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant, including any provision for any determination or method of determination of the amount (if any) deemed be earned on any deferred amount during any deferral period; (viii) to determine the terms and restrictions applicable to Stock Purchase Rights and the Stock purchased by exercising such Rights; and 3 (ix) to determine an aggregate number of awards and the type of awards to be granted to eligible persons employed or engaged by the Company and/or any specific Subsidiary, Affiliate or division and grant to management the authority to grant such awards, provided that no awards to any person subject to the reporting and short-swing profit provisions of Section 16 of the Exchange Act may be granted awards except by the Committee. (c) In the event that any officers or other participants have Employment Agreements with the Company which provide for the grant of options to such participants, unless the Committee or the Board otherwise determines, the options shall be treated for all purposes as if they were granted pursuant to this Plan as long as there is a sufficient number of shares available for grant pursuant to this Plan. (d) The Committee shall have the authority to adopt, alter and repeal such rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan and any agreements relating thereto, and otherwise to supervise the administration of the Plan. (e) All decisions made by the Committee pursuant to the provisions of the Plan shall be made in the Committee's sole discretion and shall be final and binding on all persons, including the Company and Plan participants. 3. Stock Subject to Plan. (a) The total number of shares of Stock reserved and available for distribution under the Plan shall be two million (2,000,000) shares of Stock. In the event that awards are granted in tandem such that the exercise of one award precludes the exercise of another award then, for the purpose of determining the number of shares of Stock as to which awards shall have been granted, the maximum number of shares of Stock issuable pursuant to such tandem awards shall be used. (b) Subject to Section 6(b)(v) of the Plan, if any shares of Stock that have been optioned cease to be subject to a Stock Option, or if any such shares of Stock that are subject to any Restricted Stock or Deferred Stock award, Stock Purchase Right or Other Stock-Based Award granted under the Plan are forfeited or any such award otherwise terminates without a payment being made to the participant in the form of Stock, such shares shall again be available for distribution in connection with future awards under the Plan. (c) In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, stock split, stock distribution, reverse split, combination of shares or other change in corporate structure affecting the Stock, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the base number of shares, in the number and option price of shares subject to outstanding Options granted under the Plan, in the number and purchase price of shares subject to outstanding Stock Purchase Rights under the Plan, and in the number of shares subject to other outstanding awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number, and provided that the treatment of such options and rights shall be consistent with the nature of the event. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. 4. Eligibility. (a) Officers and other key employees and directors of, and consultants and independent contractors to, the Company and its Subsidiaries and Affiliates (but excluding, except as to Sections 4(b) and 4(c) of the Plan, Independent Directors) who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and/or its Subsidiaries and Affiliates are eligible to be granted awards under the Plan. (b) On each the first trading day in of the April of each year, commencing in 2007 (provided, however, that if the Corporation changes its fiscal year from the calendar year, the date shall be the first trading day of the fourth month following the completion of the fiscal year, commencing with the first such fiscal year that ends after December 31, 2006), each person who is a Independent Director on such date shall automatically be granted a Non-Qualified Stock Option to purchase five thousand (5,000) shares of Stock (or such lesser 4 number of shares of Stock as remain available for grant at such date under the Plan, divided by the number of Independent Directors at such date). Such Stock Options shall be exercisable at a price per share equal to the greater of the Fair Market Value on the date of grant or the par value of one share of Stock. The Non-Qualified Stock Options granted pursuant to this Section 4(b) and pursuant to Section 4(c) of the Plan shall become exercisable cumulatively as to fifty percent (50%) of the shares subject thereto six months from the date of grant and as to the remaining fifty percent (50%), eighteen months from the date of grant, and shall expire on the earlier of (i) five years from the date of grant, or (ii) seven (7) months from the date such Independent Director ceases to be a director if such Independent Director ceases to be a director other than as a result of his death or Disability. The provisions of this Section 4(b) and said Section 4(c) may not be amended more than one (1) time in any six (6) month period other than to comply with changes in the Code or the Employee Retirement Income Security Act ("ERISA") or the rules thereunder. (c) At the time an Independent Director is first elected to the Board, such person shall automatically be granted a Non-Qualified Stock Option to purchase thirty thousand (30,000) shares of Stock (or such lesser number of shares of Stock as remain available for grant at such date under the Plan, divided by the number of Independent Directors who are elected as directors at such date). Such Stock Options shall be exercisable at a price per share equal to the greater of the Fair Market Value on the date of grant or the par value of one share of Stock. 5. Stock Options. (a) Administration. Stock Options may be granted alone, in addition to or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. The Committee shall have the authority to grant to any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). (b) Option Grants. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee, in its sole discretion, shall deem desirable: (i) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant. (ii) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten (10) years after the date the Option is granted. (iii) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant. If the Committee provides, in its sole discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time at or after grant in whole or in part, based on such factors as the Committee shall, in its sole discretion, determine. (iv) Method of Exercise. (A) Subject to whatever installment exercise provisions apply under Section 5(b)(iii) of the Plan, Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by check, note or such other instrument, securities or property as the Committee may accept. As and to the extent determined by the Committee, in its sole discretion, at or after grant, payments in full or in part may also be made in the form of Stock already owned by the optionee or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee). (B) If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock or Deferred Stock, the Stock issuable upon such exercise (and any replacement shares relating thereto) shall remain (or be) restricted or deferred, as the case may be, in 5 accordance with the original terms of the Restricted Stock award or Deferred Stock award in question, and any additional Stock received upon the exercise shall be subject to the same forfeiture restrictions or deferral limitations, unless otherwise determined by the Committee, in its sole discretion, at or after grant. (C) No shares of Stock shall be issued until full payment therefor has been received by the Company. In the event of any exercise by note or other instrument, the shares of Stock shall not be issued until such note or other instrument shall have been paid in full, and the exercising optionee shall have no rights as a stockholder until such payment is made. (D) Subject to Section 5(b)(iv)(C) of the Plan, an optionee shall generally have the rights to dividends or other rights of a stockholder with respect to shares subject to the Option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in Section 14(a) of the Plan. (v) Non-Transferability of Options. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (vi) Termination by Death. Subject to Section 5(b)(ix) of the Plan with respect to Incentive Stock Options, if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent such option was exercisable at the time of death or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of one year (or such other period as the Committee may specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (vii) Termination by Reason of Disability or Retirement. Subject to Section 5(b)(ix) of the Plan with respect to Incentive Stock Options, if an optionee's employment by the Company and any Subsidiary or Affiliate terminates by reason of a Disability or Normal or Early Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination or on such accelerated basis as the Committee may determine at or after grant (or as may be determined in accordance with procedures established by the Committee), for a period of one year (or such other period as the Committee may specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that, if the optionee dies within such one-year period (or such other period as the Committee shall specify at grant), any unexercised Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of one year from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability or Normal or Early Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (viii) Other Termination. Unless otherwise determined by the Committee (or pursuant to procedures established by the Committee) at or after grant, if an optionee's employment by the Company and any Subsidiary or Affiliate terminates for any reason other than death, Disability or Normal or Early Retirement, the Stock Option shall thereupon terminate; provided, however, that if the optionee is involuntarily terminated by the Company or any Subsidiary or Affiliate without Cause, including a termination resulting from the Subsidiary, Affiliate or division in which the optionee is employed or engaged, ceasing, for any reason, to be a Subsidiary, Affiliate or division of the Company, such Stock Option may be exercised, to the extent otherwise exercisable on the date of termination, for a period of three months (or seven months in the case of a person subject to the reporting and short-swing profit provisions of Section 16 of the Exchange Act) from the date of such termination or until the expiration of the stated term of such Stock Option, whichever is shorter. (ix) Incentive Stock Options. 6 (A) Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the optionee(s) affected, to disqualify any Incentive Stock Option under such Section 422. (B) To the extent required for "incentive stock option" status under Section 422(d) of the Code (taking into account applicable Treasury regulations and pronouncements), the Plan shall be deemed to provide that the aggregate Fair Market Value (determined as of the time of grant) of the Stock with respect to which Incentive Stock Options are exercisable for the first time by the optionee during any calendar year under the Plan and/or any other stock option plan of the Company or any Subsidiary or parent corporation (within the meaning of Section 425 of the Code) shall not exceed $100,000. If Section 422 is hereafter amended to delete the requirement now in Section 422(d) that the plan text expressly provide for the $100,000 limitation set forth in Section 422(d), then this Section 5(b)(ix)(B) shall no longer be operative and the Committee may accelerate the dates on which the incentive stock option may be exercised. (C) To the extent permitted under Section 422 of the Code or the applicable regulations thereunder or any applicable Internal Revenue Service pronouncement: (I) If (x) a participant's employment is terminated by reason of death, Disability or Retirement and (y) the portion of any Incentive Stock Option that is otherwise exercisable during the post-termination period specified under Sections 5(b)(vi) and (vii) of the Plan, applied without regard to the $100,000 limitation contained in Section 422(d) of the Code, is greater than the portion of such option that is immediately exercisable as an "incentive stock option" during such post-termination period under Section 422, such excess shall be treated as a Non-Qualified Stock Option; and (II) if the exercise of an Incentive Stock Option is accelerated by reason of a Change in Control, any portion of such option that is not exercisable as an Incentive Stock Option by reason of the $100,000 limitation contained in Section 422(d) of the Code shall be treated as a Non-Qualified Stock Option. (x) Buyout Provisions. The Committee may at any time offer to buy out for a payment in cash, Stock, Deferred Stock or Restricted Stock an option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the optionee at the time that such offer is made. (xi) Settlement Provisions. If the option agreement so provides at grant or is amended after grant and prior to exercise to so provide (with the optionee's consent), the Committee may require that all or part of the shares to be issued with respect to the spread value of an exercised Option take the form of Deferred or Restricted Stock which shall be valued on the date of exercise on the basis of the Fair Market Value (as determined by the Committee) of such Deferred or Restricted Stock determined without regard to the deferral limitations and/or forfeiture restrictions involved. 6. Stock Appreciation Rights. (a) Grant and Exercise. (i) Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Stock Option. (ii) A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, subject to such provisions as the Committee may specify at grant where a Stock Appreciation Right is granted with respect to less than the full number of shares covered by a related Stock Option. (iii) A Stock Appreciation Right may be exercised by an optionee, subject to Section 6(b) of the Plan, in accordance with the procedures established by the Committee for such purpose. Upon such exercise, the optionee shall be entitled to receive an amount determined in the manner prescribed in said Section 6(b). Stock Options relating to exercised Stock Appreciation Rights shall no longer be exercisable to the extent that the related Stock Appreciation Rights have been exercised. 7 (b) Terms and Conditions. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of this Section 6 and Section 5 of the Plan; provided, however, that any Stock Appreciation Right granted to an optionee subject to Section 16(b) of the Exchange Act subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of its term, except that this special limitation shall not apply in the event of death or Disability of the optionee prior to the expiration of the six-month period. The exercise of Stock Appreciation Rights held by optionees who are subject to Section 16(b) of the Exchange Act shall comply with Rule 16b-3 thereunder to the extent applicable. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash and/or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. When payment is to be made in shares of Stock, the number of shares to be paid shall be calculated on the basis of the Fair Market Value of the shares on the date of exercise. When payment is to be made in cash, such amount shall be based upon the Fair Market Value of the Stock on the date of exercise, determined in a manner not inconsistent with Section 16(b) of the Exchange Act and the rules of the Commission thereunder. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under Section 5(b)(v) of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised only to the extent of the number of shares issued under the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. (v) In its sole discretion, the Committee may grant Stock Appreciation Rights that become exercisable only in the event of a Change in Control and/or a Potential Change in Control, subject to such terms and conditions as the Committee may specify at grant; provided that any such Stock Appreciation Rights shall be settled solely in cash. (vi) The Committee, in its sole discretion, may also provide that, in the event of a Change in Control and/or a Potential Change in Control, the amount to be paid upon the exercise of a Stock Appreciation Right shall be based on the Change in Control Price, subject to such terms and conditions as the Committee may specify at grant. 7. Restricted Stock. (a) Administration. Shares of Restricted Stock may be issued either alone, in addition to or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient of Restricted Stock, subject to Section 7(b) of the Plan, the time or times within which such awards may be subject to forfeiture, and all other terms and conditions of the awards. The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may, in its sole discretion, determine. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. (i) The prospective recipient of a Restricted Stock award shall not have any rights with respect to such award unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such award. 8 (ii) The purchase price for shares of Restricted Stock may be equal to or less than their par value and may be zero. (iii) Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify at grant) after the award date, by executing a Restricted Stock Award Agreement and paying the price, if any, required under Section 7(b)(ii). (iv) Each participant receiving a Restricted Stock award shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award. (v) The Committee shall require that (A) the stock certificates evidencing shares of Restricted Stock be held in the custody of the Company until the restrictions thereon shall have lapsed, and (B) as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Restricted Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to this Section 7 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of the Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Committee, in its sole discretion, may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, based on service, performance and/or such other factors or criteria as the Committee may determine, in its sole discretion. (ii) Except as provided in this Section 7(c)(ii) and Section 7(c)(i) of the Plan, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company, including the right to vote the shares and the right to receive any regular cash dividends paid out of current earnings. The Committee, in its sole discretion, as determined at the time of award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested, subject to Section 14(e) of the Plan, in additional Restricted Stock to the extent shares are available under Section 3 of the Plan, or otherwise reinvested. Stock dividends, splits and distributions issued with respect to Restricted Stock shall be treated as additional shares of Restricted Stock that are subject to the same restrictions and other terms and conditions that apply to the shares with respect to which such dividends are issued, and the Committee may require the participant to deliver an additional stock power covering the shares issuable pursuant to such stock dividend, split or distribution. Any other dividends or property distributed with regard to Restricted Stock, other than regular dividends payable and paid out of current earnings, shall be held by the Company subject to the same restrictions as the Restricted Stock. (iii) Subject to the applicable provisions of the award agreement and this Section 7, upon termination of a participant's employment or other services with the Company and any Subsidiary or Affiliate for any reason during the Restriction Period, all shares still subject to restriction will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant. (iv) If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, certificates for an appropriate number of unrestricted shares, and other property held by the Company with respect to such Restricted Shares, shall be delivered to the participant promptly. (d) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem Stock Option or performance-based or other award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a Restricted Stock award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. 8. Deferred Stock. (a) Administration. Deferred Stock may be awarded either alone, in addition to or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. The Committee shall determine the eligible persons to whom and the time or times at which Deferred Stock shall be awarded, the 9 number of shares of Deferred Stock to be awarded to any person, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and the other terms and conditions of the award in addition to those set forth in Section 8(b). The Committee may condition the grant of Deferred Stock upon the attainment of specified performance goals or such other factors or criteria as the Committee shall, in its sole discretion, determine. The provisions of Deferred Stock awards need not be the same with respect to each recipient. (b) Terms and Conditions. The shares of Deferred Stock awarded pursuant to this Section 8 shall be subject to the following terms and conditions: (i) Subject to the provisions of the Plan and the award agreement referred to in Section 8(b)(vi) of the Plan, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or the Elective Deferral Period referred to in Section 8(b)(v) of the Plan, where applicable), share certificates representing the shares covered by the Deferred Stock award shall be delivered to the participant or his legal representative. (ii) Unless otherwise determined by the Committee at grant, amounts equal to any dividends declared during the Deferral Period with respect to the number of shares covered by a Deferred Stock award will be paid to the participant currently, or deferred and deemed to be reinvested in additional Deferred Stock, or otherwise reinvested, all as determined at or after the time of the award by the Committee, in its sole discretion. (iii) Subject to the provisions of the award agreement and this Section 8, upon termination of a participant's employment with the Company and any Subsidiary or Affiliate for any reason during the Deferral Period for a given award, the Deferred Stock in question will vest, or be forfeited, in accordance with the terms and conditions established by the Committee at or after grant. (iv) Based on service, performance and/or such other factors or criteria as the Committee may determine, the Committee may, at or after grant, accelerate the vesting of all or any part of any Deferred Stock award and/or waive the deferral limitations for all or any part of such award. (v) A participant may elect to further defer receipt of an award (or an installment of an award) for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions adopted by the Committee, such election must generally be made at least twelve months prior to completion of the Deferral Period for such Deferred Stock award (or such installment). (vi) Each award shall be confirmed by, and subject to the terms of, a Deferred Stock agreement executed by the Company and the participant. (c) Minimum Value Provisions. In order to better ensure that award payments actually reflect the performance of the Company and service of the participant, the Committee may provide, in its sole discretion, for a tandem Stock Option or performance-based or other award designed to guarantee a minimum value, payable in cash or Stock to the recipient of a deferred stock award, subject to such performance, future service, deferral and other terms and conditions as may be specified by the Committee. 9. Stock Purchase Rights. (a) Awards and Administration. The Committee may grant eligible participants Stock Purchase Rights which shall enable such participants to purchase Stock (including Deferred Stock and Restricted Stock): (i) at its Fair Market Value on the date of grant; (ii) at a percentage of such Fair Market Value on such date, such percentage to be determined by the Committee in its sole discretion; (iii) at an amount equal to Book Value on such date; or (iv) at an amount equal to the par value of such Stock on such date. 10 The Committee shall also impose such deferral, forfeiture and/or other terms and conditions as it shall determine, in its sole discretion, on such Stock Purchase Rights or the exercise thereof. The terms of Stock Purchase Rights awards need not be the same with respect to each participant. Each Stock Purchase Right award shall be confirmed by, and be subject to the terms of, a Stock Purchase Rights Agreement. (b) Exercisability. Stock Purchase Rights shall generally be exercisable for such period after grant as is determined by the Committee not to exceed sixty (60) days. However, the Committee may provide, in its sole discretion, that the Stock Purchase Rights of persons potentially subject to Section 16(b) of the Exchange Act shall not become exercisable until six months and one day after the grant date, and shall then be exercisable for ten trading days at the purchase price specified by the Committee in accordance with Section 9(a) of the Plan. 10. Other Stock-Based Awards. (a) Administration. (i) Other awards of Stock and other awards that are valued in whole or in part by reference to, or are otherwise based on, Stock ("Other Stock-Based Awards"), including, without limitation, performance shares, convertible preferred stock (to the extent a series of preferred stock has been or may be created by, or in accordance with a procedure set forth in, the Company's certificate of incorporation), convertible debentures, warrants, exchangeable securities and Stock awards or options valued by reference to Fair Market Value, Book Value or performance of the Company or any Subsidiary, Affiliate or division, may be granted either alone or in addition to or in tandem with Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock or Stock Purchase Rights granted under the Plan and/or cash awards made outside of the Plan. (ii) Subject to the provisions of the Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such award shall be made, the number of shares of Stock to be awarded pursuant to such awards, and all other conditions of the awards. The Committee may also provide for the grant of Stock upon the completion of a specified performance period. The provisions of Other Stock-Based Awards need not be the same with respect to each recipient. (b) Terms and Conditions. Other Stock-Based Awards made pursuant to this Section 10 shall be subject to the following terms and conditions: (i) Subject to the provisions of the Plan and the award agreement referred to in Section 10(b)(v) of the Plan, shares of Stock subject to awards made under this Section 10 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. (ii) Subject to the provisions of the Plan and the award agreement and unless otherwise determined by the Committee at grant, the recipient of an award under this Section 10 shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest or dividend equivalents with respect to the number of shares covered by the award, as determined at the time of the award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Stock or otherwise reinvested. (iii) Any award under Section 10 and any Stock covered by any such award shall vest or be forfeited to the extent so provided in the award agreement, as determined by the Committee, in its sole discretion. (iv) In the event of the participant's Retirement, Disability or death, or in cases of special circumstances, the Committee may, in its sole discretion, waive in whole or in part any or all of the remaining limitations (if any) imposed with respect to any or all of an award pursuant to this Section 10. (v) Each award under this Section 10 shall be confirmed by, and subject to the terms of, an agreement or other instrument by the Company and by the participant. (vi) Stock (including securities convertible into Stock) issued on a bonus basis under this Section 10 may be issued for no cash consideration. 11 11. Change in Control Provisions. (a) Impact of Event. In the event of a "Change in Control," as defined in Section 11(b) of the Plan, or a "Potential Change in Control," as defined in Section 11(c) of the Plan, except to the extent otherwise determined by the Committee or the Board at or after grant (subject to any right of approval expressly reserved by the Committee or the Board at the time of such determination), the following acceleration and valuation provisions shall apply: (i) Any Stock Appreciation Rights outstanding for at least six months and any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested and any Incentive Stock Options may, with the consent of the holders thereof, be treated as Non-Qualified Stock Options. (ii) The restrictions and deferral limitations applicable to any Restricted Stock, Deferred Stock, Stock Purchase rights and Other Stock-Based Awards, in each case to the extent not already vested under the Plan, shall lapse and such shares and awards shall be deemed fully vested. (iii) The value of all outstanding Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and Other Stock-Based Awards, in each case to the extent vested (including such rights which shall have become vested pursuant to Sections 11(a)(i) and (ii) of the Plan), shall be purchased by the Company ("cashout") in a manner determined by the Committee, in its sole discretion, on the basis of the "Change in Control Price" as defined in Section 11(d) of the Plan as of the date such Change in Control or such Potential Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control, unless the Committee shall, contemporaneously with or prior to any particular Change of Control or Potential Change of Control, determine that this Section 11(a)(iii) shall not be applicable to such Change in Control or Potential Change in Control. (b) Definition of "Change in Control." For purposes of Section 11(a) of the Plan, a "Change in Control" means the happening of any of the following after the completion of the acquisition of Plaza Consulting Group, Inc., a Puerto Rico corporation (the "Acquisition Effective Date"): (i) When any "person" (as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) of the Exchange Act, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Company and any Subsidiary and any employee benefit plan sponsored or maintained by the Company or any Subsidiary and any trustee of such plan acting as trustee) directly or indirectly becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; provided, however, that a Change of Control shall not arise if such acquisition is approved by the board of directors or if the board of directors or the Committee determines that such acquisition is not a Change of Control or if the board of directors authorizes the issuance of the shares of Stock (or securities convertible into Stock or upon the exercise of which shares of Stock may be issued) to such persons; or (ii) When, during any period of twenty-four consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death, Disability or Retirement to constitute at least a majority thereof, provided, however, that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of, or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 11(b)(ii); provided, however, that all directors who are elected to the board not later than six months after the Acquisition Effective Date shall be deemed to be an Incumbent Director and shall be deemed to have satisfied the 24-month requirement set forth in this Section 11(b)(ii); or (iii) The occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a Subsidiary through purchase of assets, or by merger, or otherwise unless approved by a majority of Incumbent Directors. (c) Definition of Potential Change in Control. For purposes of Section 11(a) of the Plan, a "Potential Change in Control" means the happening of any one of the following: 12 (i) The approval by stockholders of an agreement by the Company, the consummation of which would result in a Change in Control of the Company as defined in Section 11(b) of the Plan; or (ii) The acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan or any trustee of such plan acting as such trustee) of securities of the Company representing five percent or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of Directors of a resolution to the effect that a Potential Change in Control of the Company has occurred for purposes of the Plan. (d) Change in Control Price. For purposes of this Section 11, "Change in Control Price" means the highest price per share paid in any transaction reported on the principal stock exchange on which the Stock is traded or the average of the highest bid and asked prices as reported by the principal stock exchange or market on which the Stock is traded, or paid or offered in any bona fide transaction related to a Potential or actual Change in Control of the Company at any time during the sixty-day period immediately preceding the occurrence of the Change in Control (or, where applicable, the occurrence of the Potential Change in Control event), in each case as determined by the Committee except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such Stock Appreciation Rights, Incentive Stock Options or, where applicable, the date on which a cashout occurs under Section 11(a)(iii). 12. Amendments and Termination. (a) The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the rights of an optionee or participant under a Stock Option, Stock Appreciation Right, Restricted or Deferred Stock award, Stock Purchase Right or Other Stock-Based Award theretofore granted, without the optionee's or participant's consent, and no amendment will be made without approval of the stockholders if such amendment requires stockholder approval under state law or if stockholder approval is necessary in order that the Plan comply with Rule 16b-3 of the Commission under the Exchange Act or any substitute or successor rule or if stockholder approval is necessary in order to enable the grant pursuant to the Plan of options or other awards intended to confer tax benefits upon the recipients thereof. (b) The Committee may amend the terms of any Stock Option or other award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights or any holder without the holder's consent. The Committee may also substitute new Stock Options for previously granted Stock Options (on a one for one or other basis), including previously granted Stock Options having higher option exercise prices. (c) Subject to the provisions of Sections 12(a) and (b) of the Plan, the Board shall have broad authority to amend the Plan to take into account changes in applicable securities and tax laws and accounting rules, as well as other developments, and, in particular, without limiting in any way the generality of the foregoing, to eliminate any provisions which are not required to included as a result of any amendment to Rule 16b-3 of the Commission pursuant to the Exchange Act. 13. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained in this Plan shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards under this Plan; provided, however, that, unless the Committee otherwise determines with the consent of the affected participant, the existence of such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan. 14. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option or other award under the Plan to represent to and agree with the Company in writing that the optionee or participant is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any 13 legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates or shares of Stock or other securities delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. (c) Neither the adoption of the Plan nor the grant of any award pursuant to the Plan shall confer upon any employee of the Company or any Subsidiary or Affiliate any right to continued employment with the Company or a Subsidiary or Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary or Affiliate to terminate the employment of any of its employees at any time. (d) No later than the date as of which an amount first becomes includible in the gross income of the participant for Federal income tax purposes with respect to any award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Stock, including Stock that is part of the award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and its Subsidiaries or Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. (e) The actual or deemed reinvestment of dividends or dividend equivalents in additional Restricted Stock (or in Deferred Stock or other types of Plan awards) at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 of the Plan for such reinvestment (taking into account then outstanding Stock Options, Stock Purchase Rights and other Plan awards). 15. Effective Date of Plan. he Plan shall be effective as of the date the Plan is approved by the Board, subject to the approval of the Plan by a majority of the votes cast by the holders of the Company's Stock at the next annual or special meeting of stockholders. Any grants made under the Plan prior to such approval shall be effective when made (unless otherwise specified by the Committee at the time of grant), but shall be conditioned on, and subject to, such approval of the Plan by such stockholders. 16. Term of Plan. Stock Option, Stock Appreciation Right, Restricted Stock award, Deferred Stock award, Stock Purchase Right or Other Stock-Based Award may be granted pursuant to the Plan, until ten (10) years from the date the Plan was approved by the Board, unless the Plan shall be terminated by the Board, in its discretion, prior to such date, but awards granted prior to such termination may extend beyond that date. 14 EX-99.6 12 v045248_ex99-6.txt EXHIBIT 99.6 FRANKLYN RESOURCES III, INC. UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS INDEX TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS Unaudited Combined Pro Forma Balance Sheet as of March 31, 2006 2 Unaudited Combined Pro Forma Statements of Operations for the Three Months Ended March 31, 2006 and for the Year Ended December 31, 2006 3-4 Notes to Unaudited Combined Pro Forma Financial Statements 5-6 1 FRANKLYN RESOURCES III, INC. UNAUDITED COMBINED PRO FORMA BALANCE SHEET As of March 31, 2006 (In thousands of United States dollars)
Qingdao Sinogas Franklyn General Sinoenergy Franklyn Resources Machinery Holding Resources III, Inc. Ltd. Corp. Limited Adjustment III, Inc. -------- -------- -------- -------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ -- $ 112 $ -- $ 112 Accounts receivable (net) -- -- -Related parties -- 1,347 -- 1,347 - Third parties -- 3,435 -- 3,435 Other receivables- -- -- -Related party -- 236 -- 236 -Third party -- 917 -- 917 Deposits and prepayments -- -- -Related parties -- 4,986 -- 4,986 - Third parties -- 951 -- 951 Inventories -- 2,060 -- 2,060 -------- -------- -------- -------- -------- TOTAL CURRENT ASSET -- 14,044 -- 14,044 ======== ======== ======== ======== ======== LONG TERM ASSETS Property, plant and equipment (net) -- 3,470 -- 3,470 Intangible assets -- 257 -- 257 Long term deferred tax asset -- 17 -- 17 TOTAL ASSETS $ -- $ 17,788 $ -- $ 17,788 ======== ======== ======== ======== ======== CURRENT LIABILITIES Short term loan $ -- $ 2,495 $ -- $ 2,495 Accounts payable-third party 3 1,213 -- 1,216 Other payables -- -- - Related party -- 622 -- 622 - Third parties -- 1,057 -- 1,057 Accrued expenses -- 24 -- 24 Warranty accrual -- 19 -- 19 Advances from customers -- 1,914 -- 1,914 Income taxes payable -- 1,662 -- 1,662 Total current liabilities 3 9,006 -- 9,009 -------- -------- -------- -------- -------- LONG TERM DEFERRED TAX LIABILITIES -- 28 -- 28 MINORITY INTERESTS -- 665 -- 665 -------- -------- -------- -------- -------- TOTAL LIABILITIES 3 9,699 -- 9,702 OWNERS' EQUITY Common Stock (2) 3 -- 50 (39) 14 Unpaid common stock (2) -- -- (50) 50 -- Paid-in capital (2) 74 4,950 -- (91) 4,933 Capital surplus -- 67 -- 67 Statutory surplus reserve fund -- 331 -- 331 Retained earnings -- 2,566 -- 2,566 Development stage (80) -- -- 80 -- -------- -------- -------- -------- -------- Accumulated other comprehensive income -- 173 -- 173 -------- -------- -------- -------- -------- Total owners' equity (3) 8,088 -- 8,085 -------- -------- -------- -------- -------- TOTAL LIABILITIES AND OWNERS' EQUITY $ -- $ 17,788 $ -- $ 17,788 ======== ======== ======== ======== ========
See notes to unaudited combined pro forma financial information. 2 FRANKLYN RESOURCES III, INC. UNAUDITED COMBINED PRO FORMA STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 2006 (In thousands of United States dollars)
Qingdao Sinogas Franklyn General Resources Franklyn Machinery Sinoenergy III, Inc. Resources Limited Holding Combined III, Inc. Corporation Limited Pro forma ------- ------- ------- ------- NET REVENUE $ -- $ 2,500 $ -- $ 2,500 COST OF REVENUE -- (1,245) -- (1,245) ------- ------- ------- ------- GROSS PROFIT -- 1,255 -- 1,255 OPERATING EXPENSES Selling expenses -- 64 -- 64 General and administrative expenses 3 265 -- 268 ------- ------- ------- ------- TOTAL OPERATING EXPENSES 3 329 -- 332 ------- ------- ------- ------- INCOME(LOSS) FROM OPERATIONS (3) 926 -- 923 OTHER INCOME(EXPENSES) Other non-operating income -- 2 -- 2 Interest expense -- (42) -- (42) Other expenses -- (3) -- (3) ------- ------- ------- ------- OTHER INCOME (LOSS) NET -- (43) -- (43) INCOME (LOSS) BEFORE INCOME TAXES (3) 883 -- 880 Income tax -- (313) -- (313) ------- ------- ------- ------- INCOME (LOSS) BEFORE MINORITY INTEREST (3) 570 -- 567 Minority interest 22 -- 22 ------- ------- ------- ------- NET INCOME $ (3) $ 548 $ -- $ 545 ======= ======= ======= =======
See notes to unaudited combined pro forma financial information. 3 FRANKLYN RESOURCES III, INC. UNAUDITED COMBINED PRO FORMA STATEMENTS OF OPERATIONS For the Year Ended December 31, 2005 (In thousands of United States dollars)
Qingdao Sinogas Franklyn General Resources Franklyn Machinery Sinoenergy III, Inc. Resources Limited Holding Combined III, Inc. Corporation Limited Pro forma ------- ------- -------- ------- NET REVENUE $ -- $ 8,236 $ -- $ 8,236 COST OF REVENUE -- (3,821) -- (3,821) ------- ------- -------- ------- GROSS PROFIT -- 4,415 -- 4,415 OPERATING EXPENSES Selling expenses -- 110 -- 110 General and administrative expenses 7 586 -- 593 ------- ------- -------- ------- TOTAL OPERATING EXPENSES 7 695 -- 703 ------- ------- -------- ------- INCOME(LOSS) FROM OPERATIONS (7) 3,719 -- 3,712 OTHER INCOME(EXPENSES) Other non-operating income -- 76 -- 76 Interest expense -- (41) -- (41) Other expenses -- (106) -- (106) ------- ------- -------- ------- OTHER INCOME (LOSS) NET -- (71) -- (71) INCOME (LOSS) BEFORE INCOME TAXES (7) 3,647 -- 3,640 Income tax -- (1,173) -- (1,173) ------- ------- -------- ------- INCOME (LOSS) BEFORE MINORITY INTEREST (7) 2,474 -- 2,467 Minority interest -- 14 -- 14 ------- ------- -------- ------- NET INCOME $ (7) $ 2,460 $ -- $ 2,453 ======= ======= ======== =======
See notes to unaudited combined pro forma financial information. 4 FRANKLYN RESOURCES III, INC. NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS 1. Introduction Franklyn Resources III, Inc. ("Franklyn") was incorporated in Nevada. Effective on June 2, 2006, Franklyn entered into an Exchange Agreement ("Exchange Agreement") with Sinoenergy Holding Limited ("Sinoenergy"), an International Business Company incorporated in the British Virgin Islands, and each of the members of Sinoenergy (the "Sinoenergy BVI Members"). Qingdao Sinogas General Machinery Limited Corporation ("Sinogas"), a limited liability company under the Company Law of The People Republic of China. The closing of the transactions contemplated by the Exchange Agreement occurred on June 2, 2006. At the closing, pursuant to the terms of the Exchange Agreement, Franklyn acquired all of the outstanding capital stock and ownership interests of Sinoenergy from the Sinoenergy BVI Members, and the Sinoenergy BVI Members contributed all of their interests in Sinoenergy to Franklyn. In exchange, Franklyn issued to the Sinoenergy BVI Members 14,215,385 shares of Common Stock. At the closing, Sinoenergy became a wholly-owned subsidiary of Franklyn. Sinoenergy, in turn, owns all of the registered capital of Sinogas, a wholly foreign owned enterprise ("WFOE") registered under the wholly foreign-owned enterprises laws of the PRC. Under generally accepted accounting principles, both acquisitions described above are considered to be capital transactions in substance, rather than business combinations. That is, the acquisitions are equivalent, in the merger of Sinoenergy and Sinogas, to the issuance of stock by Sinogas for the net monetary assets of Sinoenergy, and in the Franklyn/Sinoenergy merger, the issuance of stock by Sinoenergy for the net monetary assets of Franklyn. Each transaction is accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition, except that no goodwill is recorded. Under reverse takeover accounting, the comparative historical financial statements in the Franklyn/Sinoenergy merger of the "legal acquirer", Franklyn, are those of the "accounting acquirer", Sinoenergy. The unaudited pro forma financial information has been prepared giving pro forma effects on the statements of operations for the year ended December 31, 2005 and for the three months ended March 31, 2006 as if the transaction occurred on January 1, 2005. The pro forma balance sheet assumes the transaction occurred on the balance sheet date. The unaudited pro forma financial information is based upon the historical financial statements of Franklyn, Sinoenergy, and Sinogas as of and for the year ended December 31, 2005 and for the three months ended March 31, 2006 after giving effect to pro forma adjustments described in Note 2. 5 FRANKLYN RESOURCES III, INC. NOTES TO UNAUDITED COMBINED PRO FORMA FINANCIAL STATEMENTS (Continued) The unaudited pro forma financial information does not purport to represent what the results of operations of Franklyn, Sinoenergy, and Sinogas would actually have been if the events described above had in fact occurred at the beginning of 2005, or any other date, or to project the net profit of Franklyn, Sinoenergy, and Sinogas for any future period. The adjustments are based on currently available information and certain estimates and assumptions. However, management believes that the assumptions provide a reasonable basis for presenting the unaudited pro forma financial information and those pro forma adjustments give effect to those assumptions and are properly applied in the unaudited pro forma financial information. 2. Pro forma Adjustments The adjustments in the combined pro forma balance sheet represent the following: (a) elimination of common stock of Sinoenergy, the BVI company; (b) elimination of accumulated deficit of Franklyn; and (c) Pursuant to the Securities Exchange Agreement, Franklyn acquired 3,305,000 share of common stock, par value $0.001 per share, and issued 14,584,385 share of common stock, par value $0.001 per share, to the stockholders of Sinoenergy (14,215,385 Shares are original shareholders of Sinoenergy and 369,000 Shares to new investors), representing approximately 99.8% of the Franklyn post-exchange issues and outstanding common stock, in exchange for 100% of the outstanding capital stock of Sinoenergy. The Company presently carries on the business of Qingdao Sinogas General Machinery Limited Corporation, a Chinese corporation and Sinoenergy's wholly-owned subsidiary, or Sinogas. 6 -----END PRIVACY-ENHANCED MESSAGE-----