-----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, K2p7LZQlLBLBAgSj5pzy1cjzybs8dRuqacpI349R1Wod/Eti45abo+h0FAWkreAR 0twdto7YovmLasJRPnqpaQ== 0001004878-05-000138.txt : 20050826 0001004878-05-000138.hdr.sgml : 20050826 20050826160945 ACCESSION NUMBER: 0001004878-05-000138 CONFORMED SUBMISSION TYPE: F-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20050826 FILER: COMPANY DATA: COMPANY CONFORMED NAME: T2CN Holding LTD CENTRAL INDEX KEY: 0001333194 IRS NUMBER: 000000000 STATE OF INCORPORATION: D8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: F-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-127874 FILM NUMBER: 051052247 BUSINESS ADDRESS: STREET 1: 1624 WASHINGTON ST. CITY: DENVER STATE: CO ZIP: 80203 BUSINESS PHONE: (86-21) 5427-8388 MAIL ADDRESS: STREET 1: 5TH FLOOR, NO. 88 STREET 2: QINJIIANG ROAD CITY: SHANGHAI STATE: F4 ZIP: 200233 F-1 1 f1august05.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form F-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 T2CN HOLDING LIMITED (Exact name of Registrant as Specified in its Charter) British Virgin Islands 7371 Not Applicable ---------------------- ---- -------------- (State or Other (Primary Standard (I.R.S. Employer Jurisdiction of Industrial Identification Number) Incorporation or Classification Code Organization) Number) 5th Floor, No. 88 Qinjiang Road Shanghai, China 200233 Telephone: (86-21) 5427-8388 (Address and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) William T. Hart, Esq. Hart & Trinen 1624 Washington St. Denver, CO 80203 (303) 839-0061 ------------------------------------------------ (Name, address, and telephone number of agent for service) Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. |_| CALCULATION OF REGISTRATION FEE Proposed Proposed Title of Maximum Maximum Each Class of Offering Aggregate Securities to be Amount to be Price per Offering Amount of Registered(1) Registered (1) Share Unit (2) Price Registration Fee Common Stock 8,091,503 $ 1.50 $12,137,255 $1,429 - -------------------------------------------------------------------------------- (1) The total number of shares of common stock to be sold by shareholders on a continuous offering basis under Rule 415. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended. 2 PROSPECTUS T2CN HOLDING LIMITED 5th Floor, No. 88 Qinjiang Road Shanghai, China 200233 Telephone: (86-21) 5427-8388 Fax: (86-21) 5426-2830 Common Stock 8,091,503 Shares A number of our shareholders are offering to sell up to 8,091,503 shares of our common stock at a price of $1.50 per share. If and when our common stock becomes quoted on the OTC Bulletin Board or listed on a securities exchange, the shares owned by the selling shareholders may be sold in the over-the-counter market, or otherwise, at prices and terms then prevailing or at prices related to the then-current market price, or in negotiated transactions. We will not receive any proceeds from the sale of the common stock by the selling stockholders. We will pay for the expenses of this offering. As of the date of this prospectus there was no public market for our common stock and we had not made any application to have our shares publicly traded. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. FOR A DESCRIPTION OF CERTAIN IMPORTANT FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, SEE "RISK FACTORS" BEGINNING ON PAGE __ OF THIS PROSPECTUS. The date of this Prospectus is _______________, 2005. PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information elsewhere in this prospectus. Because it is a summary, it does not contain all of the information that you should consider before making an investment decision. You should read the entire prospectus carefully, including the "Risk Factors" section and the financial statements and the accompanying notes to those financial statements. We are involved in the operation of online internet games in China. We were incorporated on May 7, 2004 in the British Virgin Islands. Unless otherwise indicated, all references to our Company include the operations of: o our wholly-owned subsidiary, T2CN Information Technology (Shanghai) Co. Ltd., which was incorporated in China on November 22, 2004, and o our affiliate, Shanghai T2 Entertainment Co., Ltd., which was incorporated in China on October 8, 2004. As of the date of this prospectus we had licensed the rights to two online internet games: RUSH ONLINE and SHENMUE ONLINE. Rush Online was licensed from JC Entertainment Corporation of Korea and Shenmue Online was licensed from JC Entertainment Corporation of Korea and Sega Corporation of Japan. RUSH ONLINE became available for commercial use in March of 2005. We are presently monitoring its performance. It is expected that SHENMUE ONLINE's internet game development will be completed by March of 2006. It is anticipated that "beta testing" of the game will commence in April of 2006 and it will be available for commercial use in July 2006. The RUSH ONLINE and SHENMUE ONLINE games are considered "massively multiplayer online role-playing games" or MMORPG's. The games are continuous and players accumulate features and communicate with one another through instant messaging. MMORPG's allow thousands of users to interact with one another in a virtual world by assuming online roles or characters with different features. As MMORPG's require a significant amount of time to master, they tend to have a high degree of user attraction, which means that users tend to spend longer amounts of time playing these games than other Internet applications. Customers will be charged for the time they spend playing our games. Customers will typically access our online games through PC's at home or in Internet cafes. They will obtain game playing time primarily through purchasing prepaid cards at various retail outlets or purchasing online points at Internet cafes in China which have subscribed to our online membership and payment system. Although we plan to license the rights to other online internet games, as of the date of this prospectus we had not entered into any licensing arrangement for any other games. 2 The Offering By means of this prospectus a number of our shareholders are offering to sell up to 8,091,503 shares of our common stock at a price of $1.50 per share. As of the date of this prospectus we had 25,357,503 outstanding shares of common stock. Risk Factors The purchase of the securities offered by this prospectus involves a high degree of risk. Risk factors include the lack of any relevant operating history and the lack of any public market for our common stock. See "Risk Factors" beginning on page 4 of this prospectus. Conventions Which Apply to This Prospectus Except as otherwise indicated and for purposes of this prospectus only: o "we", "us" and "our" refer to: Our company - T2CN Holding Limited, T2CN Information Technology (Shanghai) Co., Ltd. our wholly-owned subsidiary, and our affiliate, Shanghai T2 Entertainment Co., Ltd. o "China" or "PRC" refers to the People's Republic of China, excluding Taiwan, Hong Kong and Macau; and o all references to "RMB" or "Renminbi" are to the legal currency of China and all references to "U.S. dollars," "dollars" and "US$" are to the legal currency of the United States. o all financial information in this prospectus is in U.S. dollars. In December 2004 we reverse split our outstanding shares of our common stock such that each twelve shares were converted to 8.5 shares. Unless otherwise indicated all share data in this prospectus has been adjusted to reflect this reverse stock split. Other than contracts disclosed elsewhere in this prospectus or entered into the ordinary course of business, we have has not entered into any contracts, which can reasonably be determined as being material to us. Forward Looking Statements This prospectus contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. All statements other than statements of historical fact in this prospectus are forward-looking statements. These forward-looking statements can be identified by words or phrases such as "may", "will", "expect", "anticipate", "estimate", "plan", "believe", "is/are likely to" or other similar expressions. 3 The forward-looking statements included in this prospectus relate to, among others, our future business development, financial condition and results of operations. Forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, we cannot assure you that our expectations will turn out to be correct. Our actual results could be materially different from, or worse, than our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in the Risk Factors section of this prospectus. You should not place undue reliance on these forward-looking statements. RISK FACTORS You should carefully consider the risks and uncertainties described below, and all other information contained in this prospectus, before making an investment decision. If any the following risks actually occur, our business, financial condition and results of operation could be materially and adversely affected and you may lose all, or part, of your investment. Risks Related to Our Business 1. Since we are in the development stage, with no operating history, evaluating our business and prospects is difficult. We have a limited operating history upon which you can evaluate our business and prospects. Our business was established in May of 2004 and has been focused on the acquisition of two online software licensing agreements and the development of an online virtual community. Our senior management and employees have worked together at our company for a relatively short period of time. In addition, the online game industry, from which we derive substantially all of our revenues, is a relatively new industry. The first massively multiplayer online role playing game in China was developed and distributed by one of our competitors in 1998. Since then, only a limited number of companies have successfully commercialized such online games on an international scale. You must consider our business prospects in light of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving industry. We may not be able to successfully address these risks and difficulties, which could materially harm our business, financial condition and results of operations. We will be focusing our attention to the commercial operation of MMORPG's and specifically the licensed games of RUSH ONLINE and SHENMUE ONLINE. We are in the development stage. There is no assurance that our online games will be popular and accepted in China. The commercialization of our two online games may result in a significant strain on our present management system and resources. We need to hire skilled and experienced personnel to complete our expansion plans. In addition to training and managing our workforce, we will need to continue to develop and improve our financial and management controls and our reporting systems and procedures. We cannot assure you that we will be able to effectively and efficiently manage the growth of our operations, and any failure to do so may adversely affect our business. 4 2. We may never be profitable. During the period from our incorporation on May 7, 2004 to December 31, 2004 we had a loss of $(1,115,056). To enable us to continue in business we will eventually need to earn a profit or obtain additional financing until we are profitable. 3. Any failure to obtain additional capital may significantly restrict our proposed operations. We may need additional capital to fund operating losses and to expand our business. If we need additional capital, we will try to sell equity or debt securities or obtain loans. Sale of equity or convertible debt securities will result in dilution to our current shareholders. Further, such securities might have rights, preferences or privileges senior to our common stock. Additional financings may not be available on acceptable terms; we may not be able to take advantage of prospective new business endeavors or opportunities, which could significantly and materially restrict our business operations. 4. We are currently dependent on two games for all of our projected revenues and profits, and therefore our failure to develop or license additional online games may adversely affect our future results of operations. We expect that our dependence on Rush Online and Shenmue Online will continue for at least the next six to twelve months as we have not licensed any other games, nor do we have any game under internal development. There is no assurance that the online games, Rush Online or Shenmue Online will be popular or will successfully operate in the Chinese marketplace. In order for our business strategy to succeed over time, we will need to introduce upgrades to Rush Online and Shenmue Online and to develop new online games that are superior to the games of our competitors and also very attractive to users as the two licensed online games have a term to their economic useful life. We believe that successful online games that have a life of four to five years and most other moderately successful online games have a life of two to three years. Our ability to license successful online games will depend on their availability at an acceptable cost, our ability to compete effectively to attract the licensors of these games, and our ability to obtain government approvals required for licensing and operating these games. We cannot assure you that any games we license or develop will be attractive to users, will be viewed by the regulatory authorities as complying with content restrictions, will be launched as scheduled or will be able to compete with games operated by our competitors. If we are not able to consistently develop or acquire superior online games with continuing appeal to users, we will not be profitable. 5. If we are unable to successfully launch and operate RUSH ONLINE and SHENMUE ONLINE in China, our future results of operations will be adversely affected. We plan to invest a significant amount of financial and personnel resources to successfully launch and operate RUSH ONLINE and SHENMUE ONLINE in China. RUSH ONLINE was commercially launched in March of 2005 and we are 5 monitoring the results of the game. The developers of SHENMUE ONLINE are completing the game's adaptation for online use. It is anticipated that the beta testing for the game will begin in April 2006 and it will be available for commercial use in July of 2006. There is no assurance that the commercial launch of RUSH ONLINE and SHENMUE ONLINE will be successful and that once they are both launched, that we will be able to operate the games at a profit or at all. Chinese governmental authorities may delay or deny the granting of the approvals required for the operation of SHENMUE ONLINE, due to its content or other factors. The games may not attract as many users as may be needed for profitable operations. We still owe JC Entertainment Corp. a remaining licensing fee of US$420,000 for RUSH ONLINE. We also owe Sega Corporation a remaining licensing fee of US$1,500,000 for SHENMUE ONLINE. The RUSH ONLINE and SHENMUE ONLINE licensing agreements also require royalty payments of 30% and 33% respectively. If we lose our exclusive software licensing rights in China for failing to meet our financial obligations or for other reasons or if we are unable to successfully launch and operate these games and generate revenues we may discontinue operations. 6. If we are unable to maintain a satisfactory relationship with JC Entertainment Corp. or Sega Corporation, or any other online game developer which licenses a game to us, our business would suffer. If we are unable to maintain a satisfactory relationship with JC Entertainment Corp. or Sega Corporation, or any other online game developer which might license a game to us, or if JC Entertainment Corp., Sega Corporation, or any other online game licensors either establishes similar or more favorable relationships with our competitors, in violation of its contractual arrangements with us, or otherwise, our operating results and our business would be harmed, because our business will depend significantly upon our exclusive licenses to operate RUSH ONLINE and SHENMUE ONLINE and other MMORPG'S in China. We cannot assure you that JC Entertainment Corp. or Sega Corporation will renew their license agreements with us or grant us an exclusive license for any new online games they may develop in the future. Online gaming depends on the developers and operators working together. If the developer does not perform properly it will cause delays and problems. Any deterioration of our relationship with JC Entertainment, Sega Corporation, or any of our other proposed online game licensors could harm the projected growth of our business, and consequently affect the future price of our shares. 7. Our business depends substantially on the continuing efforts of our senior executives, and our business may be severely disrupted if we lose their services. Our future success heavily depends upon the continued services of our senior executives. We rely on their expertise in business operations, technology support and sales and marketing and on their relationships with our shareholders, distributors and relevant government authorities. We do not maintain key-man life insurance for any of our key executives. If one or more of our key executives are unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all. As a result, our business may be severely disrupted, our financial conditions and results of operations may be materially adversely affected, and we may incur additional expenses to recruit and train personnel. 6 8. If we are unable to attract, train and retain key individuals and highly skilled employees, our business may be adversely affected. If our business continues to expand, we will need to hire and retain additional qualified employees, including skilled and experienced online game developers. Since our industry is characterized by high demand and intense competition for talent, we may need to offer higher compensation and other benefits in order to retain key personnel in the future. We cannot assure you that we will be able to attract or retain the qualified game developers or other key personnel that we will need to achieve our business objectives. In addition, as we are still a relatively young company and our business has grown rapidly since our establishment, at times our ability to train and integrate new employees into our operations may not meet the increasing demands of our business. 9. Undetected programming errors or flaws in our games could harm our reputation or decrease market acceptance of our games, which would materially and adversely affect our results of operations. Our games may contain errors or flaws, which only become apparent after their release, particularly as we launch new games or introduce new features to existing games under tight time constraints. If our games contain programming errors or other flaws, our customers may be less inclined to play our games and may switch to competitors' games. We believe that if our customers have a negative experience with our games, they may be less inclined to continue or resume playing our games or recommend our games to other potential customers. Undetected programming errors and game defects can disrupt our operations, adversely affect the game experience of our users, harm our reputation, cause our customers to stop playing our games divert our resources and delay market acceptance of our games, any of which could materially and adversely affect our results of operations. 10. We face the risks of changing consumer preferences and uncertainty of market acceptance of our new products. Online game play is a new and evolving entertainment concept in Asia and particularly in China. The level of demand and market acceptance of our online games is subject to a high degree of uncertainty. This uncertainty is particularly relevant in our current situation, because we are relying on two online games for substantially all of our revenues. Our future operating results will depend on numerous factors beyond our control. These factors include: o the popularity, price and timing of new online games being launched and distributed by us and our competitors; o Sega's and JC Entertainment's timely upgrades of RUSH ONLINE and SHENMUE ONLINE to extend the game's life span and to maintain their competitive position in the online game market in China; o general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending; 7 Our ability to plan for product development and distribution and promotional activities will be significantly affected by our ability to anticipate and adapt to relatively rapid changes in consumer tastes and preferences. Currently, one of the most popular types of online games in China are MMORPGs. However, there is no assurance that MMORPGs will continue to be popular in China and their status as one of the most popular types of online games in the Chinese online game industry will not be replaced by any new and different types of online or other games in the future. A decline in the popularity of online games in general or the games, in particular, the MMORPGs that we operate, will likely adversely affect our business and prospects. 11. We could be liable for breaches of security on our websites and fraudulent transactions by users of our websites. Currently, a portion of our transactions will be conducted through our website. In such transactions, secured transmission of confidential information (such as customers' credit card numbers and expiration dates, personal information and billing addresses) over public networks is essential to maintain consumer confidence. Our current security measures may not be adequate. Security breaches could expose us to litigation and possible liability for failing to secure confidential customer information and could harm our reputation and ability to attract customers. 12. We will rely on services from third parties to carry out our businesses and to deliver our prepaid cards to customers, and if there is any interruption or deterioration in the quality of these services, our customers may cease using our products and services. We rely on third parties to distribute our game cards in China. In addition, we will rely on a number of provincial and regional distributors to sell our prepaid online points to Internet cafes throughout China. Also, we will rely on third-party licenses for some of the software underlying our technology platform as well as China Telecom's Internet data centers to host our servers. Any interruption in our ability to obtain the services of these or other third parties or deterioration in their performance could impair the timeliness and quality of our service. Furthermore, if our arrangements with any of these third parties are terminated or modified against our interest, we may not be able to find alternative channels of distribution on a timely basis or on terms favorable to us. 13. Our business may be harmed if our technology becomes obsolete or if our system infrastructure fails to operate effectively. The online game industry is subject to rapid technological change. We need to anticipate the emergence of new technologies and games, assess their acceptance and make appropriate investments. If we are unable to do so, new technologies in online game programming or operations could render RUSH ONLINE and SHENMUE ONLINE or other games obsolete or unattractive. We will use internally developed software systems that support nearly all aspects of our billing and payment transactions. Our business may be harmed if we are unable to upgrade our systems fast enough to accommodate future traffic levels, to avoid obsolescence or to successfully integrate any newly developed or acquired technology with our existing systems. Capacity constraints could cause unanticipated system disruptions and slower response times, affecting data 8 transmission and game play. These factors could, among other things, cause us to lose existing or potential customers and existing or potential game developer partners. Risks Related to Conducting Business in China - --------------------------------------------- 14. Adverse changes in political and economic policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and adversely affect our competitive position. All of our assets are located in China and substantially all of our revenues will be derived from operations in China. Accordingly, our results of operations, financial condition and prospects are subject, to a significant degree, to economic, political and legal developments in China. The laws and regulations governing the online game industry in China are developing and subject to future changes. If we fail to comply with existing or future laws or regulations, our business and operations would be materially and adversely affected. Any adverse change in the economic conditions in China, in policies of the Chinese government or in laws and regulations in China, could have a material adverse effect on the overall economic growth of China, investment in the online game industry and our business. 15. If the PRC government finds that the agreements that establish the structure for operating our business in China do not comply with PRC regulations on foreign investment in the online games industry, we could be subject to severe penalties. PRC regulations currently limit foreign ownership of companies that operate online internet games to 50%. In addition, foreign and foreign invested enterprises are currently unable to apply for the licenses required to operate online games in China. We are a British Virgin Islands company and we conduct our operations in China through our affiliate, Shanghai T2 Entertainment. We and T2CN Information Technology are foreign or foreign invested enterprises under PRC law and accordingly are ineligible to operate online games. In order to comply with foreign ownership restrictions, we operate our online games business in China through Shanghai T2 Entertainment, which is owned by Ji Wang (our President) and by Shanghai NewMargin Ventures Capital Co., Ltd. (a PRC corporation owned by the PRC Government). Shanghai T2 Entertainment holds the licenses and approvals that are required to operate our online games business and T2CN Information Technology owns most of the physical assets required to operate our business. We have entered into a series of contractual arrangements with Shanghai T2 Entertainment pursuant to which we provide services, software licenses and equipment to Shanghai T2 Entertainment in exchange for fees, and we have undertaken to provide financial support to Shanghai T2 Entertainment to the extent that it is required to finance their operations. In addition, we have entered into agreements with Shanghai T2 Entertainment and its shareholders that provide us with the substantial ability to control Shanghai T2 Entertainment. As a result of these contractual arrangements, we are considered the primary beneficiary of Shanghai T2 Entertainment Co., Ltd. and accordingly we consolidate the financial statements of Shanghai T2 Entertainment with our financial statements. There are, however, substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. If we found to be in violation of any existing or future PRC laws or regulations relating to our corporate structure and foreign investment in the online game industry, the relevant regulatory authorities would have broad discretion in dealing with such violations including, but not limited to, the following penalties or remedies: 9 (i) revoking T2CN Information Technology or Shanghai T2 Entertainment's business and operating licenses; (ii) discontinuing or restricting T2CN Information Technology's or Shanghai T2 Entertainment's operations; (iii) imposing conditions or requirements with which we, T2CN Information Technology and Shanghai T2 Entertainment may not be able to comply with; (iv) requiring us, T2CN Information Technology or Shanghai T2 Entertainment to restrict the relevant ownership structure and operations; (v) restricting or prohibiting the use of cash reserves to finance our business and operations in China or (vi) taking other regulatory or enforcement actions, including levying fines, that could be extremely detrimental to our business. 16. We have limited business insurance coverage in China. The insurance industry in China is still in an early stage of development. In particular, PRC insurance companies offer limited business insurance products. As a result, we do not presently have any business liability or disruption insurance coverage for our online game business operations in China. Any business disruption, litigation or natural disaster could result in our incurring substantial costs and the diversion of our resources. Risks Relating to this Offering - ------------------------------- 17. There is presently no public market for our common stock. As of the date of this prospectus there was no public market for our common stock and if no public market develops purchasers of the shares offered by this prospectus may be unable to sell their shares. 18. Our officers and principal shareholders own approximately 68% of our outstanding shares and are able to control all aspects of our operations. As a result, investors in this offering will not have the ability to elect any of our directors or to adopt any resolution at any meeting of our shareholders. 19. Provisions in our organizational documents may discourage our acquisition by a third party, which could limit your opportunity to sell your shares at a premium. Our board of directors has the authority, without further action by our shareholders, to issue common shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with common shares which were outstanding as of the date of this prospectus. Common shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors issues common shares with special rights, the price of our ordinary common shares may fall and the voting and other rights of the holders of our ordinary shares may be adversely affected. 20. We are a British Virgin Islands company and, because the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have difficulty protecting your shareholder rights. 10 We were incorporated under the laws of the British Virgin Islands and substantially all of our assets are located in China. In addition, a majority of our directors and executive officers are nationals or residents of China and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to enforce judgments obtained in United States courts against our directors or executive officers. Our corporate affairs are governed by our memorandum and articles of association, the International Business Companies Act of the British Virgin Islands and the common law of the British Virgin Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under British Virgin Islands law are to a large extent governed by the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from comparatively limited judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law. In addition, British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The British Virgin Islands courts are also unlikely: o to recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S. securities laws; and o to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would if we were incorporated in the United States. For more information see "Enforcement of Civil Liabilities." MARKET FOR OUR COMMON STOCK. As of the date of this prospectus there was no public market for our common stock. Our authorized capital consists of 50,000,000 shares of common stock with a par value of US$0.01 per share. As of the date of this prospectus we had 11 25,357,503 outstanding shares of common stock and approximately 100 shareholders of record. Shares may be issued by our directors at their discretion. Holders of our common stock are entitled to receive dividends as may be declared by our Board of Directors. Our board of directors is not obligated to declare a dividend. No dividends have ever been declared and it is not anticipated that dividends will ever be paid. Current Chinese regulations restrict T2CN Information Technology and Shanghai T2 Entertainment from paying dividends to us in the following two principal aspects: (i) T2CN Information Technology and Shanghai T2 Entertainment are only permitted to pay dividends out of their respective accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations; (ii) these entities are required to set aside at least 10% of their after-tax profits each year, if any, to fund a general reserve account until the reserved amount reaches 50% of the entities' registered capital. The reserve is created to fund potential operating losses and is not distributable as a dividend. Our inability to receive dividends from T2CN Information Technology or Shanghai T2 Entertainment may adversely affect our business. The provisions in our Memorandum of Association (which is the same as Articles of Incorporation for U.S. corporations) allows our directors to issue common stock with multiple votes per share and dividend rights which would have priority over any dividends paid with respect to the other holders of our common stock. The issuance of common stock with these rights may make the removal of management difficult, even if the removal would be considered beneficial to shareholders generally, and will have the effect of limiting shareholder participation in certain transactions such as mergers or tender offers if these transactions are not favored by our management. Trades of our common stock, should a market ever develop, will be subject to Rule 15g-9 of the Securities Exchange Act of 1934, which rule imposes certain requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser's written agreement to the transaction prior to sale. The Securities and Exchange Commission also has rules that regulate broker/dealer practices in connection with transactions in "penny stocks". Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in that security is provided by the exchange or system). The penny stock rules require a broker/ dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. As a result of these rules, investors in this offering, should a market for our shares ever develop, may find it difficult to sell their shares. 12 SUMMARY FINANCIAL DATA The following summary of consolidated financial information has been derived from our consolidated financial statements. Our statements of operations and comprehensive income for the period ended December 31, 2004 and our balance sheet as at December 31, 2004 have been audited by BDO Shanghai Zhonghua, CPA's, who are independent auditors. The report of BDO Shanghai Zhonghua on those financial statements is included in this prospectus. The summary consolidated financial information of the period ended December 31, 2004 and as of that date, should be read in conjunction with those statements and the accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." In order to comply with PRC regulations we operate our online game business in China through Shanghai T2 Entertainment which holds the licenses and approvals that are required to operate online games in China. We have entered into a series of contractual arrangements with Shanghai T2 Entertainment and its shareholders including contracts relating to the transfer of assets, the provision of services, software licenses and equipment, and certain shareholder rights and corporate governance matters. Ji Wang, our President and one of our directors, is the sole officer and director of Shanghai T2 Entertainment and owns 20% of Shanghai T2 Entertainment's outstanding shares. The remaining 80% of the outstanding shares of Shanghai T2 Entertainment is owned by Shanghai NewMargin Venture Capital Co. Ltd., a company controlled by Mr. Tao Feng, who is the Chairman of our board of directors. As a result of these contractual arrangements, we essentially control Shanghai T2 Entertainment and the financial statements of Shanghai T2 Entertainment are consolidated with our financial statements. Our consolidated financial statements are prepared and presented in accordance with generally accepted accounting principles in the United States, or US GAAP. Balance Sheet Data December 31, 2004 ------------------ US$ Current assets 468,831 Total assets 4,175,685 Current liabilities 2,457,184 Total liabilities 2,457,184 Working capital (deficiency) (1,988,353) Minority interests 344,088 Shareholders' equity 1,374,413 Capitalization December 31, 2004 ----------------- US$ Shareholders' equity: Common Stock, US$0.01 par value; 50,000,000 shares authorized; 22,100,000 shares issued and outstanding 221,000 Additional paid-in capital 2,404,000 Deferred share-based compensation (284,101) Accumulated deficit (965,144) 13 Cumulative translation adjustments (1,342) ------------ Total shareholders' equity 1,374,413 ============ Statement of Operations Data Period from Inception (May 7, 2004) to December 31, 2004 --------------------- US$ Revenues -- Operating expenses (1,114,365) Other operating expenses (691) -------------- Net loss (1,115,056) =========== Loss attributed to minority interests (149,912) Loss attributed to common stock (965,144) Loss per share (0.07) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATION You should read the following discussion in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. For additional information regarding these risks and uncertainties, please see "Risk Factors. General We are involved in the operation of internet games in China. We were incorporated May 7, 2004 in the British Virgin Islands. As of the date of this prospectus we had licensed the rights to two online internet games: RUSH ONLINE and SHENMUE ONLINE. The license to operate the game RUSH ONLINE in China was obtained from JC Entertainment Corp. of Korea. The initial licensing fee was US$570,000 of which US$150,000 has been paid as at June 15, 2005. RUSH ONLINE was commercially launched in March of 2005 and its performance is presently being monitored. The license for RUSH ONLINE expires on December 13, 2006. We have agreed to pay J.C. Entertainment Corp. 30% of the net revenues that we earn from the operation of RUSH ONLINE. The license to operate the game SHENMUE ONLINE was obtained from JC Corporation of Korea and Sega Corporation of Japan. The initial licensing fee was US$3,000,000 of which US$1,500,000 has been paid as of June 15, 2005. It is anticipated that SHENMUE ONLINE's Internet online game development will be completed by March 2006. We expect that beta testing of the game will commence in April 2006 and it will be available for commercial use in July 2006. The license expires in October 2007. We have agreed to pay Sega Corporation 33% of all gross revenues, less distribution costs, that we earn from the operation of SHENMUE ONLINE. 14 We will derive substantially all of our revenues from usage fees paid by those playing our games. In the next twelve months we expect to earn most of our revenue from the games RUSH ONLINE and SHENMUE ONLINE. Results of Operations For the Period from May 7, 2004 (inception) to December 31, 2004. We did not earn any revenue between our inception (May 7, 2004) to December 31, 2004 since our two online internet games were in their testing phases during this period. Operating costs during the period consisted primarily of: o Consulting fees of $569,899 o Compensation expense of $155,000. o Wages and benefits of $131,901. o Advertising and promotion of $87,517 o Legal fees of $37,922 o Depreciation relating to computer equipment of $4,381, and o General and administrative expenses of $127,745 During the period we issued 8,500,000 shares to the founders of the Company for services provided to us and issued 5,100,000 shares for consulting services. The value of these shares for services provided between the date of our inception (May 7, 2004) and December 31, 2004 was $569,899 and was reflected as part of our general and administrative expenses in our Statement of Operations for this period. Liquidity and Capital Resources Our material sources (uses) of cash during the year ended December 31, 2004 were: Cash used in operations (144,194) Purchase of equipment (132,635) Payment of licensing fees for our online games (1,650,000) Loans to related parties (127,662) Restricted cash (117,238) Deposit (8,600) Sale of common stock 2,100,000 Loans from shareholders 318,124 Cash value allocated to minority interests (339,000) Other (1,342) Between May 2004 and June 2005 we raised: 15 o $1,983,152 from the sale of 2,644,203 shares of our common stock to a group of private investors at a price of $0.75 per share and o $613,300 from the sale of 613,300 shares of our common stock to a group of private investors at a price of $1.00 per share. Our plan of operation and capital requirements during the twelve months following the date of this prospectus follows: Projected Estimated Activity Time Frame Cost in US $ -------- ---------- ------------- Pay remaining licensing fee for Rush Online September 2005 $ 420,000 Complete testing of Shenmue Online April and May 2006 50,000 Repay loans of $600,000 September 2005 600,000 Purchase computer hardware, software and other equipment required to operate our online games Next twelve months 200,000 Complete commercial launch of Rush Online June and July 2005 125,000 Pay remaining licensing fee for Shenmue Online June 2006 1,500,000 Commercial launch of Shenmue Online July 2006 1,000,000 Sales and marketing - Next twelve months 500,000 Expansion of our prepaid card distribution system Next twelve months 100,000 License or otherwise acquire new online games Next twelve months 500,000 Hire approximately 50 new employers Next twelve months 300,000 Operating expenses and working capital Next twelve months 1,500,000 ----------- $6,795,000 =========== We have financed our operations to date through the private sale of our common stock and short-term loans. As of July 15, 2005 we had cash on hand of approximately US$1,058,000. Cash on hand, plus additional capital from borrowings from private lenders and the sale of our common stock are expected to be adequate to fund our operations over the next twelve months. At present, we have no lines of credit or other bank financing arrangements. Our material future contractual obligations as of July 31, 2005 are as follows: Years Ending December 31, --------------------------------------- Total 2005 2006 2007 ----- ---- ---- ---- Office lease $206,712 $ 43,065 $103,356 $ 60,291 Short term loan $600,000 $600,000 -- -- License fee - Rush Online $420,000 $420,000 -- -- License fee - Shenmue Online $1,500,000 -- $1,500,000 -- 16 Restrictions on currency exchange Substantially all of our projected revenues and operating expenses are denominated in Renminbi. The Renminbi is currently freely convertible under the "current account", which includes dividends, trade and service-related foreign exchange transactions, but not under the "capital account", which includes foreign direct investment and loans. Currently, T2CN Information Technology may purchase foreign exchange for settlement of "current account transactions", including payment of dividends to us and payment of license fees to foreign game licensors, without the approval of the State Administration for Foreign Exchange. T2CN Information Technology may also retain foreign exchange in its current account, subject to a ceiling approved by the State Administration for Foreign Exchange, to satisfy foreign exchange liabilities or to pay dividends. However, we cannot assure you that the relevant PRC governmental authorities will not limit or eliminate our ability to purchase and retain foreign currencies in the future. Since a significant amount of our future revenues will be denominated in Renminbi, the existing and any future restrictions on currency exchange may limit our ability to utilize revenues generated in Renminbi to fund our business activities outside China, if any, or expenditures denominated in foreign currencies. Taxation We are a British Virgin Islands corporation. Under the current tax laws of the British Virgin Islands, neither Shanghai T2 Entertainment, nor T2CN Information Technology, is subject to tax on its income or capital gains. In addition, payment of dividends by either company is not subject to withholding tax in the British Virgin Islands. Pursuant to China's business tax regulations, Shanghai T2 Entertainment will pay a 5% business tax on gross revenues derived from its online game operations. T2CN Information Technology will be required to pay a 5% business tax on the gross revenues received from Shanghai T2 Entertainment. We will account for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, income taxes are accounted for under the asset and liability method. Deferred taxes are determined based upon the differences between the carrying value of assets and liabilities for financial reporting and tax purposes at currently enacted statutory tax rates for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period of change. Reserves In accordance with current Chinese laws, regulations and accounting standards, T2CN Information Technology and Shanghai T2 Entertainment are required to set aside as a general reserve at least 10% of their respective after-tax profits. Appropriations to the reserve account are not required after these reserves have reached 50% of the registered capital of the respective companies. These reserves are created to fund potential operating losses and are 17 not distributable as cash dividends. Shanghai T2 Entertainment is also required to set aside between 5% to 10% of its after-tax profits to the statutory public welfare reserve. In addition, at the discretion of their respective board of directors, T2CN Information Technology and Shanghai T2 Entertainment may set aside a portion of their respective after-tax profits to their enterprise expansion funds, staff welfare and bonus funds and discretionary surplus reserve. These statutory reserves and funds can only be used for specific purposes and are not transferable to us in the forms of loans, advances or cash dividends. PRC Requirements Pertaining to Loans, Capital Contributions and Distributions. We will fund the operations of Shanghai T2 Entertainment by means of capital contributions or loans. The capital contributions and loans will be made directly or through T2CN Information Technology. However, if we finance T2CN Information Technology (Shanghai) Co., Ltd. by means of foreign currency loans, those loans cannot exceed certain statutory limits and must be registered with the State Administration for Foreign Exchange, and if we finance T2CN Information Technology by means of capital contributions, those capital contributions must be approved by the Ministry of Commerce. Our ability to use U.S. dollars to finance our business activities conducted through T2CN Information Technology will depend on our ability to obtain these governmental registrations or approvals. In addition, because of the regulatory issues related to foreign currency loans to, and foreign investment in, domestic PRC enterprises, we may not be able to finance Shanghai T2 Entertainment Co, Ltd. or its subsidiaries' operations by loans or capital contributions. We cannot assure you that we can obtain these governmental registrations or approvals on a timely basis, if at all. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk. Our exposure to interest rate risk for changes in interest rates relates primarily to the interest income generated by excess cash invested in short-term money market accounts and certificates of deposit. We have not used any derivative financial instruments in our investment portfolio or for cash management purposes. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. However, our future interest income may fall short of expectations due to changes in interest rates. Foreign Exchange Risk. Substantially all of our revenues are denominated in Renminbi, while a portion of our expenditures are denominated in foreign currencies, primarily the U.S. dollar and the Chinese Renminbi. Fluctuations in exchange rates, primarily those involving the U.S. dollar and the Chinese Renminbi, may affect our costs and operating margins. In addition, these fluctuations could result in exchange losses and increased costs in Chinese Renminbi terms. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to successfully hedge our exposure at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into U.S. dollars. 18 Critical Accounting Policies We prepare financial statements in conformity with U.S. GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on the date of the financial statements, and the reported amounts of revenue and expenses during the financial reporting period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed below to be critical to an understanding of our financial statements as their application assists management in making their business decisions Revenue Recognition We will account for the amounts received upon the sale of pre-paid game cards, but prior to usage and expiration of the value sold, as deferred revenue in our consolidated balance sheets. We will recognize revenues as the playing time and points purchased by our users are used in playing our online games. We will also recognize revenues when our users, who had previously purchased paying time and or points are no longer entitled to access the online games in accordance with our expiration policy that will be established and published. We will account for the amounts received upon the sale of prepaid cards, but prior to usage or expiration of the value sold, as deferred revenue in our consolidated balance sheets. Deferred revenue will be reduced as revenues are recognized. Property, Equipment and Software In addition to the original cost of property, equipment and software, the recorded value of these assets is impacted by a number of estimates and assumptions, including estimated useful lives, residual values and impairment charges. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from its undiscounted future cash flows. For the period from inception to December 31, 2004 we did not recognize any impairment charges for our property, equipment or software. Most of our computer and equipment for our online game operation is amortized over an estimated useful life of three years. For the period from inception to December 31, 2004 we amortized US$4,381 in our operating statement. Recent Accounting Pronouncements See Note 2 to the financial statements included as part of this prospectus for information concerning recent accounting pronouncements. OUR BUSINESS Overview The electronic game industry is broadly divided into offline games and online games. 19 o Offline games can be played without accessing the Internet. Offline games are comprised of PC-packaged games for playing on personal computers, video game consoles or console games as well as handheld video games. The software is typically made available to consumers on a disk or a cartridge. o Online games have at least one component that must be played by accessing the Internet. Online games are predominantly played on personal computers, although they can also be played on various other devices. The main part of the game software operates on network servers to which end users have no access. User and individual game data are stored on the servers. Online Games are broadly classified into three categories: o Web games. Web games are the least complex form of online games, and typically include cards, chess, trivia and other parlor games. Web games do not have sophisticated graphics and generally downloading of software is not necessary to play these games. Web games are typically free of charge, and operators of web games typically sell web banners and other forms of advertisements to generate revenues. o Casual online games. These games tend to be somewhat less complex and are easier to play than the massively multiplayer online games described below. However, users must install user-end software, either available on disk or on the game website, on the user device. Casual games are typically session based, meaning that a game can be played to a conclusion within a short period of time. Generally fewer than ten users interact online in a casual game. o Massively multiplayer online games (including massively multiplayer online role playing games). These games tend to be sophisticated and complex, often requiring a significant time commitment to learn as well as to play. Users must install user-end software, either available on disk or on the game website, on the user device. In China, although the user-end software is typically free, users generally must pay a fee to play the game. Typical genres of massively multiplayer online games, or MMOGs, include action adventure, martial arts, real time strategy, simulation and sports fantasy. MMORPGs, which is a specific category of massively multiplayer games, are those in which thousands of players can interact with each other, each playing a separate character in a virtual world. Games are typically ongoing, meaning that there is no conclusion in the game story. MMORPG's tend to have a high degree of user attraction, which means that users tend to spend greater amounts of time playing these games than using other Internet applications. As of July 20, 2005 there were over 120 on-line games played in China. The rapid development of the Chinese online games industry into a sizeable market has all occurred since 2001 when the first online game was introduced in China. We believe that this growth is attributable to the growing popularity of the Internet as an attractive source of entertainment, particularly for young people in China. A strong factor in Chinese culture is the "interaction between people". Online games provide an excellent conduit for that interaction. 20 According to the 2004 IDC report on China Online Game Market Sizing and Forecast, 2003-2008, online game direct expenditures in China (including subscription and usage fees, but not including Internet connection charges, telecommunications charges or purchase of associated software or materials) was US$159.6 million in 2003, was forecast to reach $238 million for 2004 and is projected to increase to US$822.9 million in 2008. As a result of its growing popularity, an increasing number of users are looking beyond traditional media to the Internet as a source of entertainment. In China in particular, we believe that the Internet, including online games, provides an attractive alternative form of low price, high volume entertainment, particularly for young people, to predominantly state-owned traditional forms of media. For the same reason, the small to medium-sized cities and townships, where alternative forms of entertainment are often limited, are important markets for online games. The entry cost for users to play online games is relatively low. Players generally do not need to incur upfront costs for the purchase of game software. While a hardware device, such as a personal computer, is required, users in China tend to play games at Internet cafes and pay only subscription or airtime charges. The proliferation of Internet Cafes throughout China also provide convenient venues for users. There is a strong Internet cafe culture in many cities and towns across China. Although the household Internet penetration rate in China is very low, Internet cafes offer an affordable means of getting online for a large number of Internet users in China, especially young people. As a result, Internet cafes have become important social venues for many young people in China. Reuters reports that there are over 1.8 million of these internet cafes in China. The strong Internet cafe culture in China further enhances the "community effect" of massive multiplayer online games. Online internet games require two stages of testing prior to commercialization: o Closed Beta Testing - this phase is used by the developer to correct technical problems with players being limited to about 1000 and the test period lasting about three months. o Open Beta Testing - this phase open to all players and is used to develop a customer base and market the game. Open Beta Testing lasts about two months. When the Open Beta testing of a game is complete, the game is launched on a commercial basis and customers are charged for the time they spend playing the game. Products and Competition RUSH ONLINE and SHENMUE ONLINE are both MMORPG's. RUSH ONLINE is a 3D MMORPG with both regular and First person shooting mode. Our target customers are hard-core players due to its unique character design and attractive player vs player format. There are two races in this game, humans and devil angels and players chose to fight on one side against other players on the other side. SHENMUE ONLINE is a full 3D MMORPG based on a PC online platform. It has free and VS. battle modes based on actual Chinese martial arts moves. The story and game concept and characters have been based on the original Shemue 2 Box game. The game world features the map of all of China which will entice people to 21 fight in their territories. Suzuki Yu ,a famous game designer for SEGA is one of the top 20 game designers in the world. Shenmue will be China style and China taste operated within the China map. We have an exclusive license to operate the game RUSH ONLINE in China from JC Entertainment Corp. of Korea. The initial licensing fee was US$570,000 of which US$150,000 has been paid as at June 15, 2005. As the game developers have had some technical problems with RUSH ONLINE, the balance due of US$420,000 under the original contract is due when the performance of the game is satisfactory to both the licensor and licensee. The license expires on December 13, 2006. We have also agreed to pay JC Entertainment 30% of the net revenues that we earn from the operation of RUSH ONLINE. RUSH ONLINE became available for commercial use in March 2005. We are presently monitoring the operation and performance of the game. We also have an exclusive license to operate the game SHENMUE ONLINE in China from JC Entertainment Corporation of Korea and Sega Corporation of Japan. The initial licensing fee was US$3,000,000 of which US$1,500,000 has been paid as at June 15, 2005. The balance of US$1,500,000 is payable when we begin Open Beta testing. The license expires in October 2007. We have agreed to pay Sega Corporation 33% of all gross revenues, less distribution costs, we earn from the operation of SHENMUE ONLINE. We expect to complete the testing of SHENMUE ONLINE in June 2006 and its release for commercial use in August 2006. Players will be able to access our games from any location with a high-bandwidth Internet connection. Registered subscribers will enter our network with a password and a user ID, after downloading our basic installation software. Players select a specific character to compete within the game with which they develop experience and enhanced game capabilities which can be carried over into sequential gaming sessions. Players can communicate with each other during the game through instant messaging and may coordinate their activities with other players to form groups to achieve collective objectives. The online games market in China is very competitive. Many of our competitors may have significantly greater financial, marketing and game development resources than we have. We expect more companies to enter the online game industry in China and a wider range of online games to be introduced to the Chinese market. Since the online game industry in China is relatively new and constantly evolving, our current or future competitors may offer products and services that provide significantly better performance or other advantages over those offered by us. We compete principally with the following companies in China: >> online game operators in China, including Shanda Interactive Entertainment Limited (which operates Actoz Soft's "Legend of Mir 2") and Guangzhou Optisp's (which operates Wemade's "Legend of Mir 3"); and the 9 Limited (which operates MU in China through 9 Webzen Limited). The 9 Limited also has exclusive licenses to operate additional MMORPG's in China including "World of Warcraft" licensed from Vivendi Universal Games, "Mystina Online" licensed from an online 22 game operator in China and "Grand Espada" licensed from Hanbitsoft Inc., a Korean online game operator. >> major Internet portal operators in China, including publicly-listed companies such as NetEase (which operates "Westward Journey Online"), Sina (which operates "Lineage I" and "Lineage II") and Sohu (which operates "Knights Online"), all of which leverage their existing strength in aggregating content, and marketing and cross-selling among their established Internet user base to promote online games; >> overseas online game providers including Enix Softstar Inc. (which operates "Crossgate"), Gamania (which operates "Laghaim") and Softworld (which distributes "Ragnarok"); and >> domestic online game developers in China, including Kingsoft (which has developed "JX Online"). We believe that the popularity of our online games will be attributable to the quality and features of our games and the services that we offer to enhance our users' game role playing experience. We believe that the RUSH ONLINE will be successful for the following reasons: >> The game has more Chinese content and traditional Chinese script and graphics than most other online games. >> As compared to other 3D online games recently released by competitors, RUSH ONLINE carries lower graphics and memory capacity requirements, which in markets like China, allows us to target a broader subscriber base. We believe that the SHENMUE ONLINE will be successful for the following reasons: o Prior versions of Shenmue have been successful. o Shenmue will have advanced graphics which will cause the game to resemble martial art motion pictures. In order to broaden our product line, we will actively search for new online games developed by established game developers. In 2005 these new games will probably be acquired under licensing agreements rather than being developed in-house. We will consider the development of in-house games at a later stage of our development. Marketing Our main marketing efforts will include: >> Advertising on web portals and in online game magazines. >> Conducting online promotional events. >> Participating in trade shows. >> Organizing local contests at Internet Cafes for prizes. 23 >> Introducing new characters to our games and adding game upgrades such as additional maps of cities within China. We hire independent agents to promote RUSH ONLINE and SHENMUE ONLINE within a specified area. We plan to pay each agent a monthly commission of 30% of revenues generated from Internet cafes in the allocated area, of which the agent will be required to use 3% for our games promotional activities, such as the purchase and distribution of mouse pads, keyboards and other promotional items. As of June 15, 2005, 25 independent agents were working for us. Pricing Following their commercial launch we charge customers for the time they spend playing our online games. Our customers will typically access our online games through PC's at home or in Internet cafes. They will obtain our game playing time primarily through purchasing our prepaid cards at various retail outlets or purchasing online points at one or more of the 56,000 Internet cafes and retail outlets throughout China that have subscribed to our online membership management and payment system. Each prepaid card contains a network access password to access our system from a PC at home or at an Internet cafe location. Subscription payments for Internet cafes in China will be directly settled through our billing system. Individual PC subscribers in China can choose from a number of alternative payment options, including online credit cards payments, prepaid cards and charges to be made through telephone service provider payment systems. In the case of payments received through any settlement provider, we will pay a commission to the settlement provider that generally ranges from 2% to 30%. We offer our customers two pricing plans: >> Hourly usage for a price of RMB .40 (US$0.05) >> Unlimited access for a period of time, generally from one to thirty (30) days for a price from RMB 48 (US$6.00) depending on the game. The same pricing plans apply to our Internet Cafes and individual PC account customers. Online payment systems in China are at an early stage of development. Although major Chinese banks are instituting online payment systems, these systems are not as widely available or acceptable to consumers in China as in the United States and other developed countries. In addition, only a limited number of consumers in China have credit cards, relative to countries like the United States. The lack of adequate online payment systems may limit the number of online commerce transactions that we can service. If online payment services do not develop, our ability to grow our business may be limited. Network We operate our games through servers. A server is basically a computer, without a monitor, keyboard or disk drive, which is connected to other servers 24 to increase the overall capacity of the computer system. We maintain our system hardware in a single climate - controlled facility in our office in Shanghai. Server groups consist of three separate servers, Login Support server, database management server and game server. One server group can support approximately 1,500 game participants. As our subscriber base expands, we can increase the number of servers running any particular game. As of June 15, 2005 we owned 55 servers and we leased 30 additional servers, primarily from telecommunications companies. These telecommunications companies host our server network and receive maintenance fees from us in addition to the lease payments. Substantially all of our servers' leases have variable payment obligations based on the number of users logging on to each relevant server. This arrangement allows us to have excess capacity without incurring significant fixed costs. We expect our costs for servers to increase in the future as we add new games, broaden our geographic reach, add features to advance our network security, and data traffic management systems and address growth in our user base. Additional servers can be added easily to ensure that we have sufficient network capacity to meet the needs of our users at all times We anticipate that we will need approximately 80 additional servers by the end of 2005. Servers will either be purchased, at a cost of approximately $3,000 per server, or will be leased. Although private sector Internet service providers currently exist in China, almost all access to the Internet is maintained through ChinaNet owned by China Telecom under the administrative control and regulatory supervision of China's Ministry of Information Industry. In addition, the national networks in China connect to the Internet through a government-controlled international gateway. This international gateway is the only channel through which a domestic Chinese user can connect to the international Internet network. We rely on this infrastructure and China Telecom to provide data communications capacity primarily through local telecommunications lines. Although the government has announced plans to develop aggressively the national information infrastructure, this new infrastructure may not be developed as planned or at all. In addition, we will have no access to alternative networks and services, on a timely basis if at all, in the event of any infrastructure disruption or failure. The Internet infrastructure in China may not support the demands associated with continued growth in Internet usage. Intellectual Property Our intellectual property rights include trademarks and domain names associated with the name "T2 ENTERTAINMENT" in China and copyright and other rights associated with our website, and other aspects of our business. We regard our intellectual property rights as critical to our business. We rely on trademark and copyright law, trade secret protection, non-competition and confidentiality agreements with our employees, and license agreement with our partners, to protect our intellectual property rights. We require our employees to enter into agreements requiring them to keep confidential all information relating to our customers, methods, business and trade secrets during and after their employment with us and assign their inventions developed during their employment to us. Our employees are required to acknowledge and recognize that 25 all inventions, trade secrets, works of authorship, developments and other processes made by them during their employment are our property. We regard our proprietary software, domain names, trade names, trade marks and similar intellectual properties as critical to our success. Intellectual property rights and confidentiality protection in China may not be as effective as in the United States or other countries. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may be inadequate to prevent the misappropriation of our proprietary technology. Any misappropriation could have a negative effect on our business and operating results. We may need to resort to court proceedings to enforce our intellectual property rights in the future. Litigation relating to our intellectual property might result in substantial costs and diversion of resources and management attention away from our business. There is no assurance that our online games do not or will not infringe upon patents, valid copyrights or other intellectual property rights held by third parties. We may be subject to legal proceedings and claims from time to time relating to the intellectual property of others in the future. In addition, some of our employees were previously employed at other companies including our current and potential competitors. We also intend to hire additional personnel to expand our product development and technical support teams. To the extent these employees have been involved in research at our company similar to research in which they have been involved at their former employers, we may become subject to claims that such employees or we may have used or disclosed trade secrets or other proprietary information of the former employers of our employees. In addition, our competitors may file lawsuits against us in order to gain an unfair competitive advantage over us. Although we are not aware of any pending or threatened claims, if any such claim arises in the future, litigation or other dispute resolution proceedings may be necessary to retain our ability to offer our current and future games, which could result in substantial costs and diversion of our financial and management resources. Furthermore, if JC Entertainment or Sega Corporation are found to have violated the intellectual property rights of others with respect to our online games, we may be enjoined from operating our online games and forced to pay fines and damages, which may adversely affect our business. PRC Regulations Since the late 1970s, the Chinese government has been reforming the economic system in China. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us or our licensees. The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China's economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. These reforms have resulted in significant economic growth. However, we cannot predict the future 26 direction of economic reforms or the effects such measures may have on our business, financial position or results of operations. Furthermore, while the Chinese economy has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among various sectors of the economy. The online game industry in China is highly regulated by the Chinese government. Various regulatory authorities of the Chinese central government, such as the State Council, the State Press and Publication Administration, the Ministry of Culture and the Ministry of Public Security, are empowered to issue and implement regulations governing various aspects of the online games industry. We are required to obtain permits or approvals from different regulatory authorities in order to provide online games. For example, an Internet content provider, or ICP, must obtain an ICP license in order to engage in any commercial ICP operations within China. In addition, an online games operator must also obtain a license from the Ministry of Culture and a license from the State Press and Publication Administration in order to distribute games through the Internet. If we fail to maintain any of these required permits or approvals, we may be subject to various penalties, including fines and the discontinuation or restriction of our operations. Any such disruption in our business operations would materially and adversely affect our financial condition and results of operations. As the online games industry is at an early stage of development in China, new laws and regulations may be adopted from time to time to require additional licenses and permits other than those we currently have, and address new issues that arise from time to time. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future Chinese laws and regulations applicable to the online games industry. For example, we may be required to obtain an inter-regional ICP license in order to operate online games in multiple provinces, autonomous regions and centrally administered municipalities. We are in the process of applying for all required licenses, and we do not believe that while our application is pending, the regulatory authorities will take any action against us. However, we cannot assure you that we will be able to timely obtain this license or any other new license required in the future, or at all. While we believe that, with the exception of the inter-regional ICP license, we are in compliance with all applicable Chinese laws and regulations currently in effect, we cannot assure you that we will not be found in violation of any current or future Chinese laws and regulations. In April 2001, the Chinese government began tightening its supervision of Internet cafes, closing unlicensed Internet cafes, requiring those remaining open to install software to prevent access to sites deemed subversive and requiring web portals to sign a pledge not to host subversive sites. Furthermore, the Chinese government's policy, which encourages the development of a limited number of national and regional Internet cafe chains and discourages the establishment of independent Internet cafes, may slow down the growth of Internet cafes. Recently, the State Administration of Industry and Commerce, one of the government agencies in charge of Internet cafe licensing, issued a notice suspending the issuance of Internet cafe licenses. It is unclear when this suspension will be removed, if at all. As Internet cafes are the primary venue for users to play our games, any reduction in the number, or any slowdown in the growth, of Internet cafes in China will limit our ability to maintain or increase our revenues and expand our customer base, which will in turn materially and adversely affect our business and results of operations. 27 It is anticipated that, most of our recurring users will be young males including students. Due to the higher degree of user loyalty to MMORPGs, easy access to PCs and Internet cafes, and lack of more appealing forms of entertainment in China, many teenagers frequently play online games. This may result in these teenagers spending less time on or refraining from other activities, including education and sports. The Internet cafes, which are currently the most important outlets for online games, have been criticized by the general public in China for having exerted a negative influence on young people. Due primarily to such adverse public reaction, some local governments in China have tightened their regulation of Internet cafe operations through, among other things, limiting the number of the new operating licenses to be issued and further reducing the hours during which the Internet cafes are permitted to open for business. Also, local and higher-level governmental authorities may from time to time decide to more strictly enforce the customers' age limit and other requirements relating to Internet cafes as a result of the occurrence of, and the media attention on, gang fights, arsons or other incidents in or related to Internet cafes. As most of our customers will access our games from Internet cafes, any restrictions on Internet cafe operations could result in a reduction of the amount of time our customers will spend on our online games or a reduction in or slowdown in the growth of our customer base, thus adversely affecting our business and results of operations. Moreover, any adverse public reaction to the online game industry may discourage or otherwise prevent our young and other customers from spending too much time playing our online games, which could limit the growth of or reduce our projected revenues, thus adversely affecting our business and results of operations. In addition, it is also possible that the Chinese government authorities may decide to adopt more stringent policies to monitor the online game industry as a result of adverse public reaction or otherwise. Any such restrictions on online game playing would adversely affect our business and results of operations. China has enacted laws and regulations governing Internet access and the distribution of news, information or other content, as well as products and services, through the Internet. In the past, the PRC government has stopped the distribution of information through the Internet that it believes violates PRC law. The Ministry of Information Industry, the State Press and Publication Administration and the Ministry of Culture recently promulgated new regulations which prohibit games from being distributed through the Internet if they contain content that is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. If any games we operate were deemed to violate any of such content restrictions, we could be subject to penalties, including confiscation of income, fines, suspension of business and revocation of its license for operating online games, which would materially and adversely affect our business, financial condition and results of operations. We may also be subject to potential liability for unlawful actions of our users or for content we may distribute that is deemed inappropriate. Furthermore, we may be required to delete content that clearly violates the laws of the PRC and report content that we suspect may violate PRC law. It may be difficult to determine the type of content that may result in liability for us, and if we are wrong, we may be prevented from operating our games in China. Legislation could conceivably be introduced in China to establish a system for protecting consumers from the influence of graphic violence and sexually explicit materials contained in various types of games. Mandatory rating systems and other regulations affecting the content and distribution of our games have are under review in China. As an example, in Thailand, the Thai government has 28 strengthened regulations by setting restricted hours for children under 18 years of age and may introduce additional measures for regulating online game operators. In the future, we may be required to modify our games or alter our marketing strategies to comply with new governmental regulations or new ratings assigned to our current or future games that may call for restrictions or modifications to our game content or features, which could delay or prohibit the release of new games or upgrades and reduce the existing and potential range of our user base. Moreover, uncertainties regarding governmental restrictions or rating systems applicable to our business could give rise to market confusion, thereby materially and adversely affecting our business. In recent years, the Chinese government has adopted certain regulations governing Internet access and the distribution of news and other information over the Internet. Under these regulations, Internet content providers and Internet publishers are prohibited from posting or displaying over the Internet content that opposes the fundamental principles in China's Constitution; compromises state security, divulges state secrets, subverts state power or damages national unity; harms the dignity or interests of the state, incites ethnic hatred or racial discrimination or damages inter-ethnic unity; sabotages China's religious policy or propagates heretical teachings or feudal superstitions; disseminates rumors, disturbs social order or disrupts social stability; propagates obscenity, pornography, gambling, violence, murder or fear or incites the commission of crimes; insults or slanders a third party or infringes upon the lawful rights and interests of a third party; or includes other content prohibited by laws or administrative regulations. Failure to comply with these requirements may result in the revocation of Internet content provider and other required licenses and the closing down of the concerned websites. In the past, failure to comply with such requirements has resulted in the closure of certain concerned websites. The website operator may also be held liable for such censored information displayed on, retrieved from or linked to such website. Recently, the Ministry of Culture has issued a notice reiterating the government's policies to prohibit the distribution of games with violence, terror, cruelty or other elements that may have the potential effect of instigating crimes, and to prevent the influx of harmful cultural products from overseas. The notice requires, among other things, the review and prior approval of all the new online games licensed from foreign game developers and related license agreements. The pre-approval will not be granted if the Ministry of Culture finds the content of the game objectionable or the terms of the related license agreement is grossly unfair to the Chinese licensee. With respect to the online games that were licensed from foreign game developers prior to the issuance of the notice and have already been operated in China, the relevant game operators were also required to submit the games and related documents for review and approval by the Ministry of Culture by September 1, 2004. We will obtain the approval from the Ministry of Culture for our licensed games, RUSH ONLINE created by the Korean game developer, JC Entertainment Corp. and SHENMUE ONLINE co-developed by JC Entertainment and a Japanese game developer, Sega Corporation. The Ministry of Culture may find the content of RUSH ONLINE and SHENMUE ONLINE or any of other new games objectionable, and we may otherwise be unable to obtain the approvals for RUSH ONLINE and SHENMUE ONLINE or other newly licensed games in a timely manner, or at all. If this happens, we will not be able to launch RUSH ONLINE and SHENMUE ONLINE or other newly licensed games within the expected timeframe or at all, and our business and results of operations would be materially adversely affected. 29 In addition, the Ministry of Information Industry has published regulations that subject website operators to potential liability for content included on their websites and the actions of users and others using their systems, including liability for violations of Chinese laws prohibiting the dissemination of content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local Internet service provider, or ISP, to block any Internet website maintained outside China at its sole discretion. Periodically, the Ministry of Public Security has stopped the dissemination over the Internet of information which it believes to be socially destabilizing. The State Secrecy Bureau, which is directly responsible for the protection of State secrets of the Chinese government, is authorized to block any website it deems to be leaking State secrets or failing to meet the relevant regulations relating to the protection of State secrets in the dissemination of online information. As these regulations are relatively new and subject to interpretation by the relevant authorities, it may not be possible for us to determine in all cases the type of content that could result in liability for us as a website operator. In addition, we may not be able to control or restrict the content of other Internet content providers linked to or accessible through our websites, or content generated or placed on our websites by our users, despite our attempt to monitor such content. To the extent that regulatory authorities find any portion of our content objectionable, they may require us to limit or eliminate the dissemination of such information or otherwise curtail the nature of such content on our websites, which may reduce our user traffic and have a material adverse effect on our financial condition and results of operations. In addition, we may be subject to significant penalties for violations of those regulations arising from information displayed on, retrieved from or linked to our websites, including a suspension or shutdown of our operations. Offices and Employees Our offices in Shanghai consist of 19,365 square feet and are leased for US$8,613 per month. The lease on our office space expires on July 30, 2007. We believe that our existing facilities are adequate for our current requirements and that additional space, if required, can be obtained on reasonable terms. As of June 15, 2005, we had 46 full-time employees, all located in Shanghai, China. The following table shows the number of our employees by department: Department Number of Employees Management 3 Administration 8 Technical Support 17 Customer Service 8 Sales and Marketing 10 ----- 46 ===== Our full-time employees are entitled to state welfare benefits, including medical care, housing subsidies, unemployment insurance and pension benefits. To fund these benefits we are required to deposit 18% of our employees' salaries to the state-sponsored pension and medical plans. These benefits amounted to $4,990 for the period from inception (May 7, 2004) to December 31, 2004. The PRC 30 government is responsible for providing medical benefits and the ultimate pension liability to our employees. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relations with our employees to be good. We expect that the number of our employees will increase if we are able to license new online games. MANAGEMENT Name Age Position ---- --- -------- Tao Feng 37 Director (Chairman of the Board) Ji Wang 33 President and a Director Yanqing Li 32 Vice President of Operations Fei Zhang 32 Chief Operating Officer Jun-Tse Teng 38 Principal Financial and Accounting Officer and a Director Bo Feng 35 Director Tao Feng has served as the chairman of our Board of Directors since November 2, 2004. Since its inception in 1999, Mr. Feng has been the managing partner of NewMargin Ventures, a venture capital firm with offices in Shanghai and Beijing. Between 1995 to 1998, Mr. Feng was the Senior Vice President of Ivanhoe Capital Corporation for its China operations. Mr. Feng obtained the Bachelor of Statistics degree from the University of Victoria, British Columbia, Canada (1990), a Master of Statistics degree from the University of Alberta in Edmonton, Alberta, Canada (1992), and a PhD in Statistics from the University of Toronto in Toronto, Ontario, Canada (1993). Ji Wang has served as a member of our Board of Directors since May 7, 2004. He has been our President since May 15, 2004. Between early 1999 and May 2004 Mr. Wang was President and founder of HDT Technologies, Inc., an Internet Technology and service supplier in China with the assistance and investment of US3, 000,000 from several high-tech venture groups in China. In 1993 Mr. Wang graduated from Fudan University in China with a major in Computer Software. Yangqing Li has been our Vice President of Operations since May 15, 2004. Mr. Li is a medical doctor and graduated from the Clinical Medicine Department of Zhejiang University School of Medicine Department in China in 1996. From 1996 to 1999 he was an Internist at Hang Zhou No.3 People's Hospital in China. In 2000 Mr. Li was the chief editor of the game channel for the largest IT portal in China enet.com. In 2001 he was the marketing manager of Taiwan's 3rd wave software company that operated the online game Dragonraja. In 2002, he was the product manager for Netease that operated the online game Pristontale. Between November 2002 and July 2003 Mr. Li was the production manager and Chief Operating Officer of Sina-MC Soft which operated the online game Lineage. Fei Zhang has been our Chief Operating Officer since May 15, 2004. He has been the Investment Manager for NewMargin Venture Capital of Shanghai since 1999. In 1998 he was a consultant to Rabobank, Shanghai for renewable energy projects. Between 1996 and 1997 he was the Marketing Manager for Zhongxing Telecom Equipment Co. (ZTE) Shanghai, China. In 1994, Mr. Zhang received his Bachelor of Science degree from Shanghai Jiao Tong University. In 1998, he 31 completed the MBA Program at the China Europe International Business School in Shanghai. In 1998 he completed the MBA Program at the IESE International Graduate School of Management in Barcelona, Spain. Jun-Tse Teng has been a Director since May 7, 2004. He has also been our Principal Financial and Accounting Officer since May 15, 2004. Mr. Teng was the Chief Executive Officer of Asia Communications Telecom Co. between 2003 and 2004. Between 2001 to 2003 he was Head of Equity Research for the Uni-President Securities Group. Between 1999 and 2000, Mr. Teng was Equity Portfolio Manager for the President International Development Co. From 1997 to 1999 he was an analyst with UBS Warburg of Taiwan. In 1989, Mr. Teng received his Bachelor of Science in Electrical Engineering from the National Tsing Hua University in Taiwan. In 1994 he received his Masters of Science degree in Electrical Engineering from the University of Southern California. In 1997 Mr. Wang received his MBA degree from the University of California at Berkley. Bo Feng has been a director since May 7, 2004. Between March 1994 and December 1997 Mr. Feng was the Chinese representative for the U.S. investment banking firm of Robertson Stephens. During 1998 and 1999 Mr. Feng was a financial consultant to an number of Chinese technology companies. In 2000, Mr Feng co-founded Chengwei Ventures to provide venture capital funding for Chinese technology companies. Bo Feng, Ji Wang, Jun-Tse Teng, and Yangquing Li are our founders. All directors hold office until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the board of directors. Elections for directors would be held each year on the date of the annual general meeting of shareholders. A director shall be removed from office automatically if the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; or (ii) is found by our company to be or becomes of unsound mind. We may also remove a director from office by ordinary resolution. We do not have a compensation committee. Our Board of Directors serves as our Audit Committee. Executive Compensation The following table shows in summary form the compensation received by the officers indicated. None of our executive officers received compensation in excess of $100,000 during the fiscal year ended December 31, 2004. All Other Other Annual Restric- Com- Name and Compen- ted Stock Options pensa- Principal Fiscal Salary Bonus sation Awards Granted tion Position Year (1) (2) (3) (4) (5) (6) - ------------ ----- ------ ----- ------- --------- ------- --------- Ji Wang, President 2004 $9,705 - - - - - 32 Yanqing Li, Vice President of Operations 2004 $7,191 - - - - - (1) The dollar value in US$ of base salary (cash and non-cash) earned during the fiscal year. (2) The dollar value of bonus (cash and non-cash) received. (3) Any other annual compensation not properly categorized as salary or bonus, including perquisites and other personal benefits, securities or property. (4) During the periods covered by the table, the value of the shares of the shares of common stock issued as compensation for services. The table below shows the number of shares of our common stock owned by the officers listed above and the value of these shares as of December 31, 2004. Name Shares Value Ji Wang 2,486,250 * Yanqing Li 1,211,250 * * As of December 31, 2004 our common stock was not publicly traded. (5) The shares of common stock to be received upon the exercise of all stock options granted during the periods covered by the table. (6) All other compensation received that we could not properly report in any other column of the table. Our directors approve their own compensation since decisions regarding compensation to be paid to our officers and directors are made by resolutions adopted by the directors. We do not have any policy which prohibits or limits the power of directors to approve their own compensation. The following table shows the amount which we expect to pay to our management during the twelve months ending December 31, 2005 and the amount of time these persons expect to devote to our business. Percentage of Time Proposed to be Devoted Name Compensation to Operations Tao Feng $ 10,000 20% Ji Wang $ 36,000 100% Yanqing Li $ 36,000 100% Fei Zhang $ 10,000 20% Jun-Tse Teng $ 48,000 100% Employment Contracts Each of our executive officers has a service agreement with us which contains confidentiality and non-competition provisions. The service agreements 33 do not address the compensation to be paid to our officers. The compensation of our officers is determined annually by our directors. Long-Term Incentive Plans - Awards in Last Fiscal Year None. Employee Pension, Profit Sharing or Other Retirement Plans None. Compensation of Directors Standard Arrangements. Currently we do not pay our directors for serving as directors. We do not have any standard arrangement pursuant to which our directors are compensated for any services provided as a director or for committee participation or special assignments. Other Arrangements. None. ------------------ Stock Option and Bonus Plans We do not have any stock option or stock bonus plans. Transactions with Related Parties and Recent Sales of Unregistered Securities The table below summarizes all sales of our common stock as of the date of this prospectus. Consideration Services rendered With a value for Date of Shares financial statement Issuance Issued Cash purposes of: Ji Wang 05/04 2,486,250 $157,950 Yanqing Li 05/04 1,211,250 $ 76,950 Fei Zhang 05/04 340,000 $ 21,600 Jun-Tse Teng 05/04 141,667 $ 9,000 Bin Zheng 05/04 283,333 $ 18,000 Chengwei (China) Investment Company 05/04 4,037,500 $256,500 Calneva Financial Group Ltd. 07/04 5,100,000 $324,000 Kingland Overseas Development Inc. 10/04 5,464,285 $1,350,000 Newmargin T2CN Investment Ltd. 10/04 3,035,715 $ 750,000 Private Investors, $0.75 per share 06/05 2,644,203 $1,983,152 Private Investors, $1.00 per share 07/05 613,300 $ 613,300
Chengwei (China) Investment Company is owned 50% by Bo Feng, one of our directors. 34 Subsequent to the receipt of its shares Calneva Financial Group assigned 5,000,000 of its shares to two of its officers and eleven other persons. Jun-Tse Teng, our Chief Financial and Accounting officer is a director and 20% shareholder of Kingland Overseas Development Inc. Tao Feng, one of our directors, is the managing partner and sole director of NewMargin T2CN Investment Ltd. PRINCIPAL SHAREHOLDERS The following table shows, as of July 20, 2005, the ownership of our common stock by shareholders known by us to be the beneficial owner of more than 5% of our common stock and by each of our executive officers and directors. Each person has sole voting and investment power with respect to the shares of their common stock, except as otherwise indicated. PERCENTAGE NAME AND ADDRESS SHARES OWNED OWNERSHIP TAO FENG (1) -- No. 9, Lane 1006, Hua Shan Road, Shanghai China 200052. JI WANG Floor 5, No.88 Qinjiang Road 2,486,250 9.8% Shanghai, PRC, 200233 YANQING LI Floor 5, No. 88, Qinjiang Road 1,211,250 4.8% Shanghai, China, 200233 FEI ZHANG Villa 3, Radisson Hotel 78 Xing Guo Road 340,000 1.3% Shanghai, China, 200052 JUN-TSE TENG Suite 22301-526, Pudong Software Park 141,667 (2) 0.6% Guo Shore Jing Road, Pudong New District Shanghai, China, 201203 BO FENG No. 3 Lane, 1610 Middle Huai Hai (3) -- Road Shanghai, PRC, 200031 KINGLAND OVERSEAS DEVELOPMENT INC. Suite 22301-526, Pudong Software Park Guo Shore Jing Road, Pudong New 5,464,285 (2) 21.4% District Shanghai, PRC, 201203 CHENGWEI (CHINA) INVESTMENT COMPANY Villa 3, Radisson Hotel 78 Xing Guo Road 4,037,500 (3) 15.8% Shanghai, China, 200052 35 AMOUNT AND PERCENTAGE OF NAME AND ADDRESS OF NATURE OF BENEFICIAL BENEFICIAL OWNER BENEFICIAL OWNERSHIP OWNERSHIP NEWMARGIN T2CN INVESTMENT LTD. Villa 3, Radisson Hotel 78 Xing Guo Road 3,035,715 (1) 11.9% Shanghai, China, 200052 ALL OFFICERS AND DIRECTORS 16,717,207 65.6% AS A GROUP (SIX PERSONS) (1) Tao Feng, our Chairman of the Board of the Company is also the President and sole director of NewMargin T2CN Investment Ltd. The sole shareholder of NewMargin T2CN Investment Ltd. is Shanghai NewMargin Ventures Capital Co., Ltd. (2) Kingland Overseas Development Inc. is owned 20% by Jun-Tse Teng. Mr. Jun-Tse Teng is our Chief Financial and Accounting Officer and one of our directors. Mr. Teng is also a director and officer of Kingland Overseas Development Inc. The remainder of Kingland Overseas Development Inc. is owned by Kimberlite Holdings, a company owned by members of Mr. Teng's family (3) Chengwei (China) Investment Company is owned 50% by Bo Feng, one of our directors. SELLING SHAREHOLDERS The persons listed in the following table plan to offer the shares shown opposite their respective names by means of this prospectus. The owners of the common stock to be sold by means of this prospectus are referred to as the "selling shareholders". The selling shareholders acquired their shares for services rendered or in private transactions for cash. See "Management-Related Parties and Recent Sales of Unregistered Securities" for information concerning the issuance of these shares. Unless extended, the offering by the selling shareholders will end on ______________. We will not receive any proceeds from the sale of the shares by the selling shareholders. We will pay all costs of registering the shares offered by the selling shareholders, estimated to be $15,000. The selling shareholders will pay all sales commissions and other costs of the sale of the shares offered by them. Shares to be sold Shares ownership Shares in this after this Offering Owned Offering Number % ------ ---------- ------ ----- Fei Zhang 340,000 34,000 306,000 1.2% Chengwei (China) Investment Company 4,037,500 200,000 3,837,500 15% Kingland Overseas Development Inc. 5,464,285 1,000,000 4,464,285 17.5% Newmargin T2CN Investment Ltd. 3,035,715 1,000,000 2,035,715 8.0% Calneva Financial Group Ltd. 100,000 100,000 -- -- 36 Shares to be sold Shares ownership Shares in this after this Offering Owned Offering Number % ------ ---------- ------ ----- Bryan M. Dear 700,000 650,000 50,000 .4% Keith Lim, Inc 100,000 100,000 -- D. Bruce Horton 850,000 450,000 400,000 2% Bradley N. Scharfe 850,000 450,000 400,000 2% Guy Peckham 500,000 250,000 250,000 1% Hampton Associates Limited 500,000 300,000 200,000 0.8% Jetco Holdings Ltd. 300,000 300,000 -- -- Richard Douglas Stewart 100,000 100,000 -- -- 622416 Alberta Ltd. 28,000 28,000 -- -- George C. Robertson 65,000 65,000 -- -- Robert C. Barton 100,000 100,000 -- -- Steve Thackray 10,000 10,000 -- -- Donald R. MacSorley 26,667 26,667 -- -- James S. Barton 100,000 100,000 -- -- Ronnie Steiner Travel Tours Inc. 10,000 10,000 -- -- The MacLachlan Investments Corporation 133,333 133,333 -- -- Ron Jones Ltd. 50,000 50,000 -- -- John Michael Keegan 28,334 28,334 -- -- Bruno Benedet Jr. 40,000 40,000 -- -- Daryl Turner 40,000 40,000 -- -- Elliott J. Lipsey 33,333 33,333 -- -- Eric K. Stewart 6,666 6,666 -- -- Verona Capital International 66,667 66,667 -- -- Matrix Partners, Inc. 133,333 133,333 -- -- Hugh Cooper 66,667 66,667 -- -- Leonard Clough 28,533 28,533 -- -- Kyung W. Lee, Trustee 20,000 20,000 -- -- Eastside Pinnacle, LLC 26,667 26,667 -- -- Micheal R. Muzos 6,000 6,000 -- -- Martin S. Rood 20,000 20,000 -- -- Mon Szeto 6,000 6,000 -- -- Kathleen Wright 6,667 6,667 -- -- Kathleen Wright Roth IRA 6,667 6,667 -- -- KC Global Holdings Inc. 53,333 53,333 -- -- Robert J. Charleton 50,000 50,000 -- -- Dr. Brandt Miles Inc. 10,000 10,000 -- -- R.J. Labonte & Co. Ltd. 12,000 12,000 -- -- United Triump Inc. 53,334 53,334 -- -- Dean Williams 26,667 26,667 -- -- Rick Griffiths 13,333 13,333 -- -- James Paleologos 80,000 80,000 -- -- Valeurs Mobilieres Dejardins Inc. ITF Roxy and Bear Investment 200,000 200,000 -- -- 37 Shares to be sold Shares ownership Shares in this after this Offering Owned Offering Number % ------ ---------- ------ ----- Jeffrey Shear 366,667 366,667 -- -- Michael Shear 166,667 166,667 -- -- Shear Holdings Limited 133,334 133,334 -- -- Bixbie Financial Group 267,000 267,000 -- -- Wally Marcolin 10,000 10,000 -- -- Brad Shackman 10,000 10,000 -- -- Richard Jeffrey 10,000 10,000 -- -- Winton Capital Holdings Ltd. 250,000 250,000 -- -- David L. Dreyer 10,000 10,000 -- -- Brendan G. Murray 10,000 10,000 -- -- Evan S. Ho 10,000 10,000 -- -- Graham Watson 15,000 15,000 -- -- Dean Roosdahl 15,000 15,000 -- -- Edward Mitchuk 1,000 1,000 -- -- Rocky J. Paolo 25,000 25,000 -- -- Alexander Wong 10,000 10,000 -- -- Lorinda Hoyem 10,000 10,000 -- -- 619476 B.C. Ltd. 15,000 15,000 -- -- Norma Vandenberg 10,000 10,000 -- -- David Vandenberg 10,000 10,000 -- -- Shane Pierce 10,000 10,000 -- -- Terry Bonneschranz 1,000 1,000 -- -- Jay Browne 500 500 -- -- Steve Pippy 2,200 2,200 -- -- Austin J. Pippy 400 400 -- -- Robert Vanoverschot 1,000 1,000 -- -- Brenda Leighton 2,500 2,500 -- -- Harold Leighton 2,500 2,500 -- -- Marvin D. Kristoff 500 500 -- -- Caroline Farrell 1,000 1,000 -- -- Troy Leighton 1,000 1,000 -- -- Ryan Leighton 1,000 1,000 -- -- Kerri Leighton 1,000 1,000 -- -- Concettina Amante 1,700 1,700 -- -- Rosa Marie Amante 500 500 -- -- Remo Pomponio 500 500 -- -- Donald S. Reitsma 1,000 1,000 -- -- Mark Storer 500 500 -- -- Barbara A. Barker 1,000 1,000 -- -- Calvin Thompson 1,500 1,500 -- -- Conrad Lacker 1,000 1,000 -- -- Don Gee 1,000 1,000 -- -- Bruce Biles 10,000 10,000 -- -- 38 Shares to be sold Shares ownership Shares in this after this Offering Owned Offering Number % ------ ---------- ------ ----- Bruce Biles In Trust For Brodie Biles 2,000 2,000 -- -- Dundee Securities Corp. In Trust for Robert Sali 35,000 35,000 -- -- Gerry Caul 5,000 5,000 -- -- Byron Hampton 1,000 1,000 -- -- Ken Nielsen 5,000 5,000 -- -- Abraham Christopher Fehr 1,000 1,000 -- -- Eric Lin 100,000 100,000 -- -- Calneva Financial Partners Ltd. 40,000 40,000 -- -- Ernie Pounder 13,334 13,334 -- -- Manner of Sale. The shares of common stock owned by the selling shareholders may be offered and sold by means of this prospectus from time to time as market conditions permit. Since as of the date of this prospectus no market exists for our common stock, sales by the selling shareholders, until our common stock becomes quoted on the OTC Bulletin Board or listed on a securities exchange, will be made at a price of $____ per share. If and when our common stock becomes quoted on the OTC Bulletin Board or listed on a securities exchange, the shares owned by the selling shareholders may be sold in the over-the-counter market, or otherwise, at prices and terms then prevailing or at prices related to the then-current market price, or in negotiated transactions. These shares may be sold by one or more of the following methods, without limitation: o a block trade in which a broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this prospectus; o ordinary brokerage transactions and transactions in which the broker solicits purchasers; and o face-to-face transactions between sellers and purchasers without a broker/dealer. In competing sales, brokers or dealers engaged by the selling shareholders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions or discounts from selling shareholders in amounts to be negotiated. The selling shareholders and any broker/dealers who act in connection with the sale of the shares may be deemed to be "underwriters" within the meaning of ss.2(11) of the Securities Act of 1933, and any commissions received by them and any profit on any resale of the shares as principal might be deemed to be underwriting discounts and commissions under the Securities Act. 39 If any selling shareholder enters into an agreement to sell his or her shares to a broker-dealer as principal, and the broker-dealer is acting as an underwriter, we will file a post-effective amendment to the registration statement, of which this prospectus is a part, identifying the broker-dealer, providing required information concerning the plan of distribution, and otherwise revising the disclosures in this prospectus as needed. We will also file the agreement between the selling shareholder and the broker-dealer as an exhibit to the post-effective amendment to the registration statement. We have advised the selling shareholders that they and any securities broker/dealers or others who may be deemed to be statutory underwriters will be subject to the prospectus delivery requirements under the Securities Act of 1933. We have also advised each selling shareholder that in the event of a "distribution" of the shares owned by the selling shareholder, the selling shareholder, any "affiliated purchasers", and any broker/dealer or other person who participates in the distribution may be subject to Rule 102 under the Securities Exchange Act of 1934 ("1934 Act") until their participation in that distribution is completed. Rule 102 makes it unlawful for any person who is participating in a distribution to bid for or purchase stock of the same class as is the subject of the distribution. A "distribution" is defined in Rule 102 as an offering of securities "that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods". We have also advised the selling shareholders that Rule 101 under the 1934 Act prohibits any "stabilizing bid" or "stabilizing purchase" for the purpose of pegging, fixing or stabilizing the price of the common stock in connection with this offering. TAXATION The following is a summary of anticipated material U.S. federal income and British Virgin Islands tax consequences of an investment in our common shares. The summary does not deal with all possible tax consequences relating to an investment in our common shares and does not purport to deal with the tax consequences applicable to all categories of investors, some of which, such as dealers in securities, insurance companies and tax-exempt entities, may be subject to special rules. In particular, the discussion does not address the tax consequences under state, local and other non-U.S. and non-British Virgin Islands tax laws. Accordingly, each prospective investor should consult its own tax advisor regarding the particular tax consequences to it of an investment in the common shares. The discussion below is based upon laws and relevant interpretations in effect as of the date of this annual report, all of which are subject to change. United States Federal Income Taxation The following discussion addresses only the material U.S. federal income tax consequences to a U.S. person, defined as a U.S. citizen or resident, a U.S. corporation, or an estate or trust subject to U.S. federal income tax on all of its income regardless of source, making an investment in the common shares. In addition, the following discussion does not address the tax consequences to a person who holds or will hold, directly or indirectly, 10% or more of our common shares, which we refer to as a "10% Shareholder". Non-U.S. persons and 10% Shareholders are advised to consult their own tax advisors regarding the tax considerations incident to an investment in our common shares. 40 A U.S. investor receiving a distribution of our common shares will be required to include such distribution in gross income as a taxable dividend, to the extent of our current or accumulated earnings and profits as determined under U.S. federal income tax law. Any distributions in excess of our earnings and profits will first be treated, for U.S. federal income tax purposes, as a nontaxable return of capital, to the extent of the U.S. investor's adjusted tax basis in our common shares, and then as gain from the sale or exchange of a capital asset, provided that our common shares constitutes a capital asset in the hands of the U.S. investor. U.S. corporate shareholders will not be entitled to any deduction for distributions received as dividends on our common shares. Gain or loss on the sale or exchange of our common shares will be treated as capital gain or loss if our common shares is held as a capital asset by the U.S. investor. Such capital gain or loss will be long-term capital gain or loss if the U.S. investor has held our common shares for more than one year at the time of the sale or exchange. A holder of common shares may be subject to "backup withholding" at the rate of 31% with respect to dividends paid on our common shares if the dividends are paid by a paying agent, broker or other intermediary in the United States or by a U.S. broker or certain United States-related brokers to the holder outside the United States. In addition, the proceeds of the sale, exchange or redemption of common shares may be subject to backup withholding, if such proceeds are paid by a paying agent, broker or other intermediary in the United States. Backup withholding may be avoided by the holder of Common Shares if such holder: o is a corporation or comes within other exempt categories; or o provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding and otherwise complies with the backup withholding rules. In addition, holders of common shares who are not U.S. persons are generally exempt from backup withholding, although they may be required to comply with certification and identification procedures in order to prove their exemption. Any amounts withheld under the backup withholding rules from a payment to a holder will be refunded or credited against the holder's U.S. federal income tax liability, if any, provided that amount withheld is claimed as federal taxes withheld on the holder's U.S. federal income tax return relating to the year in which the backup withholding occurred. A holder who is not otherwise required to file a U.S. income tax return must generally file a claim for refund or, in the case of non-U.S. holders, an income tax return in order to claim refunds of withheld amounts. British Virgin Islands Taxation Under the International Business Companies Act of the British Virgin Islands as currently in effect, a holder of common shares who is not a resident of British Virgin Islands is exempt from British Virgin Islands income tax on dividends paid with respect to the common shares and holders of common shares are not liable for British Virgin Islands income tax on gains realized during that year on any sale or disposal of the shares. The British Virgin Islands does 41 not currently impose a withholding tax on dividends paid by a company incorporated under the International Business Companies Act. There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands on companies incorporated under the International Business Companies Act. In addition, the common shares are not subject to transfer taxes, stamp duties or similar charges. There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands. DESCRIPTION OF CAPITAL STOCK We were registered in the British Virgin Islands on May 7, 2004 as a British Virgin Islands International Business Company, number 595721. Our charter documents consist of our Memorandum of Association and our Articles of Association. The Memorandum of Association loosely resembles the Articles of Incorporation of a United States corporation and the Articles of Association loosely resembles the bylaws of a Untied States corporation. A brief description of our Memorandum of Association and Articles of Association follows, including a summary of material differences between the corporate laws of the United States and those of the British Virgin Islands. This description and summary does not purport to be complete and does not address all differences between United States and British Virgin Islands corporate laws. Copies of our Memorandum of Association and Articles of Association have been filed as exhibits to our registration statement on Form F-1 and readers are urged to review these exhibits in their entirety for a complete understanding of the provisions of our charter documents. Our Memorandum of Association provides that we any engage in any act or activity which is not prohibited by any laws of the British Virgin Islands. We are authorized to issue 50,000,000 shares of common stock, with a par value of $0.01 per share. As of June 15, 2005 we had 25,290,835 outstanding shares of common stock. All of our outstanding shares are fully paid and non-assessable. All shareholders have the same voting rights. Holders of common stock are each entitled to cast one vote for each share held of record on all matters presented to shareholders. Our shareholders are entitled to vote together as a single class on all matters submitted to a vote of the shareholders. Cumulative voting is not allowed; hence, the holders of a majority of the outstanding common stock can elect all directors. Holders of common stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available for dividends. All outstanding common shares have the same rights with regard to dividends and distributions upon our liquidation, which is to share pro rata in any distribution of our assets after payment of liabilities. Our Board of Directors is not obligated to declare a dividend and it is not anticipated that dividends will ever be paid. All dividends unclaimed for three years after having been declared may be forfeited by resolution of the directors for our benefit. 42 Although there are no conversion, redemption, sinking fund or similar provisions applicable to our outstanding shares of common stock, we may redeem any of our own shares for fair value. However, no purchase, redemption or other acquisition of shares can be made unless out of surplus (as defined by the International Business Companies Act) and unless the directors determine that immediately after the purchase, redemption or other acquisition we will be able to satisfy our liabilities as they become due in the ordinary course of business, and the realizable value of our assets will not be less than the sum of our total liabilities and capital. In the absence of fraud, the decision of the directors as to the realizable value of our assets is conclusive, unless a question of law is involved. If our shares are divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of the shares of that class) may be changed only with the consent in writing of the holders of not less than 75% of the issued shares of that class and the holders of not less than 75% of the issued shares of any other class of shares which may be affected by such variation. There are no limitations on the right of any person to own or vote our securities. However, holders of common stock do not have preemptive rights to subscribe to any additional shares we may issue. Our Memorandum and Articles of Association do not contain any provision discriminating against any existing or prospective holder of our common stock as a result of ownership of any particular number of shares. Our Memorandum and Articles of Association do not contain any provisions relating to changes in our capital which are more stringent than those required by law. Our Articles of Association provide that our board of directors will consist of not less than one nor more than 15 directors. Each director holds office until his successor has been elected or the director is removed or resigned. The directors may by resolution fix the compensation of directors for services provided in any capacity to us. There is no age requirement or limit for a director and a director is not required to own any shares of our capital stock. Directors may be natural persons or companies, in which event the company may designate a person as its representative as a director. Directors or shareholders may remove a director for any reason. A director may appoint an alternate to attend meetings and vote in the place of the director. No agreement or transaction between us and one or more of our directors or any person in which any of our directors has a financial interest is void or voidable by reason of the presence, vote or consent by the interested director at the meeting at which the agreement or transaction is approved if the material facts of the interest of each director are disclosed in good faith or known to the other directors. The directors may convene meetings of our shareholders at such times and in such manner and places as the directors consider necessary or desirable. The directors are required to convene such a meeting upon the written request of shareholders holding 50% or more of our outstanding voting shares. At least seven days' notice of the meeting must be given to the shareholders whose names appear on the share register. One-third of our outstanding shares entitled to vote must be present at a meeting of shareholders in order to constitute a quorum and the affirmative vote of a majority of those present and entitled to 43 vote is required in order to approve action by shareholders. Our Memorandum and Articles of Association do not contain any conditions relating to admission to any meeting of our shareholders. Our directors have the power to take certain actions without shareholder approval, including an amendment of our Memorandum of Association or Articles of Association or an increase or reduction in our authorized capital, which would require shareholder approval under the laws of most US jurisdictions. In addition, the directors of a British Virgin Islands company, subject in certain cases to court approval but without shareholder approval, may, among other things, implement a reorganization, certain mergers or consolidations with a subsidiary, the sale, transfer, exchange or disposition of any assets, property, part of the business, or securities of the company, or any combination (provided the assets do not represent more than 50% of the total assets of the company and the sale is not outside of the usual or ordinary course of the company's business), if they determine it is in the best interests of the company. The directors may, by a resolution of directors, exercise all powers we may have to borrow money. The director's ability to amend our Memorandum of Association and Articles of Association without shareholder approval could have the effect of delaying, deterring or preventing a change in our control without any further action by the shareholders, including a tender offer to purchase our common shares at a premium over then current market prices. Our directors may also, by resolution: o change the shares of all or part of a class into a different number of shares of the same class. o sub-divide all or any of our outstanding shares into a smaller number of shares, and determine that, as between the holders of the shares resulting from the sub-division, one or more of the shares may have special rights, or may have qualified or deferred rights over other outstanding shares or be subject to any restrictions imposed by the directors. British Virgin Islands law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in US jurisdictions. While British Virgin Islands law does permit a shareholder of a British Virgin Islands company to sue its directors derivatively, that is, in the name of, and for the benefit of, our company and to sue a company and its directors for his benefit and for the benefit of others similarly situated, the circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the US. As in most US jurisdictions, the board of directors of a British Virgin Islands company is charged with the management of the affairs of the company. In most US jurisdictions, directors owe a fiduciary duty to the corporation and its shareholders, including a duty of care, under which directors must properly apprise themselves of all reasonably available information, and a duty of loyalty, under which they must protect the interests of the corporation and refrain from conduct that injures the corporation or its shareholders or that 44 deprives the corporation or its shareholders of any profit or advantage. Many US jurisdictions have enacted various statutory provisions which permit the monetary liability of directors to be eliminated or limited. Under British Virgin Islands law, liability of a corporate director to the corporation is primarily limited to cases of willful malfeasance in the performance of his duties or to cases where the director has not acted honestly and in good faith and with a view to the best interests of the company. However, under our Memorandum of Association, we are authorized to indemnify any director or officer who is made or threatened to be made a party to a legal or administrative proceeding by virtue of being one of our directors or officers, provided such person acted honestly and in good faith. Our Memorandum of Association also enables us to indemnify any director or officer who was successful in such a proceeding against expense and judgments, fines and amounts paid in settlement and reasonably incurred in connection with the proceeding. Transfer Agent/Dividend and Paying Agent As of the date of this prospectus we did not have a transfer agent or a dividend and paying agent. ENFORCEMENT OF CIVIL LIABILITIES Substantially all of our current operations are conducted in China, and substantially all of our assets are located in China. All of our directors and officers are nationals or residents of China and all of their assets are located outside the United States. As a result, from a practical standpoint, it will be virtually impossible for a shareholder to enforce against us, or our officers and directors, judgments obtained in United States courts or any state in the United States. LEGAL MATTERS We are not involved in any legal proceedings. INDEMNIFICATION Our Articles of Association authorize indemnification of any director or officer against any losses or liabilities sustained in connection with any action, suit, or proceeding to which he or she is named a party by reason of having acted or served in such capacity. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers, or controlling persons pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. EXPERTS Our balance sheet as of December 31, 2004, and the statements of operations, stockholders' equity, and cash flows for the period from inception (May 7, 2004) to December 31, 2004, have been included in this prospectus in reliance on the report of BDO Shanghai Zhonghua, independent registered public accountants, given on authority of that firm as experts in accounting and auditing. 45 The address of BDO Shanghai Zhonghua is 12/F Ocean Towers, 550 Yanan Road (East), Shanghai, China. AVAILABLE INFORMATION We have filed with the Securities and Exchange Commission a Registration Statement on Form F-1 (together with all amendments and exhibits) under the Securities Act of 1933, as amended, with respect to the securities offered by this prospectus. This prospectus does not contain all of the information which is in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. For further information, reference is made to the Registration Statement which may be read and copied at the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The registration statement is also available at www.sec.gov, the website of the Securities and Exchange Commission. T2CN HOLDING LIMITED AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) ----------------------- REPORT ON AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (MAY 7, 2004) TO DECEMBER 31, 2004 ----------------------- T2CN HOLDING LIMITED AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONTENTS F-1 Report of Independent Registered Public Accounting Firm F-2 Consolidated Financial Statements Balance Sheet F-3 Statement of Operations and Comprehensive Loss F-4 Statement of Shareholders' Equity F-5 Statement of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 Report of Independent Registered Public Accounting Firm The Board of Directors T2CN Holding Limited We have audited the accompanying consolidated balance sheet of T2CN Holding Limited (the "Company") and subsidiaries as of December 31, 2004 and the related consolidated statements of operations and comprehensive loss, shareholders' equity and cash flows for the period from inception (May 7, 2004) to December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of T2CN Holding Limited and subsidiaries, as of December 31, 2004 and the results of operations and comprehensive loss, shareholders' equity and its cash flows for the period from inception (May 7, 2004) to December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. BDO Shanghai Zhonghua Shanghai, PRC April 8, 2005 except No. 5 and No. 6 dated May 13, 2005 F-2 T2CN HOLDING LIMITED AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEET December 31, 2004 ------------ ASSETS Current assets: Cash $ 185,841 Restricted cash 117,238 Due from a related party 127,662 Advances to suppliers 30,590 Prepaid expenses 7,500 ------------ Total current assets 468,831 Computers and equipment, net 128,254 Licensed rights 3,570,000 Deposit 8,600 ------------ Total assets $ 4,175,685 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 38,069 License fee payable 1,920,000 Accrued liabilities 180,991 Shareholders' loans 318,124 ------------ Total current liabilities 2,457,184 ------------ Commitments and contingencies Minority interests 344,088 Shareholders' equity: Common stock, par value $0.01, 50,000,000 shares authorized, 22,100,000 shares issued and outstanding 221,000 Additional paid-in capital 2,404,000 Deferred share-based compensation (284,101) Accumulated deficit (965,144) Accumulated other comprehensive loss - translation adjustments (1,342) ------------ Total shareholders' equity 1,374,413 ------------ Total liabilities and shareholders' equity $4,175,685 ============ See accompanying notes to consolidated financial statements. F-3 T2CN HOLDING LIMITED AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS Period from Inception (May 7, 2004) to December 31, 2004 ------------- Revenues: Online games revenues $ - Others - ------------- Total revenues, net - Cost of services - Gross profit - Operating expenses: Selling expenses - General and administrative 1,114,365 ------------- Total operating expenses 1,114,365 ------------- Loss from operations (1,114,365) Interest income 699 Other expense, net (1,390) ------------- Loss before income taxes (1,115,056) Income taxes - ------------- Net loss $ (1,115,056) ------------- Loss attributed to minority interests (149,912) ------------- Loss attributed to common shares $ (965,144) ============= Weighted average common shares outstanding - basic and diluted 14,657,143 ============= Loss per share - basic and diluted $ (0.07) ============= Comprehensive loss: Net loss $ (965,144) Translation adjustments (1,342) ------------- Comprehensive loss $ (966,488 ) ============= See accompanying notes to consolidated financial statements. F-4 T2CN HOLDING LIMITED AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY PERIOD FROM INCEPTION (MAY 7, 2004) TO DECEMBER 31, 2004 Accumulated Additional Deferred Other Total Common Stock Paid-in Share-based Accumulated Comprehensive Shareholders' Shares Amount Capital Compensation Deficit Loss Equity ------- -------- ------- ------------ ----------- ------------- ------------- Balance, May 7, 2004 - $ - $ - $ - $ - $ - $ - Issuance of common shares to founding shareholders 8,500,000 85,000 455,000 - - - 540,000 Issuance of common shares for consulting services 5,100,000 51,000 273,000 - - - 324,000 Issuance of common shares for cash 8,500,000 85,000 1,676,000 - - - 1,761,000 Deferred share-based compensation - - - (284,101) - - (284,101) Net loss for the period - - - - (965,144) - (965,144) Translation adjustment - - - - - (1,342) (1,342) ---------- ---------- ---------- ----------- ------------ ------------ ----------- Balance, December 31, 2004 22,100,000 $ 221,000 $2,404,000 $ (284,101) $ (965,144) $ (1,342) $1,374,413 ========== ========== ========== =========== ============ ============ ===========
See accompanying notes to consolidated financial statements. F-5 T2CN HOLDING LIMITED AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents From Inception (May 7, 2004) to December 31, 2004 ------------ Cash flows used in operating activities: Net loss for the period $ (965,144 ) Adjustments to reconcile net cash used in operating activities: Depreciation 4,381 Common shares issued for services 579,899 Minority interests 344,088 Changes in operating assets and liabilities: Advance to suppliers (30,590 ) Prepaid expense (7,500 ) Accounts payable 38,069 Accrued liabilities 180,991 ------------ Net cash used in operating activities 144,194 ------------ Cash flows from investing activities: Purchase of fixed assets (132,635 ) Acquisition of software licensed rights (1,650,000 ) Due from related party (127,662 ) Restricted cash (117,238 ) Deposit (8,600 ) ------------ Net cash used in investing activities (2,036,135 ) ------------ Cash flows from financing activities: Shareholders' loan 318,124 Common shares issued for cash 2,100,000 Cash value allocated to minority interests (339,000 ) ------------ Net cash provided by financing activities 2,079,124 ------------ Effect of exchange rate changes (1,342 ) ------------ Increase in cash 185,841 Cash, beginning of period - ------------ Cash, end of period $ 185,841 ============ Cash paid: Income tax - Interest - ------------ - ============ Non-cash transactions: Licensed rights (1,920,000 ) License fee payable 1,920,000 Common stock 44,720 Additional paid-in capital 239,381 Deferred share-based compensation (284,101 ) Compensation expense 155,000 Minority interests (155,000 ) See accompanying notes to consolidated financial statements. F-6 NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS T2CN Holding Limited (the "Company" or "T2CN Holding") was incorporated under the laws of the British Virgin Islands on May 7, 2004 to hold two subsidiaries, who are in the business of developing online games and related businesses in the People's Republic of China (the PRC). T2CN Information Technology Co., Ltd. (T2CN Information), a wholly owned subsidiary of the Company based in China, was incorporated in Shanghai under the laws of the PRC on November 22, 2004. Shanghai T2 Entertainment Co., Ltd. ("T2 Entertainment"), a China-based company, was incorporated in Shanghai under the laws of the PRC on October 8, 2004. The Company accounts for their investment in T2 Entertainment in accordance with the variable interest entity concept. The PRC laws and regulations currently limit foreign ownership of companies that provide internet content services, including the development and operation of the online games businesses, to 50% and grant online game business operation licenses only to Chinese-owned companies. As required under the PRC laws, T2 Entertainment has registered capital of RMB1 million (the US dollar equivalent of approximately $121,000), and is 80% owned by a Chinese venture capital company and 20% owned by a Chinese individual, who is President of T2CN Holding (see Note 5). T2 Entertainment owns the license issued by the Chinese government to conduct the online games business. Pursuant to the signed exclusive technical services and consultancy agreement, operation agreement, proxy agreement, pledge agreement, and equity transfer agreement entered into by T2CN Information and T2 Entertainment, the legal owners of T2 Entertainment agreed to: o Give T2CN Information the exclusive right to operate T2 Entertainment in exchange for a service fee (The service fee is composed of: a) a fixed service fee of RMB2 million (approximately US$241,700); b) a performance-based service fee of 80% of T2Entertainment total income before taxes in the fiscal year the services rendered, and c) an equipment depreciation fee of RMB100,000 (approximately US$12,080).); o Give T2CN Information the right to exercise their authority over T2 Entertainment; pledge their respective equity interests to T2CN Information; and o Ultimately transfer their equity interest to T2CN Holding once the PRC laws and regulations permit them to do so. As a result of these signed contractual agreements, T2CN Holding is deemed the primary beneficiary as it has control over T2 Entertainment, it has the right to participate in the favorable and unfavorable operation results of T2 Entertainment, and its investment in T2 Entertainment is at risk in accordance with FIN 46(R), "Consolidation of Variable Interest Entities". Consequently, the financial statements of T2 Entertainment have been consolidated into the financial statements of the Company. As of December 31, 2004, the Company had not commenced its planned principal operation and had not generated any revenue yet. In accordance with Statement of Financial Accounting Standards, No 7, "Accounting and Reporting by Development Stage Enterprises (SFAS No. 7), the Company is considered a development stage company. In addition, the accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). F-7 NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS (Continued) During the period from inception to December 31, 2004, the Company has been focusing on implementing its business plan, which includes developing and launching its online gaming business. While effectuating its business plan, the Company has accumulated a deficit of $960,056 and additional financing will be required by the Company to fund the development and launching of its online games business and to support its operations. Management plans to fund its future operations through revenues from business operations, debt and/or equity financing. Management plans to mitigate its losses by launching its online games business as quickly as possible. However, there is no assurance that the Company will be able to obtain additional financing from investors or lenders, or that the Company will be able to generate cash flows sufficient to cover its working capital requirements once it launches its online games. There is no assurance that the Company will successfully launch either of its online games. The financial statements do not include any adjustments that might result from the outcome of those uncertainties. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of T2CN Holding, T2CN Information, and T2 Entertainment. All transactions and balances among the Company and its subsidiaries have been eliminated upon consolidation. Foreign Currency Translation and Transactions The Renminbi ("RMB"), the national currency of the PRC, is the primary currency of the economic environment in which the operations of T2CN Information and T2 Entertainment are conducted. The Company uses the United States dollar ("U.S. dollars") for financial reporting purposes. The Company translates the assets and liabilities of T2CN Information and T2 Entertainment into U.S. dollars using the rate of exchange prevailing at the balance sheet date, and the statement of operation is translated at the average rate during the reporting period. Adjustments resulting from the translation of financial statements of T2CN information and T2 Entertainment from RMB into U.S. dollars are recorded in shareholders' equity as part of accumulated comprehensive income (loss) - translation adjustments. Gains or losses resulting from transactions in currencies other than RMB are reflected in income for the reporting period. Cash and Cash Equivalents Cash and cash equivalents represents cash on hand, placed with banks, which have remaining maturities of three months or less. Restricted Cash Restricted cash represents the cash and cash equivalents as of December 31, 2004 held by T2 Entertainment. This cash balance is considered restricted because it cannot be transferred outside of China for the purposes of inter-company loans or advances under the terms of existing PRC laws and regulations. F-8 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Concentration of Credit Risk Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash. As of December 31, 2004, substantially all of the company's cash was held at a major financial institution located in the PRC, which management believes is of high credit quality. Depreciation and Amortization Computers and equipment are stated at the acquisition cost and depreciation expense is determined using the straight-line method over the estimated useful lives of three (3) years. Maintenance and repairs are charged directly to expense as incurred, whereas betterment and renewals are generally capitalized in their respective property accounts. When an item is retired or otherwise disposed of, the cost and applicable accumulated depreciation are removed and the resulting gain or loss is recognized and reflected as an item before operating income (loss). Licensed Rights Upfront licensing fees paid to third party licensors have been capitalized and will be amortized on a straight-line basis over the shorter of the useful economic life of the relevant online games or license period, which is 2 to 3 years. At the balance sheet date, the Company will determine whether there is any indication of impairment. Since the Company's planned principal operation of online games has not commenced yet, no amortization of upfront licensing fees was recorded for the period from inception to December 31, 2004. Impairment of long-lived assets The Company reviews long-lived assets periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. There was no impairment of long-lived assets in the period from inception to December 31, 2004. Fair Value of Financial Instruments Financial instruments of the Company are primarily comprised of cash, restricted cash, due from a related party, accounts payable and accrued liabilities, and shareholders' loans. At December 31, 2004, due to the short-term nature of these financial instruments, their carrying values approximated their fair values except the shareholder's loans. Regarding the fair value of shareholders' loans which did not bear interest, it is difficult for the Company to determine the exact amount of the deemed interest as that deemed interest had being included the lump-sum consulting fee pursuant to the signed consulting agreement. It also is the intention of management of the Company to repay the outstanding shareholder's loans by using the proceeds from the next run of private placement. F-9 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires an entity to recognize deferred tax liabilities and assets. Deferred tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. T2CN Information and T2 Entertainment are subject to PRC tax laws and the tax rates are 15% and 33%, respectively, on taxable income. During the period from May 7, to December 31, 2004, both T2CN Information and T2 Entertainment suffered losses, therefore, there were no income tax provisions recorded in the accompanying financial statements. In addition, under China tax laws, the taxable income in one entity cannot be offset by taxable loss in another entity. In accordance with SFAS No. 109, the Company disclosed the reconciliation of effective income tax rate based on Chinese statutory income tax rate of 33% as there is no income tax in the jurisdiction of British Virgin Islands. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among the more significant estimates included in these financial statements are the estimated valuation allowance for deferred tax assets. Actual results could differ materially from those estimates. Earnings Per Share The Company presents earnings per share in accordance with the Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). Basic earnings (loss) per share includes no dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution of securities that could share in the earnings of an entity. The Company had no potential common shares at December 31, 2004. Stock-Based Compensation The Company has elected to continue to record employee stock compensation based on APB No. 25 which includes the shares issued to the founders. Share issued to non-employees are accounted for under FAS 123. The value of shares issued to a consulting firm is determined based on the estimated fair value of consulting services to be rendered (which is based on the value of similar services provided by other consulting firms and available in China marketplace) rather than on the fair value of shares because at the time of issuance the Company did not have substantial business and assets and there isn't a traded market for the shares. As the stock issuance to the consulting firm was deemed a third party transaction, the value of shares issued to founders was deemed to be the same as the value of shares issued to a third party. F-10 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) As of December 31, 2004, the Company had not entered into any other share-based compensation arrangements and no other share-based compensation was recognized. Comprehensive Income (Loss) The Company adopted Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and presentation of comprehensive income (loss) and its components in a full set of general-purpose financial statements. The Company has chosen to report comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss). Comprehensive income (loss) is comprised of net income and all changes to shareholders' equity except those due to investments by owners and distributions to owners. Segment Reporting The Company operates in a single business segment: the business of developing and operating online games. As the Company primarily operates in the PRC, no geographical segments are presented. Accounting for Appropriation of Employee Welfare and Bonus Fund Pursuant to PRC laws and regulations, T2CN Information and T2 Entertainment are required on an annual basis to set aside at least 5% of their after-tax profits, calculated in accordance with PRC accounting standards and regulations, for employee welfare and bonus purposes and determined by the Board of Directors of the respective company. The appropriation to the employee welfare and bonus fund is derived from net income after income tax under China GAAP whereas the employee welfare and bonus would be included in operating expense under US GAAP. The Company did not have any appropriation of employee welfare and bonus fund for the period from inception to December 31, 2004. Recent Accounting Pronouncements In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, "Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29" (SFAS No. 153). This statement requires that non-monetary exchanges must be recorded at fair value and the appropriate gain or loss must be recognized so long as the fair value is determinable and the transaction has commercial substance. According to this statement, companies can no longer use the "similar productive assets" concept to account for non-monetary exchanges at book value with no gain or loss being recognized. SFAS No. 153 will be effective for fiscal periods beginning after June 15, 2005. The Company believes that the adoption of SFAS No. 153 will not have impact on its financial statements. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, "Share-Based Payment" (SFAS No. 123R). SFAS No. 123R revises SFAS No. 123, "Accounting for Stock-Based Compensation", and focuses on accounting for share-based payments for services by employer to employee. The statement requires companies to expense the fair value of employee stock options and other equity-based compensation at the grant date. The statement does not require a certain type of valuation model and either a binomial or Black-Scholes model may be used. The provisions of SFAS No. 123R are effective for financial statements for fiscal periods ending after June 15, 2005. The Company expects to adopt SFAS No. 123R effective January 1, 2006 and believes that the adoption of SFAS No. 123R will not have material impact on its financial statements. F-11 NOTE 3 - COMPUTERS AND EQUIPMENT A summary of computers and equipment at cost is as follows: December 31, 2004 ------------ Computers and equipment $ 132,635 Accumulated depreciation (4,381) - ------------ $ 128,254 ============ The depreciation expense for the period from inception to December 31, 2004 was $4,381. NOTE 4 - LICENSED RIGHTS On October 10, 2004, T2 Entertainment entered into a software license agreement with a game software vendor located in Korea. Pursuant to the software license agreement, T2 Entertainment is has the right to use, copy, duplicate, sell, and distribute the licensed software (including the right to use, install, test, and run the server software) on various media within the PRC, Hong Kong, and Macao ("the specified territory"). T2 Entertainment agreed to pay exclusive license fees of $570,000 (which should be paid in four installment payments of $30,000, $120,000, $180,000, and $240,000, respectively, within the defined time period) plus a royalty equal to 30% of net monthly sales revenue, commencing on the date of the commercial launch of the online game. This software license agreement has an initial term of two years effective on the on the later of (i) execution of the agreement by the licensor and the licensee, or (ii) approval of this agreement by relevant governmental authority of the PRC. The agreement can be extended for another year with the same terms, by the mutual agreement between licensor and licensee, 60 days prior to the expiration day. On October 15, 2004, T2 Entertainment entered into an exclusive software license agreement with two game software vendors (one located in Japan and another located in Korea). Pursuant to the exclusive software license agreement, T2 Entertainment obtained the operating rights to market, promote, display, publish, and sell the licensed software (including the rights to use, install, test, and run the server software) within the geographical territory of the PRC. T2 Entertainment agreed to pay an upfront fee of $3 million (in three installment payments of $300,000, $1,200,000, and $1,500,000, respectively, in the defined time period) plus a royalty equal to 33% of gross monthly revenue, commencing from the commercial release of the licensed software. The agreement has an initial term of three years commencing from October 15, 2004 plus one additional year if neither of the parties give notice of termination within one month of the expiration date of the agreement. In accordance with the terms of the above agreements, the Company recorded the gross licensed rights and liabilities of $3 million and $570,000, respectively. At December 31, 2004, the first two installment payments of $30,000 and $120,000 have been paid on licensing fees payable of $570,000 and the first two installment payments of $300,000 and $1,200,000 have been paid on licensing fees payable of $3 million. As the Company is still in the development stage, no amortization of the licensed rights was recorded for the period from inception to December 31, 2004. F-12 NOTE 5 - EQUITY TRANSACTIONS On May 7, 2004, the Company issued 8,500,000 shares of its common stock to five individual founding shareholders and one corporate founding shareholder (the five individuals are either corporate directors or officers of T2CN Holding) with at an approximate price of $0.064 per share. The value was determined by using the same per share as was used in the subsequent transaction with a third party consulting firm. On July 25, 2004, the Company entered into a consulting agreement with a third party consulting firm located in Vancouver, Canada. Pursuant to the signed consulting agreement, the consulting firm has agreed to provide financial advisory services, such as assisting with setting up proper corporate structure, assisting with securing private and/or public financing, assisting with handling certain public relationship and communications, securing and working with SEC legal counsel, providing certain bookkeeping services, and assisting with temporary financing, etc. In lieu of receiving cash payments for these services the consulting firm agreed to accept payment in shares of the Company's common stock. The fair value of consulting services was estimated to be $324,000 (which was based on the value of similar services provided by other consulting firms and available in China marketplace) for which the consulting firm agreed to accept 5.1 million shares. Therefore, the per-share value was deemed to be approximately $0.064. According to management, as of December 31, 2004, only approximately 12% of the subscribed services were rendered. Accordingly, approximately 88% of the $324,000 has been recorded in deferred share-based compensation in the shareholders equity statement. On October 15, 2004, one of founders introduced a venture capital company where he is employed as an officer. The venture capital company, which is a China-based company, agreed to purchase 3,035,715 shares of the Company's common stock at approximately $0.25 per share and to pay $750,000 of cash. Under T2CN Holding's instruction, the $750,000 directly went to T2 Entertainment, which is a Shanghai based company, accounting for 80% equity interest. In this case, the 80% equity interest of T2 Entertainment was registered under the name of this venture capital company which was in compliance with PRC laws and regulations and made T2 Entertainment a Chinese-owned company. Accordingly, the venture capital company entered into an equity transfer agreement (disclosed in Note 1) with the Company) to make sure that the ultimate ownership of the said 80% equity interest belongs to the Company once the PRC laws and regulations permit. Pursuant to the signed equity transfer agreement, the venture capital company committed to transfer all of the 80% equity interest at T2 Entertainment to the Company once the PRC laws and regulations allow such transfer to take place at a transfer price of the applicable lowest transfer price then permitted by the PRC laws. On October 15, 2004, one of founding shareholder introduced an investment company located in Taiwan where he is one of the owners to invest $1.35 million into the Company in exchange for 5,464,285 shares of the Company's common stock at the value of approximately $0.25 per share. Of the $1.35 million $25,000 was invested into T2 Entertainment in exchange for a 20% equity interest in T2 Entertainment by designating the Chairman of Board of Directors of the Company who is a Chinese citizen to hold this 20% equity interest. In this case, the 20% equity interest of T2 Entertainment was registered under the name of Chairman of Board of Directors at T2CN Holding which was in compliance with PRC laws and regulations and made T2 Entertainment a Chinese-owned company. Accordingly, the Chairman entered into an equity transfer agreement (disclosed in Note 1) with the Company to make sure that the ultimate ownership of the said 20% equity interest belongs to the Company if the PRC laws and regulations permit. Pursuant to the signed equity transfer agreement, the Chairman committed to transfer all of the 20% equity interest at T2 Entertainment to the Company once the PRC laws and regulations allow such transfer to take place at a transfer price of the applicable lowest transfer price then permitted by the PRC laws. F-13 NOTE 5 - EQUITY TRANSACTIONS (Continued) Based on the above facts, management believes since the venture capital company has received two considerations: one is the 3,035,175 shares of the Company's common stock and the other is the 80% equity interest in T2 Entertainment, therefore, the proceeds of $750,000 should be allocated into two parts: $411,000 represents the investment of T2CN Holding in T2 Entertainment and the remaining $339,000 represents the interest held by the venture capital company in T2 Entertainment based on the relative fair value method. In addition, management believes since the Chairman has received the 20% equity interest in T2 Entertainment at zero cost, T2CN Holding should recognize a compensation expense of $155,000 which also represents the Chairman's interest in T2 Entertainment. Consequently, the total investment owned by T2CN Holding is $436,000, which accounts for approximately 56% of the total capital measured by cash value of $775,000. Accordingly, the total beginning minority interests in T2 Entertainment should be $494,000 which, upon the completion of the expected equity transfer, should be reclassified into additional paid-in capital. On December 15, 2004 the Company completed a common stock reverse split on the basis of 8.5 shares received for each 12 shares held. Accordingly, all of the above equity transactions from inception to December 31, 2004 (including shares and per share value) have been retrospectively restated to reflect this stock reverse split. On May 13, 2005, with the approval of Board of Director at T2CN Holding, this 20% equity interest in T2 Entertainment was transferred from the Chairman of Board of Directors to another corporate officer, who is also a Chinese citizen. Consequently, the Company entered into an equity transfer agreement with this corporate officer under the same terms as those with the Chairman. NOTE 6 - RELATED PARTY TRANSACTIONS On December 31, 2004, T2 Entertainment had an outstanding balance due from a related party of approximately $127,662 from a company where two shareholders of the Company are also two shareholders of that company. The amount of due from a related party did not bear interest, was unsecured and due on demand. The outstanding amount was fully collected in March 2005. On December 6, 2004, the consulting firm (after becoming a shareholder of the Company) advanced $300,000 to the Company. This advance does not bear any interest, is unsecured and due on demand. On May 9, 2005, the consulting firm advanced another $300,000 to the Company under the same terms and conditions as the first $300,000. It is the intention of the management of the Company to repay this $600,000 temporary loan out of the proceeds of its next private placement. As of December 31, 2004, the Company had advances payable totaling $18,151 from two directors and officers of the Company. These advances bear no interest, are unsecured and have no specific terms of repayment. In January of 2005, the Company repaid these advances. Of the 5.1 million shares (post reverse spilt) issued to the consulting firm, 850,000 shares were allocated to one 50% equity owner of the consulting firm, who is also a member of Board of Directors of the Company. The value of these 850,000 shares was approximately $54,000. F-14 NOTE 7 - INCOME TAXES The loss generated in BVI company and two Chinese entities before income taxes for the period from inception to December 31, 2004 was as follows: Period From Inception to December 31, 2004 ----------- Loss in BVI company before income taxes $ (730,113 ) Loss in Chinese entities before income taxes (235,031 ) ----------- $ (965,144 ) =========== The income tax provision was as follows: Period From Inception to December 31, 2004 ----------- Current BVI Company $ - Chinese entities - ----------- $ - =========== T2CN Information is a wholly foreign owned investment enterprise under PRC tax laws which is granted an income tax concession and is taxable at a rate of 15%, whereas T2 Entertainment is taxable under PRC tax laws at a statutory income tax rate of 33%, because it is in the online games business. During the period from the inception to December 31, 2004, both T2CN Information and T2 Entertainment suffered losses. Therefore, there were no income tax provisions recorded. In addition, under PRC tax laws, the taxable income in one entity cannot be offset by taxable losses in another entity. The difference between the effective income tax rate and the expected statutory rate was as follows: Period From Inception to December 31, 2004 ----------- PRC statutory rate (33.0 )% Income tax incentive 26.0 Permanent difference - Change in valuation allowance 7.0 -------------- Effective income tax rate - % ============== NOTE 7 - INCOME TAXES (Continued) At December 31, 2004, the Company had a net operating loss carryforwards of approximately $235,031 for PRC income tax purposes. These net operating losses expire through 2009. F-15 Net deferred tax assets consist of the following: December 31, 2004 ------------ Net operating loss carryforward $ 70,000 ------------ 70,000 Valuation allowance (70,000 ) ------------ Net deferred tax assets $ - ============ In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those net operating losses become deductible. Based upon the fact that both T2CN Information and T2 Entertainment are in the development stage as of December 31, 2004, management has concluded that it is uncertain whether the Company will realize the benefits of these deferred tax assets. Consequently, the Company has provided a full valuation allowance against the deferred tax assets. NOTE 8 - COMMITMENTS AND CONTINGENCIES Operating Lease Commitments The Company has entered into leasing arrangements relating to office premises that are classified as operating leases. Future minimum lease payments for non-cancellable leases as of December 31, 2004 are as follows: December 31, Amount - ---------------------- ------------ 2005 $ 103,000 2006 102,000 2007 60,000 ------------ $ 265,000 ------------ Total rental expenses were $45,000 during the period from inception to December 31, 2004 and were charged to the statement of operations and comprehensive loss when incurred. Contingent Loss and Economic Uncertainty PRC laws and regulations currently limit foreign ownership of companies that provide internet content services, which include operating online games, to 50%. In addition, foreigners or foreign investment enterprises are currently not able to apply for the required licenses for operating online games in the PRC. T2CN Holding is incorporated in the British Virgin Islands and accordingly T2CN Information is considered a wholly foreign owned enterprise (WFOE) under the PRC law. In order to comply with foreign ownership restrictions, the Company operates its online games business in the PRC through T2 Entertainment, which is directly owned by a PRC citizen and a Shanghai-based venture capital company. F-16 NOTE 8 - COMMITMENTS AND CONTINGENCIES T2 Entertainment holds the licenses and government approvals and T2CN Information holds the physical assets required to operate the online games business. T2CN Information has entered into a series of contractual arrangements with T2 Entertainment pursuant to which T2CN Information provides T2 Entertainment with services in exchange for fees, and T2CN Information commits to provide financial support to T2 Entertainment to the extent necessary for its operations. In addition, T2CN Information has entered into agreements with T2 Entertainment and its shareholders that provide it with the substantial ability to control T2 Entertainment. In the opinion of management and the Company's PRC legal counsel, (i) the ownership structure of T2CN Holdings, T2CN Information and T2 Entertainment are in compliance with the existing PRC laws and regulations; (ii) the contractual arrangements with T2 Entertainment and its shareholders are valid and binding, and will not result in any violation of the PRC laws or regulations currently in effect; and (iii) the Company's business operations are in compliance with the existing PRC laws and regulations. However, the Company cannot assure that the PRC regulatory authorities will not ultimately take a contrary view to its opinion. If the current ownership structure of the Company and its contractual arrangements with T2 Entertainment were found to be in violation of any the existing or future PRC laws and regulations, the Company may be required to restructure its ownership structure and operations in the PRC to comply with the changes and new PRC laws and regulations. In the opinion of management, the likelihood of contingent loss in respect of the Company's current ownership structure or the contractual arrangements with T2 Entertainment is remote. F-17 TABLE OF CONTENTS Page PROSPECTUS SUMMARY ........................................ RISK FACTORS .............................................. MARKET FOR OUR COMMON STOCK ............................... SELECTED FINANCIAL DATA.................................... MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION ................................ OUR BUSINESS............................................... MANAGEMENT ................................................ PRINCIPAL SHAREHOLDERS..................................... SELLING SHAREHOLDERS....................................... TAXATION................................................... DESCRIPTION OF CAPITAL STOCK............................... ENFORCEMENT OF CIVIL LIABILITIES .......................... LEGAL MATTERS.............................................. INDEMNIFICATION ........................................... EXPERTS.................................................... AVAILABLE INFORMATION...................................... FINANCIAL STATEMENTS....................................... No dealer, salesperson or other person has been authorized to give any information or to make any representation not contained in this prospectus, and if given or made, you should not rely on such information or representations. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any of the securities offered in any jurisdiction to any person to whom it is unlawful to make an offer by means of this prospectus. Until ____________, 2005 all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PART II Information Not Required in Prospectus Item 6. Indemnification of Officers and Directors The International Business Companies Act of the British Virgin Islands and the Company's Articles of Association provide that the Company may indemnify any and all of its officers, directors, employees or agents or former officers, directors, employees or agents, against expenses actually and necessarily incurred by them, in connection with the defense of any legal proceeding or threatened legal proceeding, except as to matters in which such persons shall be determined to not have acted in good faith and in the Company's best interest. Item 7. Recent Sales of Unregistered Securities. The following lists all shares issued by the Company since its inception. In December 2004 the Company's shareholders approved a reverse split such that each twelve outstanding shares were converted to 8.5 shares. All share data in this table has been adjusted to reflect this reverse stock split. Note Name Date Shares Consideration Reference U.S.$ Ji Wang 05/04 2,486,250 Services rendered A, C Yanqing Li 05/04 1,211,250 Services rendered A, C Fei Zhang 05/04 340,000 Services rendered A, C Jun-Tse Teng 05/04 141,667 Services rendered A, C Bin Zheng 05/04 283,333 Services rendered A, C Chengwei (China) Investment Company 05/04 4,037,500 Services rendered A, C Calneva Financial Group Ltd. 07/04 5,100,000 Services rendered A, C Kingland Overseas Development Inc. 10/04 5,464,285 $1,350,000 A Newmargin T2CN Investment Ltd. 10/04 3,035,715 $ 750,000 A Richard Douglas Stewart 06/05 100,000 75,000 A 622416 Alberta Ltd. 06/05 28,000 21,000 A George C. Robertson 06/05 65,000 48,750 A Robert C. Barton 06/05 100,000 75,000 A Steve Thackray 06/05 10,000 7,500 A Donald R. MacSorley 06/05 26,667 20,000 A James S. Barton 06/05 100,000 75,000 A Ronnie Steiner Travel Tours Inc. 06/05 10,000 7,500 A The MacLachlan Investments Corporation 06/05 133,333 100,000 A Ron Jones Ltd. 06/05 50,000 37,500 A John Michael Keegan 06/05 15,000 11,250 A Bruno Benedet Jr. 06/05 40,000 30,000 A Daryl Turner 06/05 40,000 30,000 A Elliott J. Lipsey 06/05 33,333 25,000 A Eric K. Stewart 06/05 6,666 5,000 A Verona Capital International 06/05 66,667 50,000 A Note Name Date Shares Consideration Reference U.S.$ Matrix Partners, Inc. 06/05 133,333 100,000 A Hugh Cooper 06/05 66,667 50,000 A Leonard Clough 06/05 28,533 21,400 A Kyung W. Lee, Trustee 06/05 20,000 15,000 A Eastside Pinnacle, LLC 06/05 26,667 20,000 B Micheal R. Muzos 06/05 6,000 4,500 B Martin S. Rood 06/05 20,000 15,000 B Mon Szeto 06/05 6,000 4,500 B Kathleen Wright 06/05 6,667 5,000 B Kathleen Wright Roth IRA 06/05 6,667 5,000 B KC Global Holdings Inc. 06/05 53,333 40,000 A Robert J. Charleton 06/05 50,000 37,500 A Dr. Brandt Miles Inc. 06/05 10,000 7,500 A R.J. Labonte & Co. Ltd. 06/05 12,000 9,000 A United Triump Inc. 06/05 53,334 40,000 A Dean Williams 06/05 26,667 20,000 A Rick Griffiths 06/05 13,333 10,000 A James Paleologos 06/05 80,000 60,000 A Valeurs Mobilieres Dejardins Inc. ITF Roxy and Bear Investment 06/05 200,000 150,000 A Jeffrey Shear 06/05 366,667 275,000 A Michael Shear 06/05 166,667 125,000 A Shear Holdings Limited 06/05 133,334 100,000 A Bixbie Financial Group 06/05 267,000 200,250 A Wally Marcolin 07/05 10,000 10,000 A Brad Shackman 07/05 10,000 10,000 A Richard Jeffrey 07/05 10,000 10,000 A Winton Capital Holdings Ltd. 07/05 250,000 250,000 A David L. Dreyer 07/05 10,000 10,000 A Brendan G. Murray 07/05 10,000 10,000 A Evan S. Ho 07/05 10,000 10,000 A Graham Watson 07/05 15,000 15,000 A Dean Roosdahl 07/05 15,000 15,000 A Edward Mitchuk 07/05 1,000 1,000 A Rocky J. Paolo 07/05 25,000 25,000 A Alexander Wong 07/05 10,000 10,000 A Lorinda Hoyem 07/05 10,000 10,000 A 619476 B.C. Ltd. 07/05 15,000 15,000 A Norma Vandenberg 07/05 10,000 10,000 A David Vandenberg 07/05 10,000 10,000 A Shane Pierce 07/05 10,000 10,000 A Terry Bonneschranz 07/05 1,000 1,000 A Jay Browne 07/05 500 500 A 2 Note Name Date Shares Consideration Reference U.S.$ Steve Pippy 07/05 2,200 2,200 A Austin J. Pippy 07/05 400 400 A Robert Vanoverschot 07/05 1,000 1,000 A Brenda Leighton 07/05 2,500 2,500 A Harold Leighton 07/05 2,500 2,500 A Marvin D. Kristoff 07/05 500 500 A Caroline Farrell 07/05 1,000 1,000 A Troy Leighton 07/05 1,000 1,000 A Ryan Leighton 07/05 1,000 1,000 A Kerri Leighton 07/05 1,000 1,000 A Concettina Amante 07/05 1,700 1,700 A Rosa Marie Amante 07/05 500 500 A Remo Pomponio 07/05 500 500 A Donald S. Reitsma 07/05 1,000 1,000 A Mark Storer 07/05 500 500 A Barbara A. Barker 07/05 1,000 1,000 A Calvin Thompson 07/05 1,500 1,500 A Conrad Lacker 07/05 1,000 1,000 A Don Gee 07/05 1,000 1,000 A Bruce Biles 07/05 10,000 10,000 A Bruce Biles In Trust For Brodie Biles 07/05 2,000 2,000 A Dundee Securities Corp. In Trust for Robert Sali 07/05 35,000 35,000 A Gerry Caul 07/05 5,000 5,000 A Byron Hampton 07/05 1,000 1,000 A Ken Nielsen 07/05 5,000 5,000 A Abraham Christopher Fehr 07/05 1,000 1,000 A Eric Lin 07/05 100,000 100,000 A John M. Keegan 08/22/05 13,334 13,334 A Calneva Financial Partners Ltd. 08/22/05 40,000 40,000 A Ernie Pounder 08/22/05 13,334 13,334 A A. These shares were all issued to non-U.S. persons who reside outside of the United States. The negotiations and agreements relating to the issuance of these shares were made by the Company's officers (who were all Chinese or Canadian citizens) from China or Canada. The shares were restricted from resale in the public markets for a period of one year from the date of their issuance. Although these shares were not technically issued in accordance with Regulation S, these shares were nevertheless exempt from the registration requirements of the Securities Act of 1933 by virtue of Release 4708, which was the predecessor to Regulation S. B. The Company relied upon the exemption provided by Section 4(2) of the Securities Act of 1933 with respect to the issuance of these shares. The persons who acquired these shares were sophisticated investors. Each person had access to the same kind of information that would be available in a 3 registration statement, including information available on the website maintained by the Securities and Exchange Commission. The persons who acquired these shares acquired the shares for their own accounts. The certificates representing the shares of common stock bear legends stating that the shares may not be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act of 1933, or pursuant to an applicable exemption from registration. The shares are "restricted" securities as defined in Rule 144 of the Securities and Exchange Commission. C. See Part I, "Management Transactions with Related Parties and Recent Sales of Unregistered Securities" for the value of the shares for financial statement purposes. Item 8. Exhibits and Financial Statement Schedules The following Exhibits are filed with this Registration Statement: Exhibit Number Exhibit Name - ------- ------------- 3.1 Memorandum of Association 3.2 Articles of Association 5 Opinion of Counsel 10.1 Software License - Rush Online 10.2 Software License - Shenmue Online 10.3 Consulting Agreement with Calneva Financial Group Ltd. 10.4 Operations Agreement concerning Shanghai T2 Entertainment Co., Ltd. 10.5 Novation Agreement - Operation Agreement 10.6 Proxy Agreement 10.7 Novation Agreement - Proxy Agreement 10.8 Equity Transfer Call Agreement 10.9 Novation Agreement - Equity Transfer Call Agreement 10.10 Equity Pledge Agreement 10.11 Novation Agreement - Equity Pledge Agreement 10.12 Technical Services and Consultancy Agreement 4 10.13 Nominee Agreement between Wang Ji and T2CN Holding Ltd. 21 Subsidiaries 23.1 Consent of Attorneys 23.1 Consent of Accountants Note financial statement schedules are filed as part of this Registration Statement. Item 9. Undertakings The Company will: (1) File, during any period in which offers or sells securities, a post-effective amendment to this Registration Statement to. (i) Include any Prospectus required by Section l0 (a)(3) of the Securities Act: (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act of l933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in 5 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, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 6 SIGNATURES In accordance with the requirements of the Securities Act of l933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Shanghai, China. T2CN HOLDING LIMITED Date: August 4, 2005 By: /s/ Ji Wang ------------------------------------- Ji Wang, President and Chief Executive Officer Date:August 4, 2005 By: /s/ Jun-Tse Teng ------------------------------------- Jun-Tse Teng, Principal Financial and Accounting Officer In accordance with the requirements of the Securities Act of l933, this registration statement has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date /s/ Tao Feng Director August 4, 2005 - ----------------------- Tao Feng /s/ Ji Wang Director August 4, 2005 - ----------------------- Ji Wang /s/ Jun-Tse Teng Director August 4, 2005 - ----------------------- Jun-Tse Teng /s/ Bo Feng Director August 4, 2005 - ----------------------- Bo Feng SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES Pursuant to the Securities Act of 1933, the undersigned, the duly authorized representative in the United States, has signed this registration statement or amendment thereto in Denver, Colorado, on August 25, 2005. SHANGHAI ENTERTAINMENT INC. By: /s/ William T. Hart ---------------------------- Name: William T. Hart Title: President T2CN HOLDING LIMITED FORM F-1 EXHIBITS EX-3.(I) 2 f1ex31aug05.txt EXHIBIT 3.1 TERRITORY OF THE BRITISH VIRGIN ISLANDS THE INTERNATIONAL BUSINESS COMPANIES ACT (CAP. 291) MEMORANDUM OF ASSOCIATION OF T2CN Holding Limited 1. NAME The name of the Company is T2CN Holding Limited. 2. REGISTERED OFFICE The registered office of the Company will be situated at Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands or at such other place within the British Virgin Islands as the directors may from time to time determine. 3. REGISTERED AGENT The registered agent of the Company will be Maples Finance BVI Limited of Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands or such other person or company being a person or company entitled to act as a registered agent, as the directors may from time to time determine. 4. GENERAL OBJECTS AND POWERS (a) To buy, sell, underwrite, invest in, exchange or otherwise acquire and to hold, manage, develop, deal with and turn to account any bonds, debentures, shares, (whether fully paid or not) stocks, options, commodities, futures, forward contracts, notes or securities of Governments, States, municipalities, public authorities or public or private limited or unlimited companies in any part of the world, precious metals, gems, works of art and other articles of value and whether on a cash or margin basis and including short sales, and to lend money against the security of any of the aforementioned property. (b) To buy, own, hold, subdivide, lease, sell, rent, prepare building sites, construct reconstruct, alter, improve, decorate, furnish, operate, maintain, reclaim or otherwise deal with and/or develop land and buildings and otherwise deal in real estate in all its branches, to make advances upon the security of land or houses or other property or any interest therein, and whether erected or in course of erection and whether on first mortgage or charge or subject to prior mortgage 1 or mortgages or charge or charges, and to develop land and buildings as may seem expedient but without prejudice to the generality of the foregoing. (c) To borrow or raise money by the issue of debentures, debenture stock (perpetual or terminable), bonds, mortgages, or any other securities founded or based upon all or any of the assets or property of the Company or without any such security and upon such term as to priority or otherwise as the Company shall think fit. (d) To mortgage, pledge or charge its assets and other property (or any part thereof) as collateral security for the Company's debts, liabilities or obligations or in connection with the Company's guarantee or grant of other security for any third party, such mortgage, pledge or charge being on such terms as the Company's members or directors deem fit. (e) To engage in any other business or businesses whatsoever, or in any acts or activities which are not prohibited under any law for the time being in force in the British Virgin Islands. (f) To do all such other things as are incidental to, or the Company may think conducive to, the attainment of all the above objects. And it is hereby declared that the intention is that each of the objects specified in each paragraph of this clause shall, except where otherwise expressed in such paragraph, be an independent main object and be in no ways limited or restricted by reference to or inference from the terms of any other paragraph or the name of the Company. 5. EXCLUSIONS The company shall not be treated as carrying on business with persons resident in the British Virgin Islands by reason only that: (a) it makes or maintains deposits with a person carrying on banking business within the British Virgin Islands; (b) it makes or maintains professional contact with solicitors, barristers, accountants, book-keepers, trust companies, administration companies, investment advisers or other similar persons carrying on business within the British Virgin Islands; (c) it prepares or maintains books and records within the British Virgin Islands; (d) it holds, within the British Virgin Islands, meetings of its directors or members; (e) it holds a lease of property for use as an office from which to communicate with members or where books and records of the Company are prepared or maintained; 2 (f) it holds shares, debt obligations or other securities in a company incorporated under the International Business Companies Act (CAP.291) or under the Companies Act (CAP. 285); (g) its shares, debt obligations or other securities in the Company are owned by any person resident in the British Virgin Islands or by any company incorporated under the International Business Companies Act (CAP.291) or under the Companies Act (CAP. 285). 6. The Company has no power to: (a) carry on business with persons resident in the British Virgin Islands; (b) own an interest in real property situate in the British Virgin Islands, other than a lease referred to in paragraph (e) of subsection (2) of the International Business Companies Act (CAP.291); (c) carry on banking or trust business, unless it is licensed under the Banks and Trust Companies Act, 1990; (d) carry on business as an insurance or as a reinsurance company, insurance agent or insurance broker, unless it is licensed under an enactment authorising it to carry on that business; (e) carry on the business of company management unless it is licensed under the Companies Management Act, 1990; or (f) carry on the business of providing the registered office or the registered agent for companies incorporated in the British Virgin Islands. 7. SHARE CAPITAL The shares in the Company shall be issued in the currency of the United States of America. 8. AUTHORISED CAPITAL The authorised capital of the Company is US$500,000.00 comprising 50,000,000 shares with a par value of US$0.01 each. Shares may be issued by the directors at their discretion and may only be issued as registered shares. 3 9. CLASSES OF SHARES The shares shall be divided into such number of classes and series as the directors shall by resolution from time to time determine and until so divided shall comprise one class and series. 10. RIGHTS, QUALIFICATIONS, DESIGNATIONS ETC. OF SHARES The directors shall by resolution have the power to issue any class or series of shares that the Company is authorised to issue in its capital, original or increased, with or subject to any designations, powers, preferences, rights, qualifications, limitations and restrictions. 11. REGISTERED SHARES Shares in the Company may only be issued as registered shares and may not be exchanged for shares issued to bearer. 12. AMENDMENTS The Company shall by resolution of the directors or members have the power to amend or modify any of the conditions contained in this Memorandum of Association and to increase or reduce the authorised capital of the Company in anyway permitted by law. 4 We, Maples Finance BVI Limited of Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands for the purpose of incorporating an International Business Company under the laws of the British Virgin Islands hereby subscribe our name to this Memorandum of Association. NAME, ADDRESS AND DESCRIPTION OF SUBSCRIBER Maples Finance BVI Limited Kingston Chambers P.O. Box 173 Road Town, Tortola British Virgin Islands Dated this 7th day of May, 2004 WITNESS to the above signature: Kingston Chambers P.O. Box 173 Road Town, Tortola British Virgin Islands 5 EX-3.(II) 3 f1ex32aug05.txt EXHIBIT 3.2 TERRITORY OF THE BRITISH VIRGIN ISLANDS THE INTERNATIONAL BUSINESS COMPANIES ACT (CAP. 291) ARTICLES OF ASSOCIATION OF T2CN Holding Limited INTERPRETATION 1. References in these Articles of Association ("Articles") to the Act shall mean The International Business Companies Act (CAP. 291), as amended. The following Articles shall constitute the Articles of the Company. In these Articles, words and expressions defined in the Act shall have the same meaning and, unless otherwise required by the context, the singular shall include the plural and vice versa, the masculine shall include the feminine and the neuter and references to persons shall include corporations and all legal entities capable of having a legal existence. SHARES 2. The authorised capital of the Company is US$500,000.00 comprising 50,000,000 shares with a par value of US$0.01each. Shares may be issued by the directors at their discretion and may only be issued as registered shares. 3. Every person whose name is entered as a member in the share register, being the holder of registered shares, shall without payment, be entitled to a certificate signed by two directors or two officers or by one director or one officer of the Company or under the common seal of the Company with or without the signature of any director or officer of the Company specifying the share or shares held and the par value thereof, provided that in respect of shares held jointly by several persons, the Company shall not be bound to issue more than one certificate and delivery of a certificate for a share to one of several joint holders shall be sufficient delivery to all. 4. If a certificate is worn out or lost it may be renewed on production of the worn out certificate, or on satisfactory proof of its loss together with such indemnity as the directors may reasonably require. Any member receiving a share certificate shall indemnify and hold the Company and its officers harmless from any loss or liability which it or they may incur by reason of wrongful or fraudulent use or representation made by any person by virtue of the possession of such a certificate. 1 SHARE CAPITAL AND VARIATION OF RIGHTS 5. Subject to the provisions of these Articles, the unissued shares of the Company (whether forming part of the original or any increased capital) shall be at the disposal of the directors who may offer, allot, grant options over or otherwise dispose of them to such persons at such times and for such consideration, being not less than the par value of the shares being disposed of, and upon such terms and conditions as the directors may determine. 6. Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any share in the Company may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise as the directors may from time to time determine. 7. Subject to the provisions of the Act in this regard, shares may be issued on the terms that they are redeemable, or at the option of the Company be liable to be redeemed on such terms and in such manner as the directors before or at the time of the issue of such shares may determine. 8. The directors may redeem any share issued by the Company at a premium. 9. If at any time the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may, whether or not the Company is being wound up, be varied with the consent in writing of the holders of not less than three-fourths of the issued shares of that class and the holders of not less than three-fourths of the issued shares of any other class of shares which may be affected by such variation. 10. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith. 11. Except as required by the Act, no person shall be recognised by the Company as holding any share upon any trust, and the Company shall not be bound by or be compelled in any way to recognise (even when having notice thereof) any equitable, contingent, future or partial interest in any share or any interest in any fractional part of a share or (except as provided by these Articles or by the Act any other rights in respect of any share except any absolute right to the entirety thereof by the registered holder. 2 TRANSFER OF SHARES 12. Shares in the Company may be transferred by a written instrument signed by the transferor and containing the name and address of the transferee or such other manner or form and subject to such evidence as the directors shall consider appropriate. 13. Upon receipt of notification of any change of name and address of any agent or attorney given to the Company for the purpose of service of any notice, information or written statement required to be given to members, identified by reference to the number of the share certificate; the directors shall forthwith amend the register maintained for this purpose. TRANSMISSION OF SHARES 14. The executor or administrator of a deceased member, the guardian of an incompetent member or the trustee of a bankrupt member shall be the only person recognized by the Company as having any title to his share but they shall not be entitled to exercise any rights as a member of the Company until they have proceeded as set forth in the following three Articles, save that and only in the event of death, incompetence or bankruptcy of any member or members of the Company as a consequence of which the Company no longer has any directors or members, then upon the production of any documentation which is reasonable evidence of the applicant being entitled to: (a) a grant of probate of the deceased's will, or grant of letters of administration of the deceased's estate, or confirmation of the appointment as executor or administrator (as the case may be), of a deceased member's estate; or (b) the appointment of a guardian of an incompetent member; or (c) the appointment as trustee of a bankrupt member; or (d) upon production of any other reasonable evidence of the applicant's beneficial ownership of, or entitlement to the shares, to the Company's Registered Agent in the British Virgin Islands together with (if so requested by the Registered Agent) a notarised copy of the share certificate(s) of the deceased, incompetent or bankrupt member, an indemnity in favour of the Registered Agent and appropriate legal advice in respect of any document issued by a foreign court, then the administrator, executor, guardian or trustee in bankruptcy (as the case may be) notwithstanding that their name has not been entered in the share register of the Company, may by written resolution of the applicant, endorsed with written approval by the Registered Agent, be appointed a director of the Company or entered in the share register as the legal and or beneficial owner of the shares. 15. The production to the Company of any document which is reasonable evidence of: 3 (a) a grant of probate of the will, or grant of letters of administration of the estate, or confirmation of the appointment as executor, of a deceased member; or (b) the appointment of a guardian of an incompetent member; or (c) the trustee of a bankrupt member; or (d) the applicants legal and or beneficial ownership of the shares, shall be accepted by the Company even if the deceased, incompetent member or bankrupt member is domiciled outside the British Virgin Islands if the document is issued by a foreign court which had competent jurisdiction in the matter. For the purposes of establishing whether or not a foreign court had competent jurisdiction in such a matter the directors may obtain appropriate legal advice. The directors may also require an indemnity to be given by the executor, administrator, guardian or trustee in bankruptcy. 16. Any person becoming entitled by operation of law or otherwise to a share or shares in consequence of the death, incompetence or bankruptcy of any member may be registered as a member upon such evidence being produced as may reasonably be required by the directors. An application by any such person to be registered as a member shall for all purposes be deemed to be a transfer of shares of the deceased, incompetent or bankrupt member and the directors shall treat it as such. 17. Any person who has become entitled to a share or shares in consequence of the death, incompetence or bankruptcy of any member may, instead of being registered himself, request in writing that some person to be named by him be registered as the transferee of such share or shares and such request shall likewise be treated as if it were a transfer. 18. What amounts to incompetence on the part of a person is a matter to be determined by the court having regard to all the relevant evidence and the circumstances of the case. ACQUISITION OF OWN SHARES 19. Subject to the provisions of the Act in this regard, the directors may, on behalf of the Company purchase, redeem or otherwise acquire any of the Company's own shares for such consideration as they consider fit, and either cancel or hold such shares as Treasury Shares. The directors may dispose of any shares held as Treasury Shares on such terms and conditions as they may from time to time determine. Shares may be purchased or otherwise acquired in exchange for newly issued shares in the Company. 4 ALTERATION IN CAPITAL 20. Subject to the terms of any resolution passed by the directors for the purpose of increasing the authorised capital of the Company, such increased authorised capital may be divided into shares of such respective amounts, and with such rights or privileges (if any) as the directors think expedient. 21. Any capital raised by the creation of new shares shall be considered as part of the original capital and shall be subject to the same provisions as if it had been part of the original capital. 22. The directors may by resolution: (a) consolidate and divide all or any of its share capital into shares of larger amounts than its existing shares; (b) cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and reduce the amount of its authorised share capital by the amount of the shares so canceled; (c) sub-divide its shares or any of them into shares of smaller amounts than is fixed by the Memorandum of Association and so that subject to the provisions of Article 10, the resolution whereby any share is sub-divided may determine that as between then holders of the shares resulting from such sub-division one or more of the shares may have such preferred or other special rights over or may have such qualified or deferred rights or be subject to any such restrictions as compared with the other or others as the Company has power to attach to unissued shares; and/or (d) subject to any confirmation or consent required by the Act, reduce its authorised and issued share capital or any capital redemption reserve fund of any share premium account in any manner. 23. Where any difficulty arises in regard to any consolidation and division under these Articles the directors may settle same as they consider expedient. MEETINGS OF MEMBERS 24. The directors may convene meetings of the members of the Company at such times and in such manner and places as the directors consider necessary or desirable, and they shall convene such a meeting upon the written request of members holding 50 percent or more of the votes of the outstanding voting shares in the Company. 25. Seven days notice at the least specifying the place, the day and the hour of the meeting and general nature of the business to be conducted shall be given in the manner hereinafter mentioned to such persons whose names on the date the notice is given appear as members in the share register of the Company. 5 26. A meeting of the members shall be deemed to have been validly held, notwithstanding that it is held in contravention of the requirement to give notice in Article 25, if notice of the meeting is waived by an absolute majority in number of the members having a right to attend and vote at the meeting. 27. The inadvertent failure of the directors to give notice of a meeting to a member or the fact that a member has not received the notice, shall not invalidate the meeting. PROCEEDINGS AT MEETINGS OF MEMBERS 28. No business shall be transacted at any meeting unless a quorum of members is present at the time when the meeting proceeds to business. A quorum shall consist of the holder or holders present in person or by proxy of not less than one-third of the shares of each class or series of shares entitled to vote as a class or series at the meeting. 29. If, within half an hour from the time appointed for the meeting, a quorum is not present, the meeting shall be dissolved. 30. At every meeting the members present shall choose someone of their number to be the chairman (the "Chairman"). If the members are unable to choose a Chairman for any reason, then the person representing the greatest number of voting shares present at the meeting shall preside as Chairman failing which the oldest individual member present at the meeting or failing any member personally attending the meeting, the proxy present at the meeting representing the oldest member of the Company, shall take the chair. 31. The Chairman may, with the consent of the meeting, adjourn any meeting from time to time, and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. 32. At any meeting a resolution put to the vote of the meeting shall be decided on a show of hands by a simple majority unless a poll is (before or on the declaration of the result of the show of hands) demanded: (a) by the Chairman; or (b) by any member present in person or by proxy and holding not less than one tenth of the total voting shares issued by the Company and having the right to vote at the meeting; 33. Unless a poll be so demanded, a declaration by the Chairman that a resolution has, on a show of hands been carried, and an entry to that effect in the book containing the minutes of the proceedings of the Company, shall be sufficient evidence of the fact, without proof of the number or proportion of the votes recorded in favour of or against such resolution. 6 34. If a poll is duly demanded it shall be taken in such manner as the Chairman directs, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand for a poll may be withdrawn. 35. In the case of an equality of votes, whether on a show of hands, or on a poll, the Chairman of the meeting at which the show of hands takes place, or at which the poll is demanded, shall be entitled to a second or casting vote. VOTES OF MEMBERS 36. At any meeting of members whether on a show of hands or on a poll every holder of a voting share present in person or by proxy shall have one vote for every voting share of which he is the holder. 37. A resolution which has been notified to all members for the time being entitled to vote and which has been approved by a majority of the votes of those members in the form of one or more documents in writing or by telefax or other written electronic communication shall forthwith, without the need for any notice, become effectual as a resolution of the members. 38. If a committee is appointed for any member who is of unsound mind, that member may vote by such committee. 39. If two or more persons are jointly entitled to a registered share or shares and if more than one of such persons shall vote in person or by proxy at any meeting of members or in accordance with the terms of Article 36, the vote of that person whose name appears first among such voting joint holders in the share register shall alone be counted. 40. Votes may be given either personally or by proxy. 41. The instrument appointing a proxy shall be produced at the place appointed for the meeting before the time for holding the meeting at which the person named in such instrument proposes to vote. 42. Subject to Article 43 below, an instrument appointing a proxy shall be in such form as the Chairman of the meeting shall accept as properly evidencing the wishes of the member appointing the proxy. 43. The instrument appointing a proxy shall be in writing under the hand of the appointer unless the appointer is a corporation or other form of legal entity other than one or more individuals holding as joint owner in which case the instrument appointing a proxy shall be in writing under the hand of an individual duly authorised by such corporation or legal entity to execute the same. The Chairman of any meeting at which a vote is cast by proxy so authorised may call for a notarially certified copy of such authority which shall be produced within seven 7 days of being so requested failing which the vote or votes cast by such proxy shall be disregarded. CORPORATIONS ACTING BY REPRESENTATIVES AT MEETINGS 44. Any corporation or other form of corporate legal entity which is member of the Company may by resolution of its directors or other governing body authorise such person as it thinks fit to act as its representative at any meeting of the members or any class of members of the Company, and the person so authorised shall be entitled to exercise the same powers on behalf of the corporation which he represents as that corporation could exercise if it were an individual member of the Company. DIRECTORS 45. Subject to any subsequent amendment to change the number of directors, the number of the directors shall be not less than one or more than fifteen. 46. The first director or directors shall be elected by the subscriber to the Memorandum of Association. Thereafter, the directors shall be elected by the members or the directors for such terms as the members or directors may determine and may be removed by the members or the directors. 47. Each director holds office until his successor takes office or until his earlier death resignation or removal. 48. A vacancy in the board of directors may be filled by a resolution of members or a resolution passed by the majority of the remaining directors. 49. A director shall not require a share qualification, but nevertheless shall be entitled to attend and speak at any meeting of the members and at any separate meeting of the holders of any class of shares in the Company. 50. A director, by writing under his hand deposited at the Registered Office of the Company, may from time to time appoint another director or another person to be his alternate. Every such alternate shall be entitled to be given notice of meetings of the directors and to attend and vote as a director at any such meeting at which the director appointing him is not personally present and generally at such meeting to have and exercise all the powers, rights, duties and authorities of the director appointing him. Every such alternate shall be deemed to be an officer of the Company and shall not be deemed to be an agent of the director appointing him. If undue delay or difficulty would be occasioned by giving notice to a director of a resolution of which his approval is sought in accordance with Article 75 his alternate (if any) shall be entitled to signify approval of the same on behalf of that director. The remuneration of an alternate shall be payable out of the remuneration payable to the director appointing him, and shall consist of such portion of the last mentioned remuneration as shall be agreed between such alternate and the director appointing him. A director by writing under his hand deposited at the Registered Office of the 8 Company may at any time revoke the appointment of an alternate appointed by him. If a director shall die or cease to hold the office of director, the appointment of his alternate shall thereupon cease and terminate. 51. The directors may, by resolution, fix the emolument of directors in respect of services rendered or to be rendered in any capacity to the Company. The directors may also be paid such traveling, hotel and other expenses properly incurred by them in attending and returning from meetings of the directors, or any committee of the directors or meetings of the members, or in connection with the business of the Company as shall be approved by resolution of the directors. 52. Any director who, by request, goes or resides abroad for any purposes of the Company, or who performs services which in the opinion of the Board go beyond the ordinary duties of a director, may be paid such extra remuneration (whether by way of salary, commission, participation in profits or otherwise) as shall be approved by resolution of the directors. 53. The Company may pay to a director who at the request of the Company holds any office (including a directorship) in, or renders services to, any company in which the Company may be interested, such remuneration (whether by way of salary, commission, participation in profits or otherwise) in respect of such office or services as shall be approved by resolution of the directors. 54. The office of director shall be vacated if the director: (a) is removed from office by a resolution of members or by a resolution of directors, or (b) becomes bankrupt or makes any arrangement or composition with his creditors generally, or (c) becomes of unsound mind, or of such infirm health as to be incapable of managing his affairs, or (d) resigns his office by a notice in writing to the Company. 55. (a) A Director may hold any other office or position of profit under the Company (except that of auditor) in conjunction with his office of director, and may act in a professional capacity to the Company on such terms as to remuneration and otherwise as the directors shall arrange. (b) A director may be or become a director or officer of, or otherwise be interested in any company promoted by the Company, or in which the Company may be interested, as a member or otherwise and no such director shall be accountable for any remuneration or other benefits received by him as director or officer or from his interest in such other company. The directors may also exercise the voting powers 9 conferred by the shares in any other company held or owned by the Company in such manner in all respects as they think fit, including the exercise thereof in favour of any resolutions appointing them, or of their number, directors or officers of such other company, or voting or providing for the payment of remuneration to the directors or officers of such other company. A director may vote in favour of the exercise of such voting rights in the manner aforesaid notwithstanding that he may be, or be about to become, a director or officer of such other company, and as such in any other manner is, or may be, interested in the exercise of such voting rights in the manner aforesaid. (c) No director shall be disqualified by his office from contracting with the Company either as a vendor, purchaser or otherwise, nor shall any such contract or arrangement entered into by or on behalf of the Company in which any director shall be in any way interested be voided, nor shall any director so contracting or being so interested be liable to account to the Company for any profit realised by any such contract or arrangement, by reason of such director holding that office or by reason of the fiduciary relationship thereby established, provided the procedure in Article 55 (d) below is followed. (d) The nature of a director's interest must be declared by him at the meeting of the directors at which the question of entering into the contract or arrangement is first taken into consideration, and if the director was not at the date of the meeting interested in the proposed contract or arrangement, or shall become interested in a contract or arrangement after it is made, he shall forthwith after becoming so interested, advise the Company in writing of the fact and nature of his interest. A general notice to the directors by a director that he is a member of a specified firm or company, and is to be regarded as interested in any contract or transaction which may, after the date of notice, be made with such firm or company shall (if such director shall give the same at a meeting of the directors, or shall take reasonable steps to secure that the same is brought up and read at the next meeting of the directors after it is given) be a sufficient declaration of interest in relation to such contract or transaction with such firm or company. A director may be counted as one of a quorum upon a motion in respect of any contract or arrangement which he shall make with the Company, or in which he is so interested as aforesaid, and may vote upon such motion. OFFICERS 56. The directors of the Company may, by resolution of directors, appoint officers of the Company at such times as shall be considered necessary or expedient, and such officers may consist of a President, one or more Vice Presidents, a Secretary, and a Treasurer and/or such other officers as may from time to time be deemed desirable. The officers shall perform such duties as shall be prescribed at the time of their appointment subject to any modifications in such duties as may be prescribed by the directors thereafter, but in the absence of any specific allocation of duties it shall be the responsibility of the President to manage the day to day affairs of the Company, the Vice 10 Presidents to act in order of seniority in the absence of the President, but otherwise to perform such duties as may be delegated to them by the President, the Secretary to maintain the registers, minute books and records (other than financial records) of the Company and to ensure compliance with all procedural requirements imposed on the Company by applicable law, and the Treasurer to be responsible for the financial affairs of the Company. 57. Any person may hold more than one office and no officer need be a director or member of the Company. The officers shall remain in office until removed from office by the directors, whether or not a successor is appointed. 58. Any officer who is a body corporate may appoint any person its duly authorised representative for the purpose of representing it and of transacting any of the business of the officers. POWERS OF DIRECTORS 59. The business of the Company shall be managed by the directors who may pay all expenses incurred preliminary to and in connection with the formation and registration of the Company, and may exercise all such powers of the Company as are not by the Act or by these Articles required to be exercised by the members subject to any delegation of such powers as may be authorised by these Articles and to such requirements as may be prescribed by resolution of the members, but no requirement made by resolution of the members shall prevail if it be inconsistent with these Articles nor shall such requirement invalidate any prior act of the directors which would have been valid if such requirement had not been made. 60. The board of directors may entrust to and confer upon any director or officer any of the powers exercisable by it upon such terms and conditions and with such restrictions as it thinks fit, and either collaterally with, or to the exclusion of, its own powers, and may from time to time revoke, withdraw, alter or vary all or any of such powers. The directors may delegate any of their powers to committees consisting of such member or members of their body as they think fit. Any committees so formed shall in the exercise of powers so delegated conform to any regulations that may be imposed on it by the directors. 61. The directors may from time to time by power of attorney appoint any company, firm or person or body of persons to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the directors under these Articles) and for such period and subject to such conditions as the directors think fit. 62. Any director who is a body corporate may appoint any person its duly authorised representative for the purpose of representing it at meetings of the directors and of transacting any of the business of the directors. 11 63. All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for monies paid to the Company, shall be signed, drawn, accepted, endorsed or otherwise executed as the case may be, in such manner as the directors shall from time to time by resolution determine. 64. The directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertakings, property and uncalled capital or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party. 65. The continuing directors may act notwithstanding any vacancy in their body, save that if the number of directors shall have been fixed at two or more persons and by reason of vacancies having occurred in the board of directors there shall be only one continuing director, he shall be authorised to act alone only for the purpose of appointing another director. PROCEEDINGS OF DIRECTORS 66. The meetings of the board of directors and any committee thereof shall be held at such place or places as the directors shall decide. 67. The directors may elect a chairman (the "Chairman of the Board of Directors") of their meeting and determine the period for which he is to hold office. If no such Chairman of the Board of Directors is elected, or if at any meeting the Chairman of the Board of Directors is not present at the time appointed for holding the meeting, the directors present may choose one of their number to be Chairman of the Board of Directors for the meeting. If the directors are unable to choose a Chairman of the Board of Directors, for any reason, then the oldest director present at the meeting shall preside as the Chairman of the Board of Directors. 68. The directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings as they think fit. Questions arising at any meeting shall be decided by a majority of votes. In case of an equality in votes the Chairman shall have a second or casting vote. A director may at any time summon a meeting of the directors. If the Company shall have only one director, the provisions hereinafter contained for meetings of the directors shall not apply but such sole director shall have full power to represent and act for the Company in all matters and in lieu of minutes of a meeting shall record in writing and sign a note of memorandum of all matters requiring a resolution of the directors. Such note or memorandum shall constitute sufficient evidence of such resolution for all purposes. 69. A director shall be given not less than five days notice of a meeting of the directors. 70. Notwithstanding Article 69 above, a meeting of the directors held in contravention of that Article shall be valid if a majority of the directors entitled to vote at the meeting have waived the notice of the meeting. 12 71. The inadvertent failure to give notice of a meeting to a director, or the fact that a director has not received the notice shall not invalidate the meeting. 72. A meeting of the directors is duly constituted for all purposes if at the commencement of the meeting there are present in person or by alternate not less than one-third of the total number of directors with a minimum of two, or in the case of only one director a minimum of one. 73. If within half an hour from the time appointed for the meeting a quorum is not present, the meeting shall be dissolved. 74. Any one or more members of the board of directors or any committee thereof may participate in a meeting of such board of directors or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participating by such means shall constitute presence in person at a meeting. 75. A resolution approved by a majority of the directors for the time being entitled to receive notice of a meeting of the directors or of a committee of the directors and taking the form of one or more documents in writing or by telefax or other written or electronic communication shall be as valid and effectual as if it had been passed at a meeting of the directors or of such committee duly convened and held, without the need for any notice. INDEMNITY 76. Subject to the provisions of the Act and of any other statute for the time being in force every director or other officer of the Company shall be entitled to be indemnified out of the assets of the Company against all losses or liabilities which he may sustain or incur in or about the execution of the duties of his office or otherwise in relation thereto, and no director or other officer shall be liable for any loss, damage or misfortune which may happen to, or be incurred by the Company in the execution of the duties of his office, or in relation thereto. 13 SEAL 77. The directors shall provide for the safe custody of the common seal of the Company. The common seal when affixed to any instrument except as provided in Article 3, shall be witnessed by a director or officer of the Company or any other person so authorised from time to time by the directors. The directors may provide for a facsimile of the common seal and approve the signature of any director or authorised person which may be reproduced by printing or other means on any instrument and it shall have the same force and validity as if the seal has been affixed to such instrument and the same had been signed as hereinbefore described. DIVIDENDS AND RESERVES 78. The directors may, by resolution, declare a dividend but no dividend shall be declared and paid except out of Surplus and unless the directors determine that immediately after the payment of the dividend (a) the Company will be able to satisfy its liabilities as they become due in the ordinary course of its business; and (b) the realisable value of the assets of the Company will not be less than the sum of its total liabilities, other than deferred taxes, as shown in the books of account, and its Capital. 79. Dividends may be declared and paid in money, shares or other property. 80. In computing the Surplus for the purpose of resolving to declare and pay a dividend, the directors may include in their computation the net unrealised appreciation of the assets of the Company. 81. The directors may from time to time pay to the members such interim dividends as appear to the directors to be justified by the Surplus of the Company. 82. Subject to the rights of the holders of shares entitled to special rights as to dividends, all dividends shall be declared and paid according to the par value of the shares in issue, excluding those shares which are held by the Company as Treasury Shares at the date of declaration of the dividend. 83. The directors may, before recommending any dividend, set aside out of the profits of the Company such sums as they think proper as a reserve or reserves which shall, at their discretion, either be employed in the business of the Company or be invested in such investments as the directors may from time to time think fit. 84. If several persons are registered as joint holders of any share, any of them may give effectual receipt for any dividend or other monies payable on or in respect of the share. 14 85. Notice of any dividend that may have been declared shall be given to each member in manner hereinafter mentioned and all dividends unclaimed for three years after having been declared may be forfeited by the directors for the benefit of the Company. 86. No dividend shall bear interest against the Company. BOOKS AND RECORDS 87. The Company shall keep such accounts and records as the directors consider necessary or desirable in order to reflect the financial position of the Company. 88. The Company shall keep minutes of all meetings of directors, members, committees of directors, committees of officers and committees of members, and copies of all resolutions consented to by the directors, members, committees of directors, committees of officers and committees of members. 89. The Company shall maintain an accurate and complete Register of Directors and Register of Officers showing the full names and addresses of all directors, officers and members, the date such person was appointed a director or officer of the Company, as applicable, and the date such person was removed as a director or officer of the Company, as applicable. 90. The Company shall maintain an accurate and complete Register of Members showing the full names and addresses of all persons holding registered shares in the Company, the number of shares held by such person and where applicable, the date such person ceased to hold any registered shares in the Company. A record of all shares issued to bearer shall also be maintained in the Register of Members showing the number of shares issued to bearer and the identifying number attached to shares issued to bearer in terms of Regulation 4 of these Articles of Association. 91. The records required by Article 87 to 90 inclusive shall be kept at the registered office of the Company or at such other place as the directors may determine, and shall be open to the inspection of the directors at all times. 92. The directors shall from time to time determine whether and to what extent and at what times and places and under what conditions or the books, records and minutes of the Company or any of them shall be open to the inspection of members not being directors, and no member (not being a director) shall have any right of inspecting any book, record, minute or document of the Company except as conferred by Law or authorised by resolution of the directors. 15 AUDIT 93. The directors may by resolution call for the accounts of the Company to be examined by an auditor or auditors to be appointed by them at such remuneration as may from time to time be agreed. 94. The auditor may be a member of the company but no director or officer shall be eligible during his continuance in office. 95. Every auditor of the Company shall have a right of access at all times to the books of accounts of the Company, and shall be entitled to require from the officers of the Company such information and explanations as he thinks necessary for the performance of his duties. 96. The report of the auditor shall be annexed to the accounts upon which he reports, and the auditor shall be entitled to receive notice of, and to attend, any meeting at which the Company's audited Profit and Loss Account and Balance Sheet is to be presented. NOTICES 97. Any notice, information or written statement required to be given to members shall be served by mail (air-mail service if available) addressed to each member at the address shown in the share register. 98. All notices directed to be given to the members shall, with respect to any registered shares to which persons are jointly entitled, be given to whichever of such persons is named first in the share register, and notice so given shall be sufficient notice to all the holders of such shares. 99. Any notice, if served by post, shall be deemed to have been served within ten days of posting, and in proving such service it shall be sufficient to prove that the letter containing the notice was properly addressed and put into the Post Office. PENSION AND SUPERANNUATION FUND 100. The directors may establish and maintain or procure the establishment and maintenance of any non-contributory or contributory pension or superannuation funds for the benefit of, and give or procure the giving of donations, gratuities, pensions, allowances or emoluments to any persons who are or were at any time in the employment or service of the Company or any company which is a subsidiary of the Company or is allied to or associated with the Company or with any such subsidiary, or who are or were at any time directors or officers of the Company or of any such other company as aforesaid or who hold or held any salaried employment or office in the Company or such other company, or any persons in whose welfare the Company or any such other company as aforesaid is, or has been at any time, interested, and to the wives, widows, families and dependents of any such persons, and make payments for or towards the insurance of such 16 persons as aforesaid, and may do any of the matters aforesaid either alone or in conjunction with any such other company as aforesaid. A director holding any such employment or office shall be entitled to participate in and retain for his own benefit any such donation, gratuity, pension, allowance or emolument. WINDING UP 101. If the Company shall be wound up, the liquidator may, in accordance with a resolution of members, divide amongst the members in specie or in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and may for such purpose set such value as he deems fair upon any such property to be divided as aforesaid and may determine how such division shall be carried out as between the members or different classes of members. The liquidator may vest the whole or any part of such assets in trustees upon such trust for the benefit of the contributors as the liquidator shall think fit, but so that no member shall be compelled to accept any shares or other securities whereon there is any liability. AMENDMENT TO ARTICLES 102. The Company may alter or modify the conditions contained in these Articles as originally drafted or as amended from time to time by a resolution of the directors or the members. 17 We, Maples Finance BVI Limited of Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands for the purpose of incorporating an International Business Company under the laws of the British Virgin Islands hereby subscribe our name to these Articles of Association. NAME, ADDRESS AND DESCRIPTION OF SUBSCRIBER Maples Finance BVI Limited Kingston Chambers P.O. Box 173 Road Town, Tortola British Virgin Islands Dated this 7th day of May, 2004 WITNESS to the above signature: Kingston Chambers P.O. Box 173 Road Town, Tortola British Virgin Islands EX-5 4 f1ex5aug05.txt EXHIBIT 5 August 15, 2005 T2CN Holding Limited 5th Floor, No. 88 Qinjiang Road Shanghai, China 200233 This letter will constitute an opinion upon the legality of the sale by certain selling shareholders of T2CN Holding Limited, a British Virgin Islands corporation (the "Company"), of up to 8,091,503 shares of common stock, all as referred to in the Registration Statement on Form F-1 filed by the Company with the Securities and Exchange Commission. We have examined the Memorandum of Association, the Articles of Association and the minutes of the Board of Directors of the Company and the applicable laws of the British Virgin Islands. In our opinion, the Company has duly authorized the issuance of the shares of stock mentioned above and such shares of common stock are legally issued, fully paid and non-assessable. Our opinion is based upon the laws of the British Virgin Islands. Very Truly Yours, HART & TRINEN, L.L.P. By William T. Hart EX-10 5 f1ex101aug05.txt 10.1 EXHIBIT 10.1 SOFTWARE LICENSE AGREEMENT (the "Agreement") (RUSH ONLINE) THIS SOFTWARE LICENSE AGREEMENT (this "Agreement') is entered into on 10th day of October 2004 by and between JC Entertainment Corp., a Korean corporation organized and existing under the laws of the Republic of Korea, having its principal office at 4th floor Rosedale Building, 724 Suseo-Dong, Kangnam-Ku, Seoul 135-885, Korea ("Licensor') and Shanghai T2 Entertainment Co., Ltd. (License) a Chinese corporation organized and existing under the laws of the People's Republic of China, having its principal office at 12A, Civil Defense Building, 593 Fu Xin MiddIe Road, Shanghai, China ("Licensee"). RECITALS WHEREAS, Licensor has developed and possesses rights to a certain Game Title which it refers to as "Rush Online"; and WHEREAS, Licensee desires to license such certain Game Title for operating online game service in the Territory and Licensor is willing to grant to Licensee an exclusive license for such purposes on the terms and conditions set forth herein. NOW, THEREFORE, In consideration of the mutual agreements and covenants contained herein, the parties agree as follows: Section 1 Definition For the purpose of this Agreement: (a) "Business Day(s)" shall mean business day(s) of the commercial banks in China. (b) "Commercial Launch Date" shall mean the date when Licensee commercially launches the Game Service in the Territory. (c) "Confidential information" means Information that (i) is confidential to the business of a party, including but not limited to, computer software source code, technical documentation and information regarding proprietary computer systems, marketing and product development plans, financial and personnel information, and other business information not generally known to the public, and (ii) is designated and identified as such by a party, or which the other party should have reasonably known was confidential. (d) "Designated Locations" shall mean the particular locations set forth in Exhibit (A) where Server Software is permitted to be used pursuant to the terms and conditions of this Agreement. (e) "Effective Date" shall mean the date on which this Agreement is executed by Licensor and Licensee, or this Agreement is approved by the Government of the People's Republic of China as contemplated in Section 15 hereunder whichever is later. (f) "Error" shall mean a defect in the code or routine of the Licensed Program making the software non-operational. (g) "Exclusive License Fees" shall have the meaning as described in Clause 3.1 herein. (h) "Game Service" shall mean the online game service to the Subscribers in the Territory utilizing the Licensed Program and the Licensed Materials. (i) "Game Title" shall mean the name of the online game which is developed by Licensor and licensed to Licensee under this Agreement. (j) "Gold Master CD" shall mean a CD-ROM on which a localized version of the Client Software is recorded and which is delivered to Licensee for reproduction, sale and distribution to the Subscribers. (k) "Net Sales Revenues" shall mean the total sales revenues earned by Licensee from the sale of the Licensed Product's Points Cards and the Client Software with deduction of distribution margin. (l) "Improvement(s)" shall mean modifications, enhancements, updates, or other changes to the Licensed Program and the Licensed Materials. (m) "Intellectual Property" shall mean (i) patents, trademarks, service marks, trade and business names, logos, slogans, characters and designs, whether registered or not, and (ii) copyright, know-how, Confidential Information, domain names and any other similar rights protected in any country. (n) "License Fees" shall mean either or both of the Software's Exclusive License Fees and technical support and maintenance fees (Royalties) paid by Licensee to Licensor in the operation period. (o) "Licensed Materials" shall mean the user guides, server operating manuals, education materials, product descriptions and specifications, technical manuals and other materials included in or related to the Licensed Program (including any characters, stories, sounds there-related), of used in association with the Game Service, including but not limited to those specified in Exhibit (A) attached to this Agreement. All improvements and new versions of such materials are also included in the definition of "Licensed Materials". (p) "Licensed Program" shall mean the online game computer program in machine readable object code only (i) which is developed by Licensor with its Korean title as "_______", its English title as "Rush Online" and its Chinese title as "_____" and (ii) which consists of Game Server Software and Client Software. Any Improvements made to the Licensed Program are also included in the definition of "Licensed Program". (q) "Marks" shall mean trademarks, service marks, trade and business names, logos, slogans, characters, or other properties that are used on or in association with the Licensed Program and the Game Service, whether registered or not, including but not limited to those specified in Exhibit (B) attached to this Agreement. (r) "Open Code" shall mean the directly executable program in binary code derived from Source Code using a compiler or otherwise. (s) "Open Beta Service Date" shall mean the date when Licensee launches the beta version of the Game Service to general public in the Territory. (t) "Royalty" or "Royalties" shall have the- meaning as describe in Clause 3.2 herein. (u) "Servers" shall mean computers with the Game Server Software installed therein at the Designated Locations, including but not limited to, Web servers and game servers which are required for online gaming. (v) "Game Server Software" shall mean a computer program which is installed in Servers. (w) "Source Code" shall mean all material necessary to enable a programmer of reasonable skill and experience to maintain and enhance software, including but not limited to, logic, logic diagrams, flowcharts, orthographic representations, algorithms, routine, sub-routines, utilities, modules, file structures, coding sheets, specifications and the program instructions. (x) "Subscribers" shall mean persons who are allowed to connect to the Servers in order to play the online game in the Territory. The Subscribers consist of Paying Subscribers and Free Subscribers. (y) "Territory" shall mean the People's Republic of China, including Hong Kong, Macao. (z) "Upgrade Version" shall mean an online game which is developed by Licensor as a subsequent version (not a sequel) of the Licensed Program which uses the same title with the Licensed Program. Section 2 Grant of Licenses 2.1 (Use of Licensed Program) Subject to the terms and conditions contained in this Agreement, Licensor grants the Licensee an exclusive, non-transferable and royalty bearing right and license to do the following within the Territory;` (a) to use the Game Server Software; (b) to use, copy, duplicate, sell, and distribute the Client Software on various media including but not limited to CD-ROM; (c) to use, copy, and distribute the Licensed Materials for use on the Game Service or in the course of the operation of the Game Service; (d) to provide the Game Service to the Subscribers; (e) to advertise, promote and market the Game Service; and (f) to produce, sell and distribute Points Cards. 2.2 (Use of Marks) Subject to the terms and conditions contained in this Agreement, Licensor grants to Licensee during the term of this Agreement an exclusive, non-transferable, and royalty free right to use the Marks and the Game Title for the purpose of advertising, promoting and marketing the Client Software and the Game Service in the Territory in a style and manner approved by Licensor in writing prior to such use. 2.3 (Use of Know-how) Subject to the terms and conditions contained in this Agreement, Licensor will provide Licensee with the Confidential Information, excluding the Source Code, in relation to the operation of the Game Service. 2.4 (Translation) For the purpose of this Agreement, Licensee shall be entitled to translate the documents of Licensed Program and Licensed Materials into Chinese and adopt the Chinese versions. In order to avoid unnecessary disputes arising from languages, Licensee shall be responsible for the translation of explanatory documents into Chinese and both parties shall examine and amend the translation when necessary. 2.5 (Modification to Licensed Program) For the purpose of marketing and promotion of Licensed Program in Chinese markets, Licensee shall be entitled to modify such the visual aspects of Licensed Programs upon prior written approval of Licensor of such modifications, which approval shall not be unreasonably withheld. In the case that such approval is delayed for more than three (3) business days in Korea, it shall be regarded as the approval of such modification. Licensee shall grant to Licensor the use of such modified or remanufactured works for free in case of Licensor's request. 2.6 (No Right to Copy) Except as otherwise provided in this Agreement, Licensee shall not copy, reproduce, Modify, translate, or create derivative works or excerpt any of the Licensed Program and the Licensed Materials for any purposes. 2.7 (Sub-Licensing) Upon the approval of the Licensor, Licensee may grant sub-license Licensed Program or derivative works hereof to third party, which is limited to the affiliated companies or subsidiary companies in China of Licensee. Such sub-license requires no extra Software license Fees. Section 3 Payments 3.1 (Exclusive License Fees) Subject to performance by Licensor of its obligations under this Agreement, Licensee shall pay Licensor an exclusive license fee of US 570,000 dollars (the "Exclusive License Fees"). this shall be paid by (4) installment payment as follows: (a) First Installment Payment: US 30,000 dollars. (b) Second Installment Payment: US 120,000 dollars on the Close Beta Service Date in twenty (20) Business Days (c) Third Installment Payment: US 180,000 dollars on the Open Beta Service Date in twenty (20) Business Days (d) Last Installment Payment: US 240,000 dollars on the Commercial Launch Date in twenty (20) Business Days The parties hereby agree that if the daily top concurrent users can reach 30,000 during the Open Beta Service Period of the Licensed Product, the third installment payment fee under the above 3.1(c) shall be reduced by US 100,000. 3.2 (Royalties) Subject to the full performance of Licensor of its obligations under this Agreement, in addition to the Exclusive License Fees specified in Section 3.1, Licensee shall pay Licensor the thirty (30) percent (%) of the licensed Product's Net Sales Revenue accrued for each calendar month until termination of this Agreement if any (the "Royalties"). These Royalties shall accrue commencing with the first commercial launch of the Game Service in the Territory. 3.3 (Time of Payments) Licensee shall pay to Licensor the Royalties under Section 3.2 on a monthly basis, not later than thirty (30) days after the end of each calendar month. The royalty can be deferred by Licensee if clause 6 is not performed by licensor. 3.4 (Bad Accounts Confirmation) The normal payment cycles of any Client Software and Points Cards is ninety (90) days from sales. The unpaid amounts overdue for more than one hundred and eighty (180) days from sales shall be confirmed as bad accounts, which shall be responsible 50% for License and 50% for Licensor. Short of compelling reasons, bad accounts below ten percent (10%) of Total Sales Revenue shall be recognized as uncollectible income and cancelled from calculation of Total Sales Revenue for the purpose of royalty payment. 3.5 (Form of Payments) Royalties and any other payments due to Licensor under this Agreement shall be paid to Licensor in United States dollars. Licensee shall first determine the Royalties and other payments owed to Licensor in the Chinese currency and then convert the amount into equivalent United States funds, using the applicable exchange rate quoted by the People's Bank of China on the last business day of each calendar month for which such Royalties or other payments are due. 3.6 (Taxes) 3.6.1 In the event that the Chinese government imposes any income taxes on any part of the Royalties and any other payments and requires Licensee to withhold such tax from payments to Licensor in order to remit such payments to Licensor, Licensee shall withhold such tax from the payments. 3.6.2 Licensee shall promptly furnish Licensor with official tax authorities or such other evidence as is reasonably requested by licensor to establish that such taxes specified in Section 3.6.1 have been paid so as to enable licensor to support a claim for credit against income taxes which may be paid by Licensor. 3.6.3 All taxes (other than such withheld Chinese income taxes imposed on Licensor on its receipt of the Royalties, and other payments), duties, assessments, fees and other governmental charges of any kind (including sales, use, excise taxes) which are .imposed by or under the authority of any government or any political subdivision thereof on the Royalties and any other payments shall be borne by Licensor and Licensee respectively in accordance with applicable laws and regulations and may be considered a part of, a deduction from or an offset against, the Royalties and any other payments upon mutual agreement of both parties. 3.6.4 Either party hereto shall hold the other party harmless from all claims and liability arising from the party's failure to report or pay any such taxes, duties, assessments, fees and other governmental charges of any kind. Section 4 Records, Reports and Audits 4.1 (Records) Licensee shall maintain complete and accurate books and records in sufficient detail to reflect its operations under this Agreement and to enable the Royalties accrued and payable under this Agreement to be determined. 4.2 (Reports) Licensee shall, at its expense, provide Licensor with a written report acknowledged by the C.P.A (Certified Public Accountant) of Licensee within fifteen (15) days of the end of each calendar month (except the first calendar month) for the prior month for the Total Sales Revenue made during such prior month period including but not limited to those specified in Exhibit (C). 4.3 (User's Database) Licensor shall have access to user's database and billing database, provided that notice shall be required regarding any actual entry by Licensor and such entry shall only be conducted in working hours of Licensee. 4.4 (Audits) 4.4.1 Licensor shall have the right, directly or through its representative, upon a fifteen (15) days' prior written notice to Licensee, (i) to review Licensee's books and records to verify the number of copies of the Client Software sold and distributed to Subscribers by Licensee, the number of Subscribers, and the number and locations of the Servers, and (ii) to enter Licensee's premises in order to inspect the Servers during regular business hours to verify compliance with the terms of this Agreement, provided that Licensee agrees not to conceal or destroy any software, materials of information after receiving such notice, through the completion of such review and inspection. 4.4.2 Licensor or representatives of Licensor shall protect the confidentiality of Licensee's confidential information and abide by Licensee's reasonable security regulations while on Licensee's reasonable security regulations while on Licensee's premises while on Licensee's premises. 4.4.3 If the results of such review disclose a deficiency in any Royalty payable by Licensee to Licensor in excess of five (5) percent for any three (3) consecutive month period and manifest evidence of such deficiency is provided by Licensor, then Licensee shall promptly reimburse Licensor for the reasonable costs of such review and inspection including, but not limited to professional fees, traveling and accommodation expenses. Licensee shall also pay the shortfall in the Royalties ascertained to be due from such review and inspection including any interest at the rate of five (5) % per month for the shortfall. Section 5 Delivery and Acceptance 5.1 (Delivery) Within [ ] days from the date this Agreement is executed, Licensor shall deliver to licensee (i) Beta testing version(s) of the Licensed Program, (ii) one (1) copy of Gold Master CD, and (iii) copies of the Licensed Materials in the quantities pursuant to specification set forth in Exhibit (D). 5.2 (Acceptance) Licensee shall within seven (7) days following its receipt of the items specified in Section 5.1, in writing, accept, or reject any items if Licensee reasonably believes that such item fail to meet the specifications identified in Exhibit (D). If any of the above items are rejected, Licensor shall send new items to Licensee in substitute for the rejected items. Section 6 Technical Support/Assistance and Maintenance 6.1 (Technical Support) Licensor covenants that it now has and for the term of this Agreement will continue to have sufficient personnel to support its technical assistance and maintenance obligations hereunder. 6.2 (System Requirements) Licensee shall at its expenses arrange the server computers ready for installation by Licensor of the Game Server Software therein. The servers must satisfy the servers must satisfy the specifications set forth in Exhibit (E). Licensee shall assign any Internet Data Center (IDC) in the Territory upon specifications set forth in Exhibit (E) 6.3 (Installation) 6.3.1 Licensor will perform installation of the Game Server Software in Server computers via Internet or at Licensee's sites on the date when mutually agreed by the parties, subject to Licensee satisfying the system requirements set forth in Exhibit (E). 6.3.2 If Licensor decides that it is necessary to install the Game Server Software at Licensee's site 3, Licensor shall bear its own travel, hotel, and out-of-pocket expenses related to the provision of installation assistance pursuant to this Section 6.3. 6.4 (Maintenance) Licensor shall exercise its best efforts to maintain the Licensed Program free of Errors at no cost to Licensee for the term of this Agreement in accordance with the following procedure: 6.4.1 In the event Licensee discovers Errors in the Licensed Program which cause the Licensed Program not to operate in material conformance to Licensor's specifications, Licensee shall submit to Licensor a written report, via e-mail or by facsimile, describing the nature of such Errors in sufficient detail to perm it Licensor to reproduce and/or correct such Errors. 6.4.2 Upon receipt of any such written reports, License to use its best efforts to respond to the reported Errors and prepare an update or patch program in a timely manner to correct such Errors as early as practicable. 6.4.3 The Licensor shall be responsible for train operation and maintenance of game server system to licensee at the first install game system. In addition, licensor shall assign an engineer in charge to solve the problem that game sever system repair and maintenance problem required by Licensee. 6.5 (Hacking) Both Licensor and Licensee shall use their best efforts to protect the Servers from hacking. In the event Licensee discovers any hacking activities, Licensee shall submit to Licensor a Written report, via e-mail or facsimile describing the nature of such activities, in sufficient detail, to permit Licensor to provide preventive measures. Upon receipt of any such written report, Licensor agrees to use its best efforts to respond to the reported hacking activities on an urgent basis and solve the hacking problems. 6.6 (Upgrade) When Game Upgrade after release of initial version, licensor shall supply Upgrade version in two months advanced period test to licensee. Also, licensor shall endeavor to positively consider for the next Upgrade version release with examining enough for the requirement at the Chinese local users or Licensee. 6.7 (Respond Time) Licensor shall assign competent engineers to respond (online support is also acceptable) to the service requirement of licensee regarding any breakdown arising in the course of service and operation by Licensee within three (3) working hours after the receipt of such requirement on working days and at the soonest possible basis on non-working days. In the event of any major breakdown (with both parties' negotiation) that requires spot services, licensor's engineers shall arrive at the spot within three (3) working days (eight working hours to count as one working day) Repair cost is for the account of Licensor if the breakdown is directly or indirectly caused by Licensor (including but not limited to problems of licensed Program, problems of upgrade version or failure of licensor to fully perform its obligations under Article 6 herein) and for the account of Licensee if directly or indirectly caused by Licensee (problems of game server hardware and OS, IDC problems, substantial mistakes of operation). 6.8 (Urgent Action by Licensee) In the event of any failure by Licensor to fully perform its obligations under this Article 6 or to fully settle any problem occurring in the operation and service of Licensed Program, Licensee shall be entitled to take urgent action to maintain its operation and service of Licensed Program. The reasonable cost and expense related to such urgent action shall be borne by Licensee as service provider, but if Licensor decide to adopt the system from Licensee or the third party, the reasonable costs and expenses related to adopting the system shall be borne by licensor as game developer. Also these urgent actions and/or the estimation of such costs and expenses shall be notified to Licensor prior to the actual urgent action. 6.9 (Expenses) In the event Licensor's personnel must travel to perform maintenance or on-site technical assistance, licensee shall reimburse Licensor for any reasonable out-of-pocket expenses incurred, including travel to and from Licensee's sites. Meals and shipping, as may be necessary in connection with duties performed under Sections 6.1, 6.4 and 6.5 by Licensor provided that Licensee has pre-approved such expenses and the licensor shall provide relevant evidence of such expenses. Section 7 Training 7.1 (Training) On Licensee's request, licensor will provide training to Licensee's personnel for the licensed Program. Training will be in the areas of engineering, use and maintenance of the Licensed Program, operations, sales and marketing. Training will be conducted at times mutually agreeable to licensor and Licensee. 7.2 (Expenses) Licensee will reimburse Licensor for any reasonable out-of-pocket expenses incurred, including travel to and from licensee's sites, lodging meals and shipping in the event that Licensor provides the Training at Licensee's premises. Section 8 Responsibilities of Licensee 8.1 Licensee is responsible for the following actions: (a) Procuring and operating server computers and operating systems to run the Game Server Software in accordance with the specifications; (b) Establishing adequate operational back-up provisions to protect against data loss and/or a defect or malfunction that render the Server non-operational. (c) Exercising its best efforts in distributing, advertising, promoting, marketing the Client Software and the Game Service; and (d) Selling the Client Software and Points Cards either to wholesalers or to retailers Licensee reasonably regard as legitimate for resale and distribution to the Subscribers; 8.2 In order to fulfill the responsibilities specified above, Licensee shall provide Licensor with master business plan which includes, without limitation, information as to the marketing plan and sales channel deployment plan. Section 9 Ownership of Intellectual Property 9.1 (Ownership) Except otherwise provided in Section 9.2 below, licensee acknowledges that rights to Intellectual Property in relation to the Licensed Program, all Improvements thereof and Licensed Materials shall be and remain the exclusive property of Licensor whether or not specifically recognized or registered under applicable law, provided that any Intellectual Property in any Improvements and derivative works of the Licensed Program and the Licensed Materials that Licensee independently develops shall be the authorization of reprocessed outputs which occur from above and shall be of both parties' joint ownership. Except otherwise provided in Section 9.2 below, Licensee will not, during or after the term of this Agreement, claim any right, title, interest in any of the Licensor's rights to Intellectual Property. 9.2 (Licensee's right) Licensor hereby acknowledges that all and any copyrights in relation to any simply Chinese version of the Licensed Program as well as all Improvements thereof shall belong to and shall remain vested in Licensee during the term hereof. Licensee will be responsible for the registration with the relevant PRC authorities of the copyrights described in the immediately preceding sentence. Upon the termination of this Agreement, licensee shall no longer hold the said copyrights, which shall be reverted to Licensor after both parties' going through all necessary copyrights transfer procedures required under the relevant PRC laws. 9.3 (Licensee's Obligation) Without prejudice to Section 9.2 above, Licensee shall not, and it shall not cause or assist any third party to register or attempt to register in its own name or otherwise, any of the Licensor's Marks and Game Title owned by or associated with Licensor or any similar forms of Marks and Game Title. 9.4 (Ownership of User's Database) Licensor and Licensee own the rights to user's database and billing database. 9.5 (Reverse Engineering) Subject to section 2.5 herein, Licensee shall not decompile, reverse engineer or otherwise attempt to derive or modify the Licensed Program including the Source Code thereof. Licensee shall not merge the Licensed Program with another software program. 9.6 (Grant-back) Licensee grants to Licensor a nonexclusive, royalty-free perpetual license for the term of this Agreement to all Improvements and derivative works of the Licensed Program and the Licensed Materials that Licensee independently develops. 9.7 (Copyright and Trademark Notices) Licensee shall assure that all Licensed Program and Licensed Materials sold and distributed by Licensee will include copyright and trademark notices. Such notices shall (i) be affixed in a prominent location on the media, in the Licensed Materials on the media packaging, and, if applicable, in a readable file in the code, and (ii) appear on at least one display screen for at least two seconds during execution of the Licensed Program. Section 10 Representations and Warranties 10.1 (Warranty of licensor) Licensor hereby represents and warrants: (a) that it has the sufficient right, title, power and interest in the licensed Program and licensed Materials to enter this Agreement and has full abilities to bear the obligations hereunder (b) that - its execution, delivery or performance of this Agreement is not in infringement of any legitimate rights or interests of any third party; (c) that it is not aware of any infringement of Intellectual Property Rights relating to Licensed Programs or Licensed Materials by any third party in the Territory that may adversely affect the commercial application of such licensed Programs or licensed Materials by licensee; (d) that it is not aware of any claims or proceedings against it, either present or prospective with respect to the infringement of any third party's software license and intellectual property rights; (e) that it has capabilities to reasonably develop and support licensed Programs in according to the developing plans attached hereto as Exhibit (F); (i) that Licensed Program provided by it shall be in accordance with the technical standards agreed by the parties and readable to be developed continuously for the purpose of normal use of the final customers in the valid term of their purchases; (g) that Licensed Program, to the extent commercially reasonable, withstands normal, common, ordinary or constantly occurred abnormality, disconnection or flaws in its operating environment for normal use or application. (h) that licensee will enjoy the sole service and operation right of licensed Program upon this Agreement taking effect; 10.2 (Warranty of licensee) Licensee hereby represents and warrants: (a) that it has the full power and authorization to execute this Agreement and has full abilities to bear the obligations hereunder; (b) that to the best knowledge of licensee, either in performing this Agreement nor in accomplishing the transactions hereunder shall licensee violate present effective laws and regulations of PRC or violate other contracts, arrangements or conventions with respect to the other party that may cause adverse legal consequences to licensee; (c) that licensee shall comply with all laws, regulations, rules and provisions of PRC with respect to the use, maintenance, market development and promotion of Licensed Program; (d) that to the best knowledge of licensee, there should be no problem under the relevant regulations and laws of the People's Republic of China in making payments of all Exclusive license Fees, Royalties and other payments to licensor in United States dollars; and (e) licensee will make best efforts to continuously develop markets and organize advertising and promoting activities for the sales of licensed Program in Territory in various manners, provided that Licensee is entitled to organize promoting activities through posters, advertisements and any other means of promotion (it may not use such promoting materials for purposes other than promotion) and licensor provides necessary information of markets, public responses, advertisements and promotions concerning licensed Program. Section 11 Confidential Information 11.1 Confidential Information belonging to licensor includes, without limitation, the licensed Program, the Source Code thereof, and the licensed Materials. For avoidance of doubt, the Source Code obtained by licensee from any third party, is the confidential information of Licensor. 11.2 Both parties undertake not to divulge customer codes and server codes of licensed Program as well as copies thereof to Territory and shall be liable for indemnifying to the other party for the losses due to such divulge. 11.3 Confidential Information and physical embodiments thereof received by either party (the "Receiving Party") from the other party (the "Disclosing Party") during the term of this Agreement are confidential to and are and will remain the sole and exclusive all times, both during the term of this Agreement and after its termination, the Receiving Party shall hold all Confidential Information of the Disclosing Party in confidence, and will not use, copy or disclose such Confidential information or any physical embodiments thereof (except as permitted by this Agreement), or cause any of the Confidential Information to lose its character as confidential Information. 11.4 Within thirty (30) days after the termination or this Agreement, the Receiving Party shall deliver to the Disclosing Party all Confidential Information belonging to the Disclosing Party, and all physical embodiments thereof, then in the custody, control or possession of the Receiving Party. Section 12 Indemnity 12.1 Either party hereto shall immediately notify Licensor if it becomes aware of (i) any threatened or actual liability claim by a third party relating to the Licensed Program and (ii) any unauthorized use in the Territory of the Licensed Program and Licensed Materials or breach of Licensor's rights to Intellectual Property therein. 12.2 Licensor shall take all necessary actions at its own costs to defend Licensee and indemnify Licensee from and against any damages, liabilities, costs and expenses arising out of any claim, suit, investigation or any other proceedings in which the Licensed Program is alleged to infringes a valid copyright, trade secret or other intellectual property right of a third party, PROVIDED THAT Licensee gives Licensor prompt, written notice of any such claim and all reasonable cooperation, information and assistance to defend such claim. Licensor shall have sole control and authority with respect to the defense, settlement, or compromise thereof, PROVIDED THAT a written notice of such defense settlement or compromise shall be given prior to the they are actual made and such defense, settlement or compromise shall in no event cause any substantial damages to Licensee. Licensee may appear in such action with counsel of its choice, at its own expense. 12.3 Licensor shall have no liability or obligation to Licensee under Section 12.2 if such claims, damages, and liabilities solely and exclusively result from (i) Licensees breach of any term of this Agreement, (ii) Licensee's unauthorized use of the Licensed Program, or (iii) modifications, alterations, or enhancements of the Licensed Program, which are not created by Licensor. 12.4 Subject to Section 10.1 (vii), Licensor shall be not responsible for the system operating errors solely and exclusively due to the causes as follows: (a) servers of the Licensee can not run normally, including the abnormal running of hardware, operation systems and application software other than Licensed Program; (b) abnormal' running of Licensed Program due to the delay or disconnection of net, including the abnormal service due to the abnormal running of the net at the servers, office LAN and IDC; (c) system suspension caused by necessary system update and maintenance; and (d) other reasons of force majeure. 12.5 Subject to Section 10.1 (vii), Licensor is not responsible for the liabilities of the abnormal running of the Licensed Program due to the operating faults of the staff of licensee (for which evidences are needed from Licensor. Section 13 Terms and Termination 13.1 This Agreement enters into effect on the date upon the later of (i) execution of this Agreement by the Licensor and the Licensee, or (ii) approval of this Agreement by relevant governmental authorities of the People's Republic of China. The effective term of this Agreement shall be two (2) years commencing from the date on which this Agreement takes effect. 13.2 The parties may terminate this Agreement by mutual consent upon such terms as they may agree in writing. 13.3 If one party breaches any material provision of this Agreement, the non-breaching party may terminate this Agreement by giving fifteen (15) days written notice of termination to the breaching party. If the breach is capable of being cured and the other party acts diligently and continuously to cure such breach, within the fifteen (15) days, the termination shall not become effective. 13.4 In addition to the above Section 13.3, Licensor may immediately terminate this Agreement by giving fifteen (15) days written notice to licensee: . (a) if Royalties and Exclusive License Fee payments due to Licensor under Section 3, or any part thereof, become sixty (60) days or more overdue; (b) if the confidentiality provisions contained in Section 11 are breached by Licensee with manifest evidence; if the Game Service in the Territory is stopped, suspended, discontinued or disrupted for more than forty five (45) days in total during the term of this Agreement due to causes solely exclusively attributable to Licensee. 13.5 In addition to the above Section 13.3, Licensee may immediately terminate this Agreement by giving fifteen (15) days written notice to Licensor: (a) if the confidentiality provisions contained in Section 11 are breached by Licensor with manifest evidence; (b) if any obligation of Licensor under Section 6 herein is not fully performed by Licensor; (c) if the Game Service in the Territory is stopped, suspended, discontinued or disputed for more than ninety (90) days in total during the term of this Agreement due to causes solely and exclusively attributable to Licensor. 13.6 (Bankruptcy) In the event that either party or its creditor is under wind-up, bankruptcy, ;liquidation, restructuring, dissolution or at a compulsive status, or such party is unable to pay for the due debts or any apparent or secret debts due (excluding of those with good credit), or if the creditor of such party has received the management power upon n or the banks and other financial institutions of such party have terminated their accounting preferential treatments for it, then the other party may adopt one or more of the following measures: (a) suspend its corresponding performance of obligations until the other party has fully performed its obligations; (b) terminate this Agreement; (c) claim for compensation for relevant loss, damage or expenses from the other party; (d) pursue consultation with the breaching party for settlement of any relevant disputes or directly seeking arbitration of the same dispute; and/or (e) take such other measures or remedies as permissible under applicable laws. 13.7 (Force Majeure) The obligations of the parties under this Agreement shall be suspended to the extent a party is hindered or prevented from complying therewith because if labor disturbances, including strikes or lockouts, wars, act of God, fires, storms, flood, epidemic, accidents, governmental regulations, failure of telecommunications vendors or suppliers, banking system breakdown, or any other cause whatsoever beyond a party's reasonable control. For so long as such circumstances prevail. the party whose performance is delayed or hindered shall seek to mitigate the effect of force majeure and continue to use all commercially reasonable efforts to recommence performance without delay. If the effect of force majeure lasts for over ten (10) weeks the parties to this Agreement shall negotiate to resolve relevant issues and possibly terminate this Agreement. 13.8 (Extension) Unless the Agreement is terminated during the period pursuant to Clause 13.1, the Agreement shall be extended for one (1) year with the same terms herein by the mutual agreement between Licensor and Licensee sixty (60) days prior to the expiration of this Agreement. (Licensor shall grant priority to the Licensee upon negotiation of the Agreement when the Licensee's terms and conditions are identical to those of other candidates.) Section 14 Effects of Termination 14.1 Upon termination or expiration of this Agreement, Licensee shall have no further right to use, copy. duplicate. modify, enhance, create derivative works of, or sell and distribute the Licensed Program and licensed Materials. 14.2 Upon termination or expiration of this Agreement for any reason, all rights, licenses granted to Licensee hereunder shall terminate and revert immediately to Licensor: and Licensee shall immediately cease using the licensed Marks and the Game Title.". 14.3 In the event of termination or expiration of this "Agreement", Licensee shall, according to the written instruction of Licensor immediately (i) return to Licensor all Gold Master CD duplication disks together with all copies of the Licensed Materials, and all other materials associated; and (ii) destroy all copies of improvements and certify in writing to the Licensor to that effect. 14.4 In the event of termination or expiration of this Agreement, Licensee may stop paying for Exclusive License Fees and Royalty Fees hereunder, provided that it shall payoff all unpaid amounts payable pursuant to the provisions herein. 14.5 Licensor shall have no liability to Licensee for damages of any kind. including indirect, incidental or consequential damages, on account of the termination or expiration of this Agreement in accordance with its terms. Without limiting the generality of the foregoing, licensor shall not 00- liable to Licensee for reimbursement or damages for the loss of goodwill, prospective profits or anticipated sales, or on account of any sales, or on account of any expenditures, investment, leases or commitments made by licensee or for any other reason whatsoever based upon, or growing out of, such termination or expiration. 14.6 Unless that the relevant parties have issued written declaration of waiver, the termination or expiration of the Agreement may not affect the antecedent rights and obligations of both parties already generated. 14.7 Subject to provisions otherwise provides herein, neither party hereto shall have any liability to the other party for damages of any kind, including indirect, incidental or consequential damages, on account of the termination or expiration of this Agreement in accordance with its terms. Without limiting the generality of the foregoing, neither party shall not be liable to the other party for reimbursement or damages for the loss of goodwill, prospective profits or anticipated sales, or on account of any sales, or on account of any expenditures, investment, leases or commitments made thereby or for any other reason whatsoever based upon, or growing out of, such termination or expiration. Section 15 Government Approval 15.1 It shall be the responsibility of Licensee to obtain promptly from the proper authorities in the People's. Republic of China any required governmental approval of this Agreement. This Agreement shall not take effect until such approval is obtained on terms and conditions acceptable to Licensor. Licensee shall inform Licensor immediately of the date of such approval. 15.2 Licensor may terminate this Agreement by written notice to Licensee if the Government of the People's Republic of China does not approve it as contemplated in Section 15.1 within six (6) months from the date of its execution. Section 16 Dispute Resolution 16.1 (Arbitration) All disputes, controversies or differences which may arise between the parties, out of or in relation to or in connection with this Agreement, or for the breach thereof, shall be finally settled by arbitration in Singapore in accordance with the Commercial Arbitration Rules of the Singaporean Commercial Arbitration Board and under the laws of Singapore. The award rendered by the arbitrator(s) shall be final and binding upon both parties concerned. 16.2 (Governing laws) The construction, validity, performance and effect of this Agreement shall be governed by the laws of Singapore. Section 17 Miscellaneous 17.1 (Notice) Any notices relating to this Agreement shall be in writing and other personally delivered or sent by certified mail, postage prepaid, return receipt requested, or by facsimile transmission or overnight courier service, addressed to the party at the address set force below, or at has advised to the other party in writing and shall be deemed given an received when actually receive: Shanghai T2 Entertainment Co., Ltd. 12A, Civil Defense Building, 593 Fu Xin Middle Road, Shanghai, China Attn: Wang Ji JC Entertainment Corp. . 41h Floor Rosedale Building, #724 Suseo-Dong, Kangnam-Ku, Seoul 135-885, Korea Attn: IS Baik 17.2 No Change of address shall be binding upon the other party hereto until written notice thereof is received by such party at the address shown herein. All notices shall be in English and shall be effective upon receipt. 17.3 (Entire Agreement) This Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matter contained herein. All prior negotiation, representation, representations, agreements and understandings, oral or otherwise, are merged into this Agreement. The parties may, from time to time during the continuance of this Agreement, modify, vary or alter any of the provisions of this Agreement, but only by an instrument duly executed by authorized representatives of both parties hereto. 17.4 (Modification) If either party desires to modify this Agreement, the parties shall, upon reasonable notice of the proposed modification by the party desiring the change, confer in good faith to determine the desirability of such modification. No modification will be effective until a written amendment is duly signed by authorized representatives of both parties hereto. 17.5 (Severability) In the event one or more of the provisions of this Agreement are found to be in valid, illegal or unenforceable by a court with jurisdiction or by panel of arbitrators, the remaining provisions shall continue in full force and effect. 17.6 (No Waiver) The waiver by either party of a breach or a default party of a breach or a default of any provision of this Agreement by the other party shall not be construed as a waiver of any succeeding breach of the same or any other provision, nor shall any delay or omission on the part of either party to exercise or avail itself of any right, power or privilege that it has, or may have hereunder operate as a waiver of any right power or privilege by such party. 17. 7 (Relationship between the Parties) The relationship between the parties is that of independent contractors. Nothing contained in this Agreement shall be deemed to imply or constitute either party as the agent or representative of the other party, or both parties as joint ventures or partners for any purpose. Each party has the right and authority to make any statement or undertaking (whether apparent or implied) or propose obligations on behalf of the other party, or bind the other party to perform solely in accordance with the manners provided in the Agreement. 17.8 (Further Cooperation) If Licensor searches cooperative operation partner for its follow-up versions of License Program in the future. Licensee has priority if Licensee's conditions are at least the same or similar with or comparable to those of third parties who want to acquire the license of the follow-up version. 17.9 (Headings) Captions and headings contained in this Agreement have been included for ease of reference and convenience and shall not be considered in. 17.10 (Assignment) without written consents of Licensee, the rights or obligations of Licensor hereunder may not be transferred to any third party. 17.11 (Counterpart) This Agreement is made of four (4) copies (two in Chinese and two in English) and each party holds two of them. The exhibits attached hereto are the indivisible component of the Agreement with equal Legal effects to the Agreement. If any dispute occurs, legal construction will set on the basis of the English contract. This contract clause with Written English contract in standard, it has the effect. [Execution Page] JC Entertainment Corporation Shanghai T2 Entertainment Co, Ltd. Name: /s/ Yang Shin Kim Name: /s/ Wang Ji -------------------- ----------------- Signature: /s/ Yang Shin Kim Signature: /s/ Wang Ji ------------------- ----------------- Date: 10/10/04 Date: 10/10/04 -------------------- ----------------- EX-10 6 f1ex102aug05.txt 10.2 EXHIBIT 10.2 EXCLUSIVE SOFTWARE LICENSE AGREEMENT (GAME TITLE: Shenmue Online) AMONG SEGA CORPORATION AND JC ENTERTAINMENT CORPORATION AND SHANGHAI T2 ENTERTAINMENT CO. LTD. INTERNET GAME LICENSE AGREEMENT THIS SOFTWARE LICENSE AGREEMENT (the "Agreement") is entered into as of October 15, 2004 (the "Effective Date") by and among SEGA CORPORATION, a corporation organized under the laws of Japan ("SEGA"); SHANGHAI T2 ENTERTAINMENT CO., LTD. a corporation organized under the laws of The People's Republic of China ("PRC," and such corporation, T2") and JC ENTERTAINMENT CORPORATION, a corporation organized under the laws of Republic of Korea, ("JCE"). RECITALS WHEREAS, SEGA and JCE are engaged in the production, development, marketing, and servicing of the Licensed Software (as defined below). WHEREAS, T2 among other things, markets, operates, distributes and publishes internet games in the Territory as (as defined below). WHEREAS, T2 desires the exclusive license, the Operation Right (as defined below) and the Technical Support (as defined below) of the Licensed Software in the Territory (as defined below) during the Term (as defined below). WHEREAS, SEGA desires to grant the license and Operation Right of the Licensed Software to T2. WHEREAS, JCE, among other things, desires to provide Technical Support of the Licensed Software to T2. THEREFORE, in consideration of the promises, agreements, covenants, representations and warranties contained herein, and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, SEGA, JCE and T2 hereby agree as follows. 1 CERTAIN DEFINITIONS For purposes of this Agreement, the following terms have the indicated meanings: 1.1 "Closed Beta Test" shall mean game tests conducted internally by T2 or externally with a limited number of users, in either case with restricted access and user registration, for the purpose of identifying and fixing bugs and/or stabilizing the game system in the Territory. 1.2 "Commercial Launch Date" shall mean the date in which the Licensed Software is commercially launched by T2. 1.3 "Game" shall mean the Internet-based game known as "Shenmue Online," which can be played by Subscribers who have installed the Client Software on their personal computers and can access the Server Software via the Internet. 1.4 "Gross Revenues" mean the revenues paid or payable (subject to Section 7.7) to T2 arising from or relating to the marketing, promotion, use, distribution, publishing or selling of the Licensed Software by T2 (calculated as per the reports produced by the Billing Server and with deduction of distribution costs actually incurred under specific distribution agreements entered into between T2 and specific distributors and in an amount not exceeding in any given calendar month thirty-five percent (35%) of the total revenues for such month), including, without limitation, revenues relating to: (i) any type or form of prepaid cards sold to end users either by on-line or off-line methods for the use of the Licensed Software, and/or (ii) CDs containing the Licensed Software sold to end users. Gross Revenues do not include any such prepaid cards or CDs distributed free of charge. 1.5 "Intellectual Property Rights" mean, on a worldwide basis, any and all now known or hereafter known tangible and intangible: (a) rights associated with works of authorship including, without limitation, copyrights, moral rights and mask-works, (b) rights associated with trademarks, service marks, trade names or similar rights, (c) trade secret rights, (d) patents, designs, algorithms and other industrial property rights, (e) all other intellectual and industrial property rights of every kind and nature and however designated, whether arising by operation of law, contract, license or otherwise (f) all registrations, applications, renewals, extensions, continuations, divisions or reissues thereof now or hereafter existing, made, or in force (including any rights in any of the foregoing), and (g) any and all causes of action arising from or related to any of the foregoing. 1.6 "Licensed Software" shall mean the object code version of any and all available versions of the following computer software components of the Game, in Mandarin Chinese (using simplified characters) only: 1.6.1 Server software which is designed to be installed onto commercial servers connected to the Internet to enable Subscribers to access the Game in Mandarin Chinese (using simplified characters) via the Client Software (the "Server Software") 1.6.2 Client software which is designed to be installed onto subscribers' personal computers to enable Subscribers to play the Game in Mandarin Chinese (using simplified characters) by accessing the Server Software via the Internet (the "Client Software"). 1.6.3 Patches and Upgrade Versions to software described in Sections 1.7.1 and 1.7.2 1.7 "Open Beta Test" shall mean game tests conducted externally with users on a generally accessible basis, for the purpose of identifying and fixing bugs and/or stabilizing the game system in the Territory. 1.8 "Operation Right" shall mean the following rights with respect to the Licensed Software: 1.8.1 The rights to market, promote, display, use, distribute, publish and sell the Client Software in the Territory; and 1.8.2 The rights to use, install, test, and run the Server Software to make the Game in Mandarin Chinese (using simplified characters) available to Subscribers in the Territory. 1.9 "Patches" shall mean the computer software designed to be installed on computers on which Licensed Software has been installed in order to modify, enhance or improve such Licensed Software. 1.10 "Subscribers" shall mean the end users of the Licensed Software who initiate their use thereof within the Territory from T2. 1.11 "Subscriber Agreement" shall mean the agreement into which each Subscriber must enter with T2 before T2 allows the Subscriber to use the Licensed Software. The Subscriber Agreement shall be subject to SEGA's approval, which approval shall not be unreasonably withheld or delayed. 1.12 "Technical Support" shall mean the following services with respect to the Licensed Software: 1.12.1 Providing training services and help documentation about the installation, testing, and maintenance of the Licensed Software. 1.12.2 Providing solutions to resolve any unexpected problems, such as errors, bugs, and downgraded performance, in the systems which the Licensed Software are installed. 1.12.3 Providing technical services in preventing and resisting hacking or cracking of any Licensed Software. 1.13 "Territory" shall mean the geographical territory of the People's Republic of China ("PRC"), excluding the Hong Kong Special Administrative Region, the Macao Special Administrative Region, and Taiwan. 1.14 "Closed Beta Version" means a version of the Licensed Software in which (a) the localization and translation thereof is substantially complete; (b) the functionality and performance is complete (i.e., the coding of all functions and features (including, without limitation, all artwork, graphics, animation, images, photographs, video and other audio-visual material, sound, music and text and all essential and non-essential data and device files) is completed and material programming errors or "bugs" have been eliminated; (c) such version operates hardware having the specifications specified by SEGA from time to time and required for the full use of the Licensed Software; and (d) such version is ready to be launched for a Closed Beta Test. 1.15 "Open Beta Version" means a version of the Licensed Software in which (a) the localization and translation therefore is complete; (b) the functionality and performance is complete (i.e., the coding of all functions and features (including, without limitation, all artwork, graphics, animation, images, photographs, video and other audio-visual and material programming errors or "bugs" have been eliminated; (c) such version operates hardware having the specifications specified by SEGA from time to time and required for the full use of the Licensed Software; and (d) such version is ready to be launched for an Open Beta Test. 1.16 "Commercial Version" means a version of the Licensed Software in which (a) the localization and translation therefore is complete; (b) the functionality and performance is complete (i.e., the coding of all functions and features (including, without limitation, all artwork, graphics, animation, images, photographs, video and other audio-visual material, sound, music and text and all essential and non-essential data and device files); (c) such version operates hardware having the specifications specified by SEGA from time to time and required for the full use of the Licensed Software; and (d) such version is ready to be commercially released. 1.17 "Upgrade Versions" shall mean modified versions of the Licensed Software that contain changes or new functionality and contents, which are similar to the storyline, cast and theme of the Licensed Software. 1.18 "Marks" shall mean trademarks, service marks, trade and business names, logos, slogans, characters, or other properties, whether registered or not, which are used on or in association with the Licensed Software. 2 TERM 2.1 Term. The term of this Agreement shall commence on the Effective Date and shall continue through and until the date that is three (3) years thereafter (the "Initial Term"), unless terminated earlier in accordance with Section 12 below. This Agreement shall automatically be extended for one (1) additional year if none of the parties gives notice of termination of this Agreement at least one (1) month before the expiration of the Initial Term. Collectively, the Initial Term and such additional one (1) year period (if applicable), shall be referred to in this Agreement as the "Term." 2.2 No Renewal. Except as may be expressly set forth in this Agreement, none of the parties shall be under any obligation to renew or extend the operation of this Agreement or to enter into any new agreement with nay other party following the expiration or earlier termination of the Term. None of the parties shall be under any obligation of any kind whatsoever to any other party by reason of any failure or refusal to renew or extend the operation of this Agreement or to enter into any new agreement with any other party, following the expiration of the Term. Notwithstanding the foregoing, if during the one (1) months immediately following the expiration of this Agreement, SEGA, in its sole discretion, offers any third party in the Territory a license to the Licensed Software for use in the Territory, T2 shall have a right of first refusal to obtain an exclusive license to the Licensed Software for use in the Territory pursuant to terms and conditions identical to those offered by SEGA to such third party in the Territory. If T2 fails to indicate in writing that it has elected to exercise such right of first refusal within fifteen (15) days of receiving notice from SEGA of any such offer to any third party in the Territory during such one (1) month period, T2 shall be deemed to have declined to exercise such right of first refusal. 3 GRANT OF RIGHTS 3.1 Grant. In accordance with and subject to the terms and conditions of this Agreement, SEGA hereby grants to T2, and T2 hereby accepts and agrees to exercise, the exclusive, non-transferable license to exercise the Operation Rights in the Territory during the Term. Notwithstanding anything to the contrary set forth in this Agreement, T2 will not distribute, sell, license or otherwise make available the Licensed Software to any party outside of the Territory, or under circumstances where T2 knows, or in the exercise of prudent business judgment should know, that such activity ultimately will result in the use of the Licensed Software outside of the Territory. 3.2 No Third Party Rights. Except as otherwise expressly set forth in this Agreement, T2 shall directly exercise the rights and licenses granted to it under this Agreement and shall not allow or permit any third party to exercise such rights on T2's behalf without SEGA's prior written approval, which approval shall not be unreasonably denied by SEGA as to controlled affiliates of T2 to the extent that the marketing and operation of the Licensed Software in accordance with this Agreement requires that such permission be granted by T2 to such controlled affiliates. T2 shall require any third party (including, without limitation, any such controlled affiliate of T2) that is approved by SEGA to exercise any such rights on behalf of T2 to execute a written sublicense agreement acceptable to SEGA in form and substance as a precondition to such third party's exercise any such rights, and T2 shall be liable for any and all acts or omissions of any such third party arising our of or relating to this Agreement or such sublicense agreement. Each such third party obtaining a sublicense from T2 shall strictly conform to the terms and conditions set forth in this Agreement with regard to the Licensed Software. T2 shall not be required to make any additional payment or compensation to SEGA beyond that set forth in this Agreement in order to grant any such sublicense in accordance with this Section 3.2 and T2 shall not receive any compensation or payments form any such sublicense as consideration for granting any such sublicense. 3.3 No Right to Reproduce, Modify or Reverse Engineer. T2 agrees that it shall not, and shall not permit or assist any other party to, copy, modify or adapt all or any part of the Licensed Software, except as may be expressly and clearly permitted by this Agreement. T2 agrees that it shall not, and shall not permit or assist any other party to disassemble, decompile, reverse assemble, reverse engineer or otherwise attempt to recreate the source code or extract any trade secrets from the Licensed Software without SEGA's prior written approval. Without limiting the materiality of any other term of this Agreement, the failure of T2 to comply with any provision of this Section shall be considered a material breach of this Agreement by T2. 3.4 License and Operation Rights Only. This Agreement only grants to T2 a license to use the Server Software and to transfer units of the Client Software to Subscribers and does not transfer any right, title, or interest in or to any of the Licensed Software to T2. Notwithstanding any "purchase" or "sale" or similar language contained herein, T2 acknowledges that the Licensed Software is licensed as indicated in this Section. 3.5 Use of Marks. Subject to the terms and conditions set forth in this Agreement, SEGA grants to T2 during the term of this Agreement an exclusive, nontransferable, and royalty free right to use the Marks and the Game title for the purpose of promoting, marketing and operating the Licensed Software in the Territory in a style and manner approved by SEGA in writing prior to such use. 3.6 Modification to Licensed Software. Without SEGA's prior written approval, T2 shall not make, or permit any third party to make, any modification or revision of or to any portion of the Licensed Software in the Territory, or in urgent situations, T2 may request in writing permission from SEGA to modify or revise certain aspects of the Licensed Software. SEGA shall respond in writing to any such request within five (5) working days of SEGA's receipt of the request. If SEGA fails to respond to any such request within such five (5) working day period, the request shall be deemed approved. Any approval by SEGA of a requested modification or revision, whether actual or deemed, will be valid only for a period of thirty (30) days from the date of such approval. If the approved modification or revision is not completed within such thirty (30) day period, it shall be treated as a new modification or revision for which approval must again be obtained from SEGA as set forth in this Section 3.6. The specific plan and schedule for the development of any approved modification or revision shall be determined through consultation and agreement by SEGA and T2. If SEGA provides T2 at any time with a patch or Upgrade that substantially performs the function of any such approved modification or revision, T2 shall promptly implement such Patch or Upgrade and cease using such modification or revision. If at any time T2 makes any modification or revision of the Licensed Software, neither SEGA nor JCE shall thereafter bear any liability to T2 with respect to the modified or revised Licensed Software, including, without limitation, any obligation to provide services with respect thereto pursuant to Section 8. The immediately foregoing sentence shall not affect SEGA's or JCE's obligations with respect to the unmodified Licensed Software, including if, after making a modification or revision to the Licensed Software, T2 subsequently completely de-installs all copies of such modified or revised Licensed Software, and re-installs the unmodified Licensed Software in the form provided by SEGA to T2. 3.7 Reserved Rights. Any and all rights not specifically and expressly granted by SEGA to T2 under this Agreement are hereby reserved by SEGA. 4 COMMUNICATION 4.1 Regular Meetings. T2, SEGA and JCE shall meet regularly (i.e., ------------------ at least once per calendar month) during the Term to discuss development, marketing and maintenance objectives, strategy, and activities for the Licensed Software in the Territory (the "Regular Meetings"). 4.2 Project Manager. At all times during the Term, T2, SEGA, and JCE shall each provide a designated individual employee as "Project Manager." All of the Project Managers shall be primarily (though not exclusively) dedicated to, and be fully familiar with the Licensed Software. The Project Managers shall be available on a reasonable basis during regular business hours and shall maintain continuous contact with each other. The Project Managers shall coordinate the performance by obligations of their own companies under this Agreement, and shall promptly respond to all inquiries, both oral and written, made by other Project Managers. 4.2.1 Wang Jim is hereby initially appointed by T2 and is deemed reasonably satisfactory by SEGA and JCE, as T2's Project Manager. 4.2.2 Kashiwaguchi Yukihiro is hereby initially appointed by SEGA and is deemed reasonably satisfactory by T2, as SEGA's Project Manager. 4.2.3 SEO, Jeung Wook is hereby initially appointed by JCE and is deemed reasonably satisfactory by T2, as JCE's Project Manager. 5 DEVELOPMENT 5.1 Translation Assets. SEGA shall deliver to T2 the assets needed for translation (the "Translation Assets") of the Closed Beta Version and shall deliver, in advance, the Translation Assets of other versions to T2 by at least two (2) weeks prior to launch of said version. T2 shall, at its sole cost and expense, promptly translate into Mandarin Chinese (using simplified characters) each version of the Translation Assets (or any portion thereof) provided by SEGA to T2, and then deliver the translated version of the Transaction Assets to SEGA. Upon receiving the translated version of the Translation Assets, SEGA shall promptly integrate such translated version into the Game as embodied in the License Software used in the Territory. However, if SEGA finds any errors in any translated version of any of the Translation Assets, SEGA shall return such Translation Assets to T2 and T2 shall promptly correct such errors and promptly provide SEGA with such corrected Translation Assets. T2 shall be only responsible for the accuracy and completeness of the translated version of the Translation Assets as presented to SEGA by T2. SEGA shall be responsible for the accuracy and completeness of any modification it may make to any such translated version of the Translation Assets. T2 shall not use the Translation Assets for any purpose other that the one specified in this Section. 5.2 Product Plan. SEGA and JEC shall develop a product plan for the future versions of the Licensed Software during the Term (the "Product Plan") as set forth in this Section 5.2. SEGA shall deliver the then-current Product Plan to T2 no later than twenty (20) business days after the Effective Date. Thereafter, SEGA shall deliver an up-to-date edition of the Product Plan to T2 at least five (5) business days prior to the date of each Regular Meetings during the Term. T2 may make suggestions to SEGA at the Regular Meetings to perfect the next version of the Licensed Software. SEGA shall make the final decision regarding development of the Product but when making such decision, SEGA shall give due consideration to T2's suggestions for the purpose of marketing, promotion and operation of the License Software in the Territory. 5.3 Upgraded Versions. If available and agreed by T2 and SEGA to be suitable for use in the Territory, SEGA shall deliver Upgraded Versions to T2. The upgrades and enhancements contained in each Upgraded Version shall be consistent with the Product Plans of SEGA and JCE and shall be developed in consultation with T2, provided however, that: (a) SEGA shall make all final decisions on the upgrades an enhancements that are included in each Upgraded Version along with the production thereof, giving due consideration to T2's suggestions as set forth in Section 5.2; and (b) T2 shall be responsible for translating all Translation Assets designated by SEGA for translation into Mandarin Chinese (using simplified characters) in connection with any Upgraded Version. T2 shall commercially launch each Upgrade Version within twenty (20) business days of receiving such Upgraded Version and thereafter shall only offer such Upgraded Version to Subscribers (i.e., upon installing an Upgraded Version, T2 immediately shall discontinue offering the prior versions of the Licensed Software). 5.4 Delivery. SEGA shall deliver the Licensed Software to T2 as set forth in this Agreement, to T2's place of business as set forth in Section 15.1. SEGA shall make such delivery in strict compliance with the schedule as set forth in Appendix II. The Licensed Software will be delivered in CD-ROM form, by FTP, or by such other electronic means as the SEGA and T2 may agree form time to time. 5.5 Acceptance. T2 shall, within seven (7) days following its receipt of the items specified in Appendix I, send SEGA a written notice indicating, and serving as proof of its receipt of such items. 6 MARKETING EFFORTS 6.1 Co-Marketing. T2 shall be responsible for the marketing of the licensed Software in the Territory. SEGA and JCE undertake that they shall provide reasonable assistance to T2 and/or bear expenses incurred by T2 in the process of such marketing efforts in such amount deemed as reasonable by SEGA and JCE, provided that such expenses have been approved in advance in writing by SEGA and JCE. 6.2 Marketing Commitment. T2 shall use its best efforts to vigorously and aggressively advertise, market and distribute the Licensed Software throughout the Territory and, in doing so, shall ensure that its marketing, promotion and advertising activities (collectively, "Marketing Activities") are in accordance with high quality and good taste and will be comparable to the highest quality and good taste and will be comparable to the highest quality Marketing Activities in the Territory for competitive products. T2 shall submit a marketing plan and budget to SEGA two months prior to the Closed Beta Test. SEGA shall review the marketing plan and shall either provide T2 with: (a) written approval of the marketing plan or (b) a written list of changes that shall be made before SEGA approves such a marketing plan. SEGA and T2 shall by consultation determine the aforesaid changes to be made to ensure that such changes are conductive to the marketing of the Licensed Software, reasonably within T2's capability and in compliance with any applicable laws. The aforesaid approvals shall not be unreasonably withheld by SEGA. If SEGA fails to respond to any such marketing plan and budget by providing T2 with such a written approval or written list of changes within five (5) business days after receipt of the marketing plan and budget from T2, SEGA will be deemed to have approved such marketing plan and budget. During the Term, T2 may reasonably change the monthly marketing budget and marketing activities as required by market conditions in the Territory. T2 shall submit monthly reports to SEGA indicating in reasonable detail: (i) the costs T2 has spent on marketing during the previous month and (ii) marketing activities conducted during the previous month (the "Marketing Report"). T2 shall not implement any Marketing Activities without receiving prior written approval thereof from SEGA. SEGA's approval of any Marketing Activities or marketing plan shall not constitute an opinion as to its legal appropriateness or adequacy and T2 shall be solely responsible for its implementation thereof. 6.3 Game Materials and Promotional Materials. Prior to using any material which shall be packaged and distributed with the Licensed Software in the Territory (the "Game Materials") or materials used to promote the Game and/or the Licensed Software in the Territory ("Promotional Materials"), T2 shall submit such Game Material or Promotional Material to SEGA for approval; provided, however, that no such approval shall be required for any Game Materials or Promotional Material provided to T2 by SEGA and used in unmodified form by T2 in the Territory. Within two (2) business days following receipt of any such Game material or Promotional material, SEGA shall provide T2 with either: (a) a written approval thereof; or (b) a written list of changes that must be made before SEGA would approve such Game Material or Promotional Material. SEGA and T2 shall by consultation determine the changes to be made to ensure that such changes are conductive to the marketing of the Game and the Licensed Software, reasonably within T2's capability and in compliance with any applicable laws. The aforesaid approvals shall not be unreasonably withheld by SEGA and the failure by SEGA to provide any such written approval or written list of changes within such two (2) business day period will be deemed to constitute SEGA's approval of the applicable Game Material or Promotional Material. T2 shall not implement any Game Material of Promotional Material until it has been approved by SEGA in writing. T2 agrees to use all Promotional Materials provided by SEGA to promote and market the Game and/or the Licensed Software in the Territory. SEGA's approval of any Game Material or Promotional Material shall not constitute an opinion as to its legal appropriateness or adequacy and T2 shall be solely responsible for the use thereof. T2 shall be solely responsible for the cost to recall any Game Material or Promotional Material that are not provided by SEGA. 6.4 Marketing Practices. T2 shall, with respect to the Game and the Licensed Software, (a) ensure that its marketing, promotion and advertising efforts are in accordance with high quality and good taste and will be comparable to the highest quality marketing, promotion and advertising efforts in the Territory for competitive products; (b) conduct business in a manner that reflects favorably at all times on the Game and the Licensed Software and the good name, goodwill and reputation of SEGA; (c) avoid deceptive, misleading or unethical practices that are or might be detrimental to SEGA, the Game, the Licensed Software or the public, including, but not limited to, disparagement of SEGA, the Game or the Licensed Software; (d) make no false or misleading representations with regard to SEGA, the Game or the Licensed Software; (e) not publish or employ or cooperate in the publication or employment of any misleading or deceptive advertising material; (f) include SEGA's and JCE's trademarks on all Game Materials and Promotional Materials and all copies of the Licensed Software; (g) comply with all of SEGA's and JCE's then-current trademark guidelines, as may be provided and updated from time to time by SEGA and/or JCE; and (h) make no representations, warranties or guaranties to anyone with respect to the specifications, features or capabilities of the Licensed Software that are inconsistent with the Game Materials prepared or approved by SEGA or any other literature pertaining to the Licensed Software that has been prepared and/or approved by SEGA. 6.5 Fundraisers. Without limiting any provisions of this Section 6, T2 shall not sell or otherwise provide the Licensed Software for use in fundraisers, sweepstakes or similar activities or provide Licensed Software for use as prizes, premiums or give-a-ways unless and until it obtains SEGA's prior written approval, which approval SEGA shall not unreasonably withhold. 6.6 Free Promotional Items. Without limiting any provisions of this Section 6, T2 shall not distribute any particular free promotional item unless and until it obtains SEGA's prior written approval, which approval SEGA shall not unreasonably withhold, especially with regard to those facilitating the marketing and operation of the Licensed Software. Such approval rights apply to all aspects of each free promotional item, including, without limitation: the type of item, the specifications of the item, the manner in which it will be distributed, the manner in which it will be marketed and promoted, the maximum number of units to be distributed, and similar matters. 6.7 Merchandising. SEGA and T2 acknowledge and agree that: (a) T2 desires the right and license to develop, manufacture, market, promote, distribute and sell merchandise based on the Licensed Software; and (b) the terms and conditions of such merchandising arrangement shall be set forth in a separate written agreement. 7 COMPENSATION AND PAYMENTS 7.1 License Fee. T2 shall pay SEGA a non-refundable and non-recoupable license fee equal to Three Million Dollars (USD$3,000,000) (the "License Fee"). The License Fee shall be deemed fully-accrued on the Effective Date and shall be paid in three (3) installments as follows: 7.1.1 Once T2 obtains the necessary governmental approval, and in any event no later that thirty (30) days after the Effective Date T2 shall pay SEGA the first of the three (3) installment payments, which payment shall be equal to Three Hundred Thousand Dollars (USD$300,000); 7.1.2 No later than ninety (90) days after execution of this Agreement, T2 shall pay SEGA the second of the three (3) installment payments, which payment shall be equal ton One Million Two Hundred Thousand Dollars (USD$1,200,000); 7.1.3 No later than the launch of the Open Beta Test, T2 shall pay SEGA the third of the three (3) installment payments, which payment shall be equal to One Million Five Hundred Thousand Dollars (USD$1,500,000). 7.2 Royalties. Subject to the full performance of SEGA, as payment for the rights granted by SEGA hereunder, T2 shall pay SEGA a royalty (the "Royalties") equal to thirty-three percent (33%) of all Gross Revenues commencing from the Commercial Release of the Licensed Software, the calculation of which shall be consistent with the reports produced by the Billing Server. T2 shall make all Royalty payments to SEGA no later than the last day of the calendar month following the calendar month during which the Gross Revenues are received by T2. The payment of such Royalty for a given calendar month may be deferred by T2 by three (3) months if SEGA of JCE fails to perform its obligations under Section 8.2 of this Agreement during such calendar month. 7.3 Late Payment. Any payments due hereunder and received by SEGA later than its respective due date shall bear interest at a rate equal to the basic monthly deposit interest rate of the People's Bank of China. 7.4 Payment Forms. All payments due to SEGA hereunder shall be made by wire transfer. All payments shall be made in U.S. Dollars, and, subject to Section 7.6, free of any withholding tax and of any currency control or other restriction. 7.5 Exchange Rate. Any necessary conversions of currencies of the Territory into United States Dollars with respect to any payment to be made to SEGA under this Agreement shall be performed using the exchange rates in effect on the last business day of the month immediately preceding the month in which such payment is due, as published or announced by the People's Bank of China. 7.6 Taxes. T2, on SEGA's behalf (as T2's licensor under this Agreement) shall withhold any amount required by the PRC tax authorities as a royalty tax from payments of the License Fee an Royalty by T2 to SEGA. SEGA agrees and acknowledges that as of the Effective Date SEGA is required to pay a ten percent (10%) royalty tax in the PRC on the License Fee and Royalty to the Government of the PRC, and that T2 is authorized hereunder to withhold the required amount of PRC royalty tax (i.e., ten percent (10%) as of the Effective Date) from each of the installment payments of the License Fee and each monthly running Royalty payment as set forth in Section 7.2, which withholding will reduce the net amount of each such installment payment of the License Fee and each monthly running Royalty payment until such time (if ever) as such withholding is no longer required by the taxation authorities of the PRC. T2 shall be solely responsible for payments of such PRC royalty taxes on the License Fee and Royalties hereunder to the government of the PRC, and T2 shall pay such withheld PRC royalty tax to the government of the PRC on behalf of SEGA in a timely manner, and shall promptly provide SEGA with official tax receipts issued by appropriate tax authorities. T2 shall at all times withhold and pay to the government of the PRC such PRC royalty taxes in accordance with lowest tax rate then permitted by the laws of the PRC. 7.7 Bad Accounts Confirmation. SEGA and T2 acknowledge that the normal payment cycle with respect to Client Software and prepaid cards therefore is ninety (90) days from the date of the applicable sale thereof. Any unpaid amounts for Client Software or prepaid cards is overdue for more than one hundred and eighty (180) days from date of the applicable sale shall be confirmed as bad accounts. T2 shall have the right to deduct from the Royalty Payment due for a given calendar months the accounts confirmed as bad accounts during such calendar month in an amount not to exceed, in the aggregate, three and three-tenths percent (3.3%) of the Gross Revenues for such calendar month. 7.8 Periodic Reports. In order to substantiate any Royalty payment due to SEGA, T2 shall deliver to SEGA with each Royalty payment, a report setting forth in reasonable detail: (a) the amount of Royalties paid to SEGA arising from the corresponding payment period; (b) the number of new Subscribers for the corresponding payment period; (c) the total number of Subscribers for the corresponding payment period; (d) the amount of Gross Revenues for the corresponding payment period; (e) the amount of distribution costs for the corresponding payment period; (f) the amount of any withheld PRC royalty taxes for the corresponding payment period; (g) the amount of any bad accounts recognized an uncollectible during the corresponding payment period: and (h) any other items reasonably necessary to verify the accuracy of the Royalty payment or to which SEGA and T2 otherwise agree. 7.9 Audits. T2 agrees to keep and preserve, for at least three (3) years after the expiration or earlier termination of this Agreement, accurate books, records and accounts of all transactions relating to this Agreement. T2 shall provide SEGA with quarterly audited financial reports. Commencing upon the Commercial Release of the Licensed Software, SEGA shall have the right, once every six (6) months, to have an independent auditor that is reasonably acceptable to both SEGA and T2, audit such books, records and accounts of T2 to verify T2's compliance with the terms and conditions of this Agreement. However, if SEGA and T2 cannot agree on an independent auditor within sixty (60) days, SEGA may conduct the audits itself in accordance with the provisions of this Section. Any such audit shall be conducted during the regular business hours of T2, in such a manner so as not to interfere unreasonably with the normal business activities of T2, and shall be at SEGA's expense. If such an audit reveals an underpayment of five percent (5%) or more, or any other material breach of this Agreement, T2 shall promptly pay to SEGA all costs and expenses of such audit. T2 shall promptly pay SEGA the amount of any underpayment (and correct any other noncompliance) revealed by any such audit along with interest at a rate equal to the basic monthly deposit interest rate of the People's Bank of China. 8 SERVICES 8.1 Customer Support. T2 shall maintain a presence throughout the Territory and provide high quality first level customer support to Subscribers via telephone and email services. SEGA and JCE shall provide second level customer support to T2 by providing T2's customer support representatives with telephone and email support during T2's normal business hours (Beijing local time) to answer customer service and usage-oriented questions relating to the Licensed Software and the related services. T2 shall provide SEGA and JCE with activity reports on no less than a monthly basis relating to customer service issues setting forth in reasonable detail, to the extent applicable, the type of problems encountered and the manner in which they were resolved 8.2 Technical Support. If T2 requires Technical Support consisting of fixing bugs or logical errors with regard to the Server Software during T2's operation of the Licensed Software, a written "Request of Technical Support" shall be delivered to the contract person of SEGA and/or JCE as designated by the parties. Upon receipt of such request, SEGA and/or JCE shall make an online response to such request within eight (8) business hours; in the event that such online response fails to solve the aforesaid issues and the parties determine that onsite support is necessary, SEGA and/or JCE shall send one (1) or more engineers to conduct onsite technical service within five (5) business days of the date such determination is made. In the event T2 discovers any third-party hacking activities targeting the Server Software, T2 shall submit to SEGA and/or JCE a written report, via e-mail or by facsimile, to the contact person of SEGA and/or JCE as designated by the parties, describing the nature of such activities in sufficient detail to permit SEGA and/or JCE to provide preventative measures. Upon receipt of any such written report, SEGA and/or JCE agree(s) to make an online response to the reported hacking activities within eight (8) business hours and on an urgent basis; in the event that such online response fails to solve the aforesaid issues and the parties determine that onsite support is necessary, SEGA and/or JCE shall send one (1) or more engineers to conduct onsite technical service within five (5) business days of the date such determination is made. For serious technical problems which are likely to result in substantial losses or other adverse effects to the operation of the Licensed Software of to T2, SEGA or JCE, SEGA and/or JCE shall send to T2, no less than three (3) senior technicians (including one for programming support, one for system support and one for scripting support) to solve such problems, within five (5) business days upon the receipt of T2's written request and report of such problems. 8.3 Returns. T2 shall honor all refund and exchange requests received from subscribers pursuant to the terms of this Agreement and the Subscriber Agreements. No returns shall be accepted by SEGA, and T2 shall instruct Subscribers to make all refund requests directly to T2 and no to SEGA. T2 may return any returned unit to T2's inventory if the unit is in salable condition. All returned units that are not returned to inventory shall be destroyed, and such destruction shall be attested to in a sworn affidavit signed by an officer duly authorized to bind T2. Returned units shall not affect the calculation of Gross Revenues under this Agreement. 8.4 Technical Documents. If JCE provides any Patches to T2, a written release note and test report for such Patch shall be delivered to T2. All documents delivered by T2 to JCE shall be written in Korean and Chinese. All documents delivered by JCE to T2 shall be written in Korean and Chinese. All documents exchanged between T2 and JCE and relating to technical issues should be signed by both JCE and T2. 8.5 Localization of the Technique Support. JCE shall provide training to a reasonable number of technical personnel designated by T2 according to the reasonable requirements of T2, and T2 and JCE shall be responsible for the confidentiality of the procedures and contents of such trainings with respect to their respective participants pursuant to the terms of this Agreement. T2 shall provide an office and bear the reasonable costs and expenses travel, room and board for the JCE personnel providing such training, to the extent that the travel of such JCE personnel has approved in advance in writing by T2. 8.6 Billing Server and Gaming Server System. 8.6.1Billing Server. T2 shall be responsible for authenticating and billing the Subscribers. In connections with such responsibilities, T2 shall set-up and maintain a computer server (the "Billing Server") to capture and store billing information in a billing database (the "Billing Database") and bill each Subscriber for all charges arising from such Subscriber's use of the Licensed Software. The Billing Server shall be connected to Internet and shall be capable of producing the periodic reports described above in Section 7.8 in addition to other reports. 8.6.2Gaming Server System. T2 shall install, operate, host and maintain the Licensed Software within the territory. In connection therewith, T2 shall set-up and maintain a computer server system (the "Gaming Server System" and, collectively with the Billing Server, the "Servers") that is connected to the Internet with sufficient processing speed and power, as well as telecommunications bandwidth, to support Subscribers in the Territory in accordance with the specifications provided by SEGA from time to time. The Gaming Server System shall include, without limitation, game servers, Subscriber database servers, login servers and Server Software. T2 shall ensure that the Licensed Software is generally accessible to Subscribers via the Internet in order to play the Game Twenty-four (24) hours a day, seven (7) day per week (excluding maintenance periods) throughout the Term. 8.6.3Security. T2 shall maintain the following security standards with respect to Billing Server and Gaming Server System: (a) the Billing Server and Gaming Server System shall be provided with redundant power sources that permit at least eight (8) hours of backup power, a fire protection system, and adequate cooling and ventilation; (b) T2 shall store and operate the Billing Server and Gaming Server System in an environment equipped with 24-hour onsite security and monitoring, security alarm systems, and other reasonable measures designed to protect the security and integrity thereof; and (c) T2 shall place the Billing Server and Gaming Server System behind a software and/or hardware firewall, and shall continuously monitor and maintain such firewall. 8.6.4Server Audit Rights. T2 shall provide SEGA with access to the Billing Server and Gaming Server System at all times during the Term so that SEGA can monitor all of T2's activities relating thereto. SEGA agrees that it shall not modify or duplicate any of the billing information in the Billing Database. 8.7 Permits and Certificates. T2 shall be solely responsible at T2's own cost and expense for obtaining any and all permits and certificates from the applicable authorities of the PRC or other governmental authorities in the Territory that are necessary to exercise the rights and licenses granted to T2 under this Agreement. 8.8 Notification of Claimed or Suspected Defects. T2 shall promptly notify SEGA in writing of any claimed or suspected defect in the Licensed Software no later than ten (10) days after T2 learns of the same. 8.9 Compliance with Law. T2 shall comply with all Laws that are necessary to exercise the rights and licensed granted to T2 under this Agreement, including, but not limited to, all applicable labor laws and regulations and all applicable governmental and industry codes of conduct and social accountability. 9 OWNERSHIP AND PROTECTION OF PROPRIETARY RIGHTS. 9.1 As between T2, on the one hand, and SEGA and JCE, on the other hand, SEGA and JCE retain all Intellectual Property Rights in and to the Marks, Game, Licensed Software (including, without limitation, the Closed Beta Version, the Open Beta Version and the Commercial Version), Promotional Materials, Game Materials, and all other materials provided by SEGA (including, without limitation, the Translation Assets), and T2 shall not have or acquire any right, title, or interest in the Marks, Game the Licensed Software, the Promotional Material, Game Materials or such other materials under any circumstances whatsoever, except that any Intellectual Property Rights in any part of the Licensed Software (including, without limitation, the Closed Beta Version and Open Beta Version), Promotional Materials and/or Game Materials independently created by T2 as permitted pursuant to this Agreement shall be jointly owned among SEGA, JCE and T2. T2 agrees that it shall not at any time during or after the Term assert or claim any interest in, or do anything that may adversely affect the validity or enforceability of, any Intellectual Property Right belonging to or licensed by SEGA and JCE (including any act, or assistance to any act, which may infringe or lead to the infringement of any such rights) hereunder. If T2 has or acquires any Intellectual Property Rights in or to the Licensed Software (including, without limitation, the Closed Beta Version, Open Beta Version and Commercial Version) or any Promotional Materials, Game Materials, Marks or other materials to which T2 is not entitled to joint ownership pursuant to the first sentence of this Section 9.1, T2 shall assign such Intellectual Property Rights to SEGA and/or JCE as instructed by SEGA without additional consideration. If for any reason any such Intellectual cannot be assigned to SEGA and/or JCE as provided above, T2 hereby waives such rights and the enforcement thereof without additional consideration. If such Intellectual Property Rights cannot be assigned to SEGA and/or JCE as provided above and cannot be waived, T2 hereby grants to SEGA and JCE an irrevocable, exclusive, worldwide, royalty-free license in perpetuity to exercise such intellectual Property Rights without additional consideration. 9.2 Except as expressly set forth in this Agreement, nothing herein, nor the exercise of any rights granted T2 hereunder, conveys to T2, and T2 shall not have or acquire, and shall not purport to have or acquire, any Intellectual Property Right or any other right or title to , or interest in, the Game or any part or aspect thereof (including, without limitation, the Licensed Software, the Closed Beta Version, Open Beta Version and Commercial Version) and any and all Promotional Materials and Game Materials, except for those to which T2 is entitled to joint ownership pursuant to Section 9.1). 9.3 Except as may be otherwise expressly set forth in this Agreement, T2 shall execute any and all documents and do such other acts requested at any time by SEGA and/or JCE as may be required to evidence, perfect, confirm and/or further effect the rights granted SEGA under this Agreement, including without limitation, the rights under this Section 9. In the event T2 fails to execute and deliver any such documents and instruments promptly upon request by SEGA and/or JCE, SEGA and/or JCE are hereby authorized and appointed to act as attorney-in-fact of and for T2 to make, execute and deliver any and all such documents and instruments, it being understood that such power is coupled with an interest and is therefore irrevocable. 9.4 SEGA and JCE shall provide T2 with appropriate copyright and trademark notices in SEGA's and JCE's respective names, and T2 shall place, in such manner and form as SEGA and JCE shall direct, such copyright and trademark notices on all Promotional Materials, Game Materials and copies of the Client Software. In no event shall T2 alter, remove, obscure, erase or deface or otherwise hide from view, any such notices or any other copyright, trademark or other proprietary rights notice of SEGA and/or JCE contained on or incorporated in any Licensed Software, Promotional Material or Game Material. 9.5 T2 shall not register or attempt to register, any trademark, trade name, software or other Intellectual Property Right related to the Marks, the Game, the Licensed Software (including, without limitation, the Closed Beta Version, Open Beta Version and Commercial Version), the Promotion Materials and/or the Game Materials with any public or private authority without the express and unambiguous prior written consent of SEGA and JCE, except for any Intellectual Property Rights to which T2 is expressly entitled to joint ownership pursuant to Section 9.1. T2 shall not attach any additional trademarks, logos or trade designations to the Licensed Software without SEGA's prior written approval. T2 shall not affix any SEGA or JCE trademark, logo or trade name to any non-SEGA or non-JCE product. 9.6 T2 shall promptly report to SEGA and JCE (a) any infringement of any of SEGA's and/or JCE's Intellectual Property Rights by any person or entity, (b) any infringement by any person or entity of any right granted to T2 hereunder and (c) any unauthorized copying or distribution of the Licensed Software or any component thereof by any person or entity. SEGA may, in its sole discretion, undertake to prosecute necessary actions to prevent such infringement or any unlicensed or unauthorized distribution. In the event T2 is joined in any such litigation, the respective counsels of SEGA and T2 shall cooperate with respect to matters of procedure, conduct of such litigation and/or handling thereof. 9.7 As between the parties, SEGA and JCE shall have the sole right, in their absolute discretion, to employ attorneys and to institute or defend any action or proceeding and to take any other appropriate steps to protect all rights owned or controlled by SEGA and/or JCE and all interest in and to the Licensed Software (including, without limitation, the Closed Beta Version, Open Beta Version and Commercial Version) and every portion thereof and, in that connection, to settle, compromise in good faith, or in any other manner dispose of any matter, claim action, or proceeding and to satisfy any judgment that may be rendered, in any manner as SEGA and JCE in their sole discretion may determine; provided, however, that this Section 9.7 shall not prevent T2 from employing attorneys or taking actions vis-a-vis third parties to defend or protect rights expressly granted to T2 pursuant to this Agreement. 9.8 SEGA, T2 and JCE jointly own the rights to Subscriber database and Billing Database. 9.9 The parties specifically acknowledge and agree that the provisions of this Section 9 are reasonable and necessary for the protection of SEGA's and JCE's Intellectual Property Rights and to prevent damage or loss to SEGA and JCE. T2 understands and agrees that SEGA and/or JCE may suffer irreparable harm in the event that T2 fails to comply with any of its obligations pursuant to this Section 9, and that monetary damages in such event would be substantial and inadequate to compensate SEGA and/or JCE, as the case may be. Consequently, T2 agrees that in such event SEGA and/or JCE (as the case may be) shall be entitled, in additions to such monetary relief as may be recoverable at law, to such injunctive or other equitable relief as may be necessary to restrain any threatened, continuing or further breach by T2, without showing or proving any actual damages sustained by SEGA and/or JCE, without bond. 10 CONFIDENTIAL INFORMATION 10.1 Confidential Information Defined. Any party (the "Receiving Party") may, during the performance of this Agreement, have access to and acquire knowledge form, material, data, systems and other information concerning the operation, business, financial affairs, products, customers and Intellectual Property Rights or other aspects of the other parties (the "Disclosing Parties") that may not be accessible or known to the general public (referred to herein as "Confidential Information"). "Confidential Information" also includes (a) the terms of this Agreement and the fact of its existence and (b) any information or materials that the Receiving Party obtains from any third party that the Disclosing Party treats as proprietary or designates as Confidential Information, whether or not owned by the Disclosing Party. "Confidential Information" does not include information that the Receiving Party can document in reasonable detail and to the Disclosing Party's satisfaction: (i) is know by the Receiving Party at the time of receipt from the Disclosing Party and is not subject to any other non-disclosure agreement between the parties; (ii) is now, or hereafter becomes, generally know to the industry through no fault of the Receiving Party; or (iii) is otherwise lawfully and independently developed by the Receiving Party, or lawfully acquired from a third party without any obligation of confidentiality. 10.2 No Disclosure. Any Confidential Information acquired by the Receiving Party shall not be used, published or divulged by the Receiving Party to any other person or entity in any manner whatsoever without the prior clear and express written approval of the Disclosing Party, which approval the Disclosing Party may withhold in its sole discretion. The Receiving Party shall, and shall cause its employees, agents and every other person and entity it employs in connection with its performance of this Agreement to, protect and safeguard the Confidential Information by using the same degree of care, but no less than a reasonable degree of care, to prevent the unauthorized use or disclosure of the Confidential Information as the Receiving Party uses to protect its own confidential or proprietary information of a like nature. In the event that the Receiving Party is directed to disclose any portion of any Confidential Information or any other materials proprietary to the Disclosing Party in conjunction with a governmental or judicial proceeding or arbitration, the Receiving Party shall immediately notify the Disclosing Party both orally and in writing. The Receiving Party agrees to provide the Disclosing Party with reasonable cooperation and assistance in obtaining a suitable protective order and in taking any other steps to preserve confidentiality. Upon any termination or expiration of this Agreement or upon the Disclosing Party's request, the Receiving Party shall immediately return all materials embodying Confidential Information to the Disclosing Party then in the custody, control or possession of the Receiving Party. 10.3 No Confidential Information of Other Parties. Each party represents and warrants that it shall not use in the course of its performance hereunder, and shall not disclose to the other parties, any confidential information of any third party (including competitors of SEGA or T2) unless such party is expressly authorized in writing by such third party to do so. 10.4 Publicity. Each party agrees that any press release it proposes to issue with regard to the execution of this Agreement shall be subject to the prior written consent of the other parties, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, T2 shall not directly or indirectly issue or permit the issuance of any publicity regarding, or grant any interview, or make any public statements whatsoever concerning (a) SEGA, this Agreement, or T2's services hereunder without prior coordination with and approval by SEGA, which approval shall not be unreasonably withheld or delayed, or (b) the Licensed Software without prior coordination with and approval by SEGA, which approval shall not be unreasonably withheld or delayed. 10.5 Confidentiality of Licensed Software. Without limiting the generality of the foregoing provisions of this Section 10, the parties hereby acknowledge that the Licensed Software constitutes Confidential Information of SEGA, and T2 and JCE hereby covenant that they shall keep in strict confidence any and all parts of the Licensed Software licensed to T2 by SEGA hereunder and all versions thereof in all languages, including but not limited to any source codes thereof to which T2 of JCE may obtain access, and that they shall not, directly or indirectly, disclose, or allow to be disclosed, such Licensed Software and related materials to any third party in the Territory or conduct any activity inside or outside the Territory under circumstances where either T2 or JCE knows, or in the exercise of prudent business judgment should know, that such activities may, directly or indirectly, result in the disclosure of such Licensed Software or related materials to any third party. 10.6 Specific Performance. The parties specifically acknowledge and agree that the provisions of this Section 10 are reasonable and necessary for the protection of the Confidential Information and to prevent damage or loss to the Disclosing Party. Each Receiving Party understands and agrees that the Disclosing Party may suffer irreparable harm in the event that Receiving Party fails to comply with any of its obligations pursuant to this Section 10, and that monetary damages in such event would be substantial and inadequate to compensate Disclosing Party. Consequently, Receiving Party agrees that in such event Disclosing Party shall be entitled, in addition to such monetary relief as may be recoverable at law, and to such injunctive or other equitable relief as may be necessary to restrain any threatened, continuing or further breach by Receiving Party, without showing or proving any actual damages sustained by Disclosing Party, without bond. 11 REPRESENTATIONS, WARRANTIES, LIMITATIONS AND INDEMNIFICATION. 11.1 Representations and Warranties of T2. T2 represents and warrants that (a) it has the right, power and authority to enter into this Agreement and to fully perform its obligations under this Agreement; (b) the making of this Agreement by it does not violate any agreement existing between it and any other person or entity, and throughout the Term it shall not make any agreement with any person or entity that is inconsistent with any of the provisions of this Agreement; (c) the Game Materials, Promotional Materials and any portions of the Licensed Software developed by T2 do not and will not violate or infringe upon the Intellectual Property Rights of any third party; (d) it complies, and at all times during the Term shall comply, with all applicable laws in effect at the time duties are performed under this Agreement and in all dealings with respect to the Licensed Software; (e) it is, and at all times during the Term shall be the holder of all consents necessary for it to perform its obligations hereunder; (f) it has the experience and skill to perform the services required to be performed by it hereunder; and (g) it shall perform such services in accordance with generally accepted professional standards and in an expeditious and economical manner consistent with sound professional practices. 11.2 Indemnification by T2. Except as expressly set forth in this Agreement, T2 shall, at its sole expense, indemnify, defend and hold harmless SEGA and its directors, officers, employees, agents, successors and assigns, from and against any and all claims, demands, suits, actions, proceedings, judgments, damages, costs, losses, expenses (including attorneys' fees and expenses) and other liabilities (including settlements) arising form, in connection with or related in any way to, directly or indirectly, (a) any breach or alleged breach of any of the representations or warranties made by T2 under this Agreement or of Sections 8.6.1, 8.6.2, 8.6.3 or 10; or (b) the gross negligence and/or willful misconduct to T2 (each, a "SEGA Claim"). SEGA shall promptly notify T2 of any SEGA Claim for which indemnification is sought pursuant to this Section 11.2. T2 shall bear full responsibility for all SEGA Claims; provided however, that (i) T2 shall keep SEGA informed of, and consult with SEGA in connection with the progress of each SEGA claim; and (ii) T2 shall not have any right without SEGA's written consent, to settle any SEGA Claim if such settlement arises from or is part of any criminal action, suit or proceeding or contains a stipulation to or admission or acknowledgment of, any liability or wrongdoing (whether in contract, torn or otherwise) on the part of SEGA. Notwithstanding any of the foregoing, SEGA shall have the right, in its absolute discretion, to employ attorneys of it own choice and to institute or defend any SEGA claim. 11.3 Representations and Warranties of SEGA 11.3.1 SEGA represents and warrants that, except if Advent Telecommunications, Inc. and ATGames Holdings, Ltd. (collectively, "Advent") prevail (or obtain any form of injunctive relief) in the pending litigation between Advent and SEGA described in the July 29th, 2004 letter that Mr. Junji Fujita of SEGA sent to Mr. Jim Wang of ZARVA (the "Advent Litigation"): (a) it has the right, power and authority to enter into this Agreement and (b) the making of this Agreement by it does not violate any agreement existing between it and any other person or entity; (c) it complies, and at all times during the Term shall comply, with all applicable laws in effect at the time duties are performed under this Agreement and in all dealings with respect to the Licensed Software in the Territory; (d) it is, and at all times during the Term shall be, the holder of all consents necessary for it to perform its obligations hereunder; and (e) the Game of any part of aspect thereof does no infringe upon of violate any Intellectual Property Rights of any other party in the Territory; (f) it shall provide T2 with the Licensed Software with such functions as set forth in Appendix I to this Agreement and deliver it upon such time as set forth in Appendix II hereto. 11.3.2 Except for the forgoing representations and warranties, THE GAME AND THE TRANLATION ASSETS ARE PROVIDED "AS IS." SEGA SPECIFICALLY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AS TO THE GAME OR SERVICE PROVIDED UNDER THIS AGREEMENT. 11.4 Limitation of Liability. EXCEPT WITH RESPECT TO ANY LIABILITY OF T2 PURSUANT TO SECTION 11.2 OR ANY BREACH BY T2 OF SECTION 3, SECTION 6.2, SECTION 6.3, SECTION 6.4, SECTION 7, SECTION 9, SECTION 10 OR SECTION 11, IN NO EVENT SHALL SEGA, JCE OR T2 BE LIABLE UNDER OF IN CONNECTION WITH THIS AGREEMENT FOR ANY LOSS OF PROFIT OR ANY OTHER COMMERCIAL DAMAGE, INCLUDING WITHOUT LIMITATION INCIDENTAL, CONSEQUENTIAL, SPECIAL, EXEMPLARY, PUNITIVE OR OTHER DIRECT OR INDIRECT DAMAGES OF ANY NATURE, FOR ANY REASON, INCLUDING WITHOUT LIMITATION THE BREACH OF THIS AGREEMENT, ANY EXPIRATION OR TERMINATION OF THIS AGREEMENT, CLAIMS ALLEGING THAT THE GAME OR ANY PART OR ASPECT THEREOF INFRINGES UPON OR VIOLATES ANY INTELLECTUAL PROPERTY RIGHT OF ANY PARTY OR CLAIMS ARISING FORM THE MALFUNCTION OF OR DEFECTS IN THE GAME WHETHER SUCH LIABILITY IS ASSERTED ON THE BASIS OF CONTRACT, TORT (INCLUDING NEGLIGENCE OR STRICT LIABILITY) OR OTHERWISE, EVEN IF SEGA, JCE OR T2 (AS THE CASE MAY BE) HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 11.5 Representations and Warranties of JCE JCE represents and warrants that (a) it has the right, power and authority to enter into this Agreement and to fully perform its obligations under this Agreement; (b) the making of this Agreement by it does not violate any agreement existing between it and any other person or entity, and throughout the Term it shall not make any agreement with any person or entity that is inconsistent with any of the provisions of this Agreement; (c) it complies and at all times during the Term shall comply, with all applicable Laws in effect at the time duties are performed under this Agreement and in all dealings with respect to the Licensed Software; (d) it is, and at all times during the Term shall be, the holder of all consents necessary for it to perform its obligations hereunder; (e) it has the experience and skill to perform the services required to be performed by it hereunder; and (f) it shall perform such services in accordance with generally accepted professional standards an in an expeditious and economical manner consistent with sound professional practices. 11.6 No Pass Through of Warranty Obligations SEGA DOES NOT MAKE BY VIRTUE OF THIS AGREEMENT OF THE TRANSACTIONS CONTEMPLATED HEREIN, AND SEGA HEREBY EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY TO ANY SUBSCRIBER OR OTHER THIRD PARTY, WITH RESPECT TO THE LICENSED SOFTWARE, EXCLUDING ANY WARRANTY OF NON-INFRINGEMENT. T2 SHALL NOT HAVE THE RIGHT TO MAKE OR PASS ON, AND SHALL TAKE ALL MEASURES NECESSARY TO ENSURE THAT NEITHER IT NOR ANY OF ITS EMPLOYEES OR AGENTS MAKES OR PASSES ON, OR ATTEMTS TO MAKE OR PASS ON, ANY SUCH REPRESENTATION OR WARRANTY ON BEHALF OF SEGA TO ANY SUBSCRIBER OR OTHER THIRD PARTY. 11.7 Indemnification by SEGA. SEGA shall, at its sole expense, indemnify and defend any suit or proceeding brought against T2 insofar as such suit or proceeding shall be based upon a claim in respect of (a) any of the warranties set forth in Section 11.3 hereof; (b) any breach by SEGA of Section 10 or (c) the Advent Litigation. SEGA shall pay any damages and costs finally awarded by a court against T2 as a result of such a claim, provided that; 11.7.1SEGA shall have been promptly notified of the suit or claim by T2 and provided with a copy of each communication, notice or other action relating to said claim; 11.7.2SEGA shall have the right to assume sufficient authority to conduct the trial or settlement of such claim or any negotiations related thereto at SEGA's expense; and 11.7.3T2 shall have provided SEGA with all information and assistance reasonably requested by SEGA in connection with such claim or suit. In the event that SEGA fails to deliver the Licensed Software with such functions as are set forth in Appendix I to this Agreement, or to deliver the Licensed Software upon such schedule as is set forth in Appendix II hereto, or to timely provide T2 with patches to solve bugs and/or hacking problems with material impact to the operation of the Licensed Software in accordance with SEGA's express obligations under this Agreement, SEGA shall be held liable for direct loss incurred by T2 thereby. The foregoing shall not apply, and SEGA shall have no obligations to T2 to the extent any such claim is based on (i) any use of the Licensed Software in combination with any product, equipment, software or data not manufactured or marketed by SEGA or expressly identified y SEGA as being compatible with the Licensed Software, (ii) any alteration or modification of the Licensed Software without SEGA's approval, or (iii) marketing, distribution or use of the Licensed Software after written notice that T2 should cease activity due to such claim. 11.8 Indemnification by JCE JCE shall, at its sole expense, indemnify, defend and hold harmless T2 and its directors, officers, employees, agents, successors and assigns, from ad against any and all claims, demands, suits, actions, proceedings, judgments, damages, costs, losses, expenses (including attorneys' fees and expenses) and other liabilities (including settlements) arising from, in connection with or related in any way to, directly or indirectly, its failure to fully perform its obligations under this Agreement, particularly the obligation of providing technical support and other services to T2 as set forth under Section 8 of this Agreement and its obligations set forth in Section 10 of this Agreement. 11.9 No Virus. T2 warrants that each unit of the Licensed Software, as distributed by T2, shall be free of any willfully introduced computer virus or any other similar harmful malicious or hidden program or data. 12 TERMINATION. 12.1 Termination by SEGA. Without prejudice to any other rights or remedies available to SEGA, SEGA shall have the right, in its sole discretion, to immediately terminate this Agreement upon written notice to T2 in the event of the occurrence of one or more of the following: 12.1.1T2 discontinues its Internet game marketing and distribution business; 12.1.2T2 breaches any of its material obligations under this Agreement and fails to cure such material breach within sixty (60) days of receipt of written notice from SEGA specifying the nature of such material breach; or 12.1.3T2 makes a general assignment for the benefit of creditors; applies for or consents to the appointment of a receiver, trustee or liquidator for substantially all of its assets or such a receiver, trustee or liquidator is appointed; or T2 has filed against it an involuntary petition of bankruptcy that has not been dismissed within sixty (60) days thereof, or files a voluntary petition ob bankruptcy, or a petition or answer seeking reorganization or seeks to take advantage of any other law relating to relief of debtors; or has wound up or liquidated its business. 12.2 Termination by T2. Without prejudice to any other rights or remedies available to T2, T2 shall have the right, in its sole discretion, to immediately terminate this Agreement upon written notice to SEGA in the event of the occurrence of one or more of the following: 12.2.1SEGA or JCE breaches any of its material obligations under this Agreement and fails to cure such material breach within sixty (60) days of receipt of written notice from T2 specifying the nature of such material breach; or 12.2.2SEGA or JCE makes a general assignment for the benefit of creditors; applies for or consents to the appointment of a receiver, trustee or liquidator for substantially all of its assets or such a receiver, trustee or liquidator is appointed; or SEGA or JCE has filed against it an involuntary petition of bankruptcy that has not been dismissed within sixty (60) days thereof, or files a voluntary petition of bankruptcy, or a petition or answer seeking reorganization, or seeks to take advantage of any other law relating to relief of debtors; or has wound up or liquidated its business. 12.3 Effect of Termination. Upon the expiration or earlier termination of this Agreement; (a) all rights and licenses granted to T2 under or pursuant to this Agreement shall revert to SEGA and T2 immediately shall terminate providing the Subscribers with access to the Server Software and any other components of the Licensed Software; (b) T2 immediately shall pay SEGA any unpaid and due portion of the License Fee; (c) each party shall return the Confidential Information of the other parties; (d) any inventory of the Licensed Software in T2's possession or control shall be destroyed or, at SEGA's election, delivered to SEGA; and (e) T2 shall promptly transfer all of its right, title and interest in and to the Billing Database and Subscriber database(s) to SEGA. In the event SEGA directs the destruction of any inventory as provided in this Section 12.3, such destruction shall be attested to in a sworn affidavit signed by an officer duly authorized to bind T2. The obligations in this Agreement which are intended by their terms to survive the expiration or earlier termination of this Agreement shall so survive. In addition, and without limiting the generality of the preceding sentence, Sections 1, 3.3, 7.9, 8, 9, 10, 11, 12.3, 14 and 15 hereof shall survive the expiration or termination of this Agreement for any reason. No expiration or termination of this Agreement shall release T2 from its obligation to pay SEGA any amounts payable to SEGA under this Agreement which accrued prior to such expiration or earlier termination of which may accrue thereafter. 13 INSURANCE T2, during the Term of this Agreement, shall carry General Commercial Liability Insurance and Employer's Liability Insurance in such amount and providing such coverage as is reasonable and customary for commercial entities providing services like those being rendered by T2 under this Agreement and shall name SEGA as an additional insured. All insurance required hereunder shall provide that the coverage there under may not be reduced or cancelled unless thirty (30) days unrestricted prior written notice thereof is furnished to SEGA. All insurance required hereunder shall be primary and not contributory. All insurance required hereunder shall be written by reputable insurers and accorded a rating by A.M. Best Company, Inc. of B+: VII or higher at the time of issuance of any policy pertaining to such insurance. Certificates of insurance (or copies of policies, if required by SEGA) evidencing satisfactory coverage as required hereunder shall be furnished to SEGA no later than thirty (30) days after the Effective Date. 14 INDEPENDENT CONTRACTOR; PERMISSIONS; NO AGENCY This Agreement shall not be construed as creating an agency, partnership, joint venture or any other form of association, for tax purposes or otherwise, among the parties, and the parties shall at all times be and remain independent contractors. Except as expressly agreed by the parties in writing, none of the parties shall have any right or authority, express or implied, to assume or create any obligation of any kind, or to make any representation or warranty, on behalf of any other party or to bind any other party in any respect whatsoever. 15 GENERAL PROVISIONS 15.1 Notices. All notices which either party is required or may desire to sere upon the other party shall be in writing, addressed to the party to be served as follows: If to SEGA: SEGA Corporation 1-2-12, Haneda, ohta-ku, Tokyo, Japan, 144-8531 Attention: Kashiwaguchi Yukihiro Telephone: +81-3-5736-7403 Facsimile: +81-3-5736-7159 And if to T2: T2 Internet Technologies Co. Ltd. 5th Floor, 88 Qinjiang Road Shanghai, China 200233 Attention: Wang Jim Telephone: +86-21-5437-8388 Facsimile: +86-21-5426-2830 And if to JCE JC Entertainment Corporation 4th Floor, Rosedale Building #724 Susco-Dong Kangnam-Ku Seoul 135-885, Korea Attention: SEO, Jeung Wook Telephone: +86-2-2040-1114 Facsimile: +82-2-2040-1109 Any such notice may be served personally or by courier, mail (postage prepaid), facsimile (provided oral confirmation of receipt is immediately obtained or a hard copy is concurrently sent by commercially recognized national overnight delivery service) or commercially recognized national overnight delivery service. Notice shall be deemed served upon personal or courier delivery or upon the date sent. Either party may change the address to which notices are to be delivered by written notice to the other party served as provided in this Section. 15.2 Entire Agreement. This Agreement, together with the appendices attached hereto and hereby incorporated herein by reference, constitutes the complete, final and exclusive understanding and agreement between the parties with respect to the transactions contemplated herein, and supersedes any and all prior or contemporaneous oral or written representation, understanding, agreement, correspondence or communication among the parties concerning the subject matter hereof. None of the parties is relying upon any warranties, representations, assurances or inducements not expressly set forth herein. It is acknowledged that substantial contents of the Appendices I and II are still to be decided by the parties hereto as of the date hereof; and it is agreed that such contents shall be agreed and reduced to writing within three (3) months after the signing hereof and the agreed-upon updated Appendixes I and II incorporating such said agreed-upon contents shall be delivered to all of the parties in a form and substance satisfactory to the parties and then shall be incorporated into this Agreement. 15.3 Amendments. All amendments or modifications of this Agreement shall be binding upon the parties despite any lack of consideration so long as the same shall be in writing and executed by each of the parties hereto. It is expressly understood and agreed that no usage of trade or other regular practice or method of dealing between the parties hereto shall be used to modify, interpret, supplement or alter in any manner the express terms of this Agreement or any part hereof. 15.4 Waiver. No waiver of any provision of this Agreement or any rights or obligations of any of the parties hereunder shall be effective, except pursuant to a written instrument signed by the party waiving compliance, and any such waiver shall be effective only in the specific instance and for the specific purpose stated in such writing. 15.5 No Other Obligations. None of the parties shall have any obligation that is not expressly set forth in this Agreement. 15.6 Cumulative Remedies. Except as may be specifically set forth in this Agreement with respect to certain matters, the rights and remedies of each party as set forth in this Agreement are not exclusive and are in addition to any other rights and remedies provided under this Agreement or now or hereafter provided by law. 15.7 Force Majeure. None of the parties shall be deemed in default hereunder, nor shall it hold any other party responsible for, any cessation, interruption or delay in the performance of its obligations hereunder due to causes beyond its reasonable control including, but not limited to: earthquake, flood, fire, storm or other natural disaster, epidemic, accident, explosion, casualty, act of God, act of terrorism, lockout, strike, labor controversy or threat thereof, riot, insurrection, civil disturbance or commotion, boycott, disruption of the public markets, war or armed conflict (whether or not officially declared), sabotage, act of a public enemy, embargo, delay of a common carrier, the inability to obtain sufficient material, supplies, labor, transportation, power or other essential commodity or service required in the conduct of its business, or any change in or the adoption of any law, ordinance, rule, regulation, order, judgment or decree; provided that the party relying upon this Section shall: (a) have given the other parties written notice thereof promptly and, in any event, within five (5) days of discovery thereof, and (b) take all steps reasonably necessary under the circumstances to mitigate the effects of the force majeure upon which such notice is based. 15.8 No Third Party Beneficiaries. Nothing in this Agreement is intended or shall be construed to give any person, other that the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 15.9 Assignment. Without limiting the materiality of any other term of this Agreement, any attempted assignment, delegation or other transfer (including without limitation any license or sublicense, mortgage or pledge) by any Party without the consent of the other Parties shall be null and void and shall constitute a material breach of this Agreement. The merger of any Party into or with any other third party or entity, shall be deemed on assignment for purposes of this Section. 15.10 Further Assurances. T2 agrees to do and perform all such further acts and things and shall execute and deliver such other agreements, certificates, instruments and documents necessary or that SEGA and/or JCE may deem advisable in order to carry out the intent and accomplish the purposes of this Agreement. 15.11 Construction. This Agreement has been negotiated by the parties hereto and by their respective counsel. This Agreement shall be fairly interpreted and construed in accordance with its terms and without strict interpretation or construction in favor or against either party. 15.12 Headings. The section and paragraph headings appearing in this Agreement are inserted only as a matter of convenience. Such headings in no way define, govern, limit, modify or construe the scope or extent of the provisions of this Agreement to which they may relate and therefore shall not be given any legal effect. 15.13 Severability. If any of the provisions of this Agreement shall be adjudged by a court of competent jurisdiction to be void as going beyond what is reasonable under the circumstances for the protection of the interests of the party seeking to enforce such provision, but would be valid if part of the wording thereof were deleted or the time periods (if any) thereof were reduced or the range of activities or area dealt with thereby reduced in scope, such provision shall apply with such modifications as may be necessary to make it valid and effective. In the event that any provision of this Agreement should be found by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 15.14 Governing Law. The validity, construction, interpretation and legal effect of this Agreement shall be governed by the laws of New York, U.S.A. without giving effect to principles of conflicts of law. 15.15 Dispute Settlement. Any dispute relating to or arising from the performance of this Agreement shall be settled through friendly negotiation by the parties. Any such dispute that is not resolved through such negotiations within thirty (30) days after the initiation of negotiations shall be finally settled by arbitration in New York, New York, U.S.A., using the English language, conducted in accordance with the rules of the American Arbitration Association, and each party agrees not to bring any action to settle any such dispute in any other forum. The arbitrator(s) shall have the authority to grant specific performance. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction or application may be made to any such court for judicial acceptance of any such award and an order of enforcement, as the case may be. Notwithstanding the foregoing, each party shall have the right to institute legal action in a court of proper jurisdiction for temporary injunctive relief pending final settlement by arbitration. 15.16 Counterparts. This Agreement may be executed by manual or facsimile signatures and in counterparts, each of which shall be deemed an original and all of which together shall constitute on and the same instrument. IN WITNESS WHEREOF, the duly authorized representatives of each of the parties hereto have executed this Agreement as of the day and year first written above. SEGA CORPORATION T2 INTERNET TECHNOLOGIES CO. LTD. By:________________________ By:______________________________ Name:______________________ Name:____________________________ Title:_______________________ Title:_____________________________ JC ENTERTAINMENT CORPORATION By:______________________________ Name:____________________________ Title:_____________________________ Appendix I Functions of the Licensed Software 1. The Closed Beta Version of the Licensed Software shall mainly include: [to be agreed] 2. The Open Beta Version of the Licensed Software shall mainly include: [to be agreed] 3. The Commercial Version of the Licensed Software shall mainly include: [to be agreed] Appendix II Schedule of Launch and Delivery 1. The Closed Beta Version of the Licensed Software shall be launched by T2 [ ] and deliver by SEGA to T2: [reasonably before February, 2005 so that T2 shall be able to properly install the Closed Beta Version on T2's computer servers on or before such date. To be agreed] 2. The Open Beta Version of the Licensed Software shall be launched by T2 [ ] and delivered by SEGA to T2: [reasonably before May. 2005 so that T2 will be able to properly install the Open Beta Version on T2's computer servers on or before such date. To be agreed.] 3. The Commercial Version of the Licensed Software shall be launched by T2 [ ] and delivered by SEGA to T2: [to be agreed] IN WITNESS WHEREOF, the duly authorized representatives of each of the parties hereto have executed this Agreement as of the day and year first written above. SEGA CORPORATION SHANGHAI T2 ENTERTAINMENT CO., LTD. By:/s/ Hsao Oguchi By: /s/ Wang Ji ------------------------- --------------------------- Name: Haso Oguchi Name: Wang Ji ----------------------- --------------------- Title: President Title: President ---------------------- -------------------------- JC ENTERTAINMENT CORPORATION By: /s/ Yang Shin Kim ----------------------------------------- Name: Yang Shin Kim --------------------------------------- Title: CEO -------------------------------- EX-10 7 f1ex103aug05.txt 10.3 EXHIBIT 10.3 LETTER OF AGREEMENT BETWEEN T2CN HOLDING LIMITED AND THE CALNEVA FINANCIAL GROUP, LTD. (the "Agreement") This agreement made as of the 15th day of July, 2004. BETWEEN: T2CN HOLDING LIMITED C/O S-HR&M FINANCIAL SERVICES LIMITED KINGSTON CHAMBERS, P.O. BOX 173 ROAD TOWN, TORTOLA BRITISH VIRGIN ISLANDS (Hereafter referred to as "T2CN") AND: THE CALNEVA FINANCIAL GROUP, LTD. 2443 ALDER STREET VANCOUVER, BRITISH COLUMBIA CANADA, V6H 4A4 (Hereafter referred to as "CALNEVA") WHEREAS: A. T2CN HOLDING LIMITED ("T2CN") is a private company limited by shares organized and existing under the laws of the British Virgin Islands. As a result of PRC legal considerations, T2CN operates an online game business in China through SHANGHAI T2 ENTERTAINMENT CO., LTD. EI(0)(pound)IiOIEi1/4(254)O-DI(222)(1)< NOW THEREFORE, in consideration of the promises and the mutual covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows: 1. TERM OF CONSULTANCY - T2CN hereby agrees to retain CALNEVA to act in a consulting capacity to the Company, and CALNEVA hereby agrees to provide services to T2CN commencing on the Effective Date of this agreement and ending eighteen (18 months from the Effective Date unless terminated by either party pursuant to the termination clause of this agreement. 2. SERVICES - During the term of this Agreement, CALNEVA'S services may include, but will not necessarily be limited to providing the following services on behalf of and for the benefit of T2CN: (i) Review of the present corporate structure of T2CN HOLDING LIMITED and SHANGHAI T2 ENTERTAINMENT CO., LTD. to ensure that it is in compliance with legal and auditing requirements relating to the filing of a Securities and Exchange Commission document to take the BVI Company or such other affiliate of BVI company as designated by the company public on NASDAQ or such other U.S. capital market as T2CN agrees to; (ii) Preparation of share subscription agreements (for US residents and non-US residents) for T2CN to comply with US Public Company legal requirements; (iii) Assist in the co-ordination and preparation of financial statements prepared in accordance with U.S generally accepted accounting principles and to be included in the filing of the documentation to take T2CN public; (iv) Assistance to ensure that corporate governance matters are complied with; (v) Assistance, on a best efforts basis, to raise financing for T2CN; (vi) Assistance in the establishment of an audit committee, compensation committee and corporate governance committee for T2CN; (vii) Establish a proper system of internal controls within the corporate organization of T2CN and T2 ENTERTAINMENT. (This is an extremely important aspect of timely financial reporting and accurate financial reporting from a Securities & Exchange Commission point of view); (viii) Assistance in the preparation of a 15C-211 document required by the NASD to take T2CN public; (ix) Assistance in the preparation of a Form F-1 (Registration Statement Under the Securities Act of 1933) for T2CN to register 10,000,000 restricted common shares; (x) Maintain all Foreign Issuer Securities & Exchange reporting requirements in a timely matter; (xi) Co-ordination between the auditors and T2CN management on all financial reporting requirements; (xii) Co-ordination between the lawyers and T2CN management on all SEC reporting requirements; (xiii) File all necessary documentation relating to "Blue Skying" of the Public Company's stock in all necessary States of the U.S.; (xiv) Assistance with the preparation of all director's minutes relating to stock issuances and co-ordination with the transfer agent; (xv) Maintain the Corporate Minute Book in T2CN as the Public Company; 2 (xvi) Attendance to development of Annual General Meetings materials for distribution to shareholders; (xvii) Attendance to the preparation of the Form 20F Securities and Exchange annual filing for Foreign Issues; (xviii) Assistance in arranging meetings with analysts and proposed investors after T2CN has gone public; (xix) Review of potential acquisition candidates for the Public Company; (xx) Interview proposed investor candidates for possible investment in the Public Company; (xxi) Assistance in the coordination and creation of a strategic public market strategy to enable the Company to have a liquid market for their publically traded stock and to increase shareholder awareness of present corporate status and future development plans; (xxii) Analyze the Company's needs with respect to public relations, investor relations; (xxiii) Oversee and facilitate, for the benefit of the Company, any or all investor relations or public relations organizations which are engaged by the Company; (xxiv) Consult and assist the Company in developing and implementing appropriate plans and means for presenting the Company and its business plans, strategy and personnel to the financial community; (xxv) Assist and advise the Company with respect to its relations with brokers, dealers, analysts and other investment professionals (including introduction to new investment professionals); 3. ALLOCATION OF TIME - The Consultant hereby promises to perform and discharge faithfully the responsibilities, which may be assigned to the Consultant from time to time by the officers and duly authorized representatives of the Company under this Agreement. Consultant and staff shall diligently and thoroughly provide the consulting services required hereunder. Although no specific hours-per-day requirement will be required, Consultant and the Company agree that Consultant will perform the duties set forth herein above in a diligent and professional manner. 4. REMUNERATION - As full and complete compensation for services described in this Agreement, the Company shall compensate CALNEVA as follows: (i) For the understanding of this engagement and for good and valuable consideration, T2CN agrees to cause to be delivered to CALNEVA 7,200,000 restricted common shares of their stock from treasury. (ii) If CALNEVA does not manage to obtain a public listing for T2CN due to CALNEVA's negligence, then CALNEVA will be required to return 500,000 common shares as a penalty for their lack of performance on this issue. This penalty would not apply to a circumstance when CALNEVA through no fault of their own were unable to secure a public listing for T2CN. 5. PLACE OF SERVICES - The Services provided by CALNEVA hereunder will be performed at CALNEVA's offices except as otherwise requested by T2CN. 6. INDEPENDENT CONTRACTOR - CALNEVA will act as an independent contractor in the performance of its duties under this agreement. This Agreement neither expressly not impliedly creates a relationship of principal and agent, or employee and employer, between CALNEVA's personnel and the 3 T2CN. Neither CALNEVA nor CALNEVA's personnel are authorized to enter into any agreements on behalf of the T2CN. T2CN expressly retains the right to approve, in its sole discretion, each opportunity introduced by CALNEVA and to make all final decisions with respect to effecting a transaction on any such opportunity. 7. CERTAIN RESTRICTIONS - Notwithstanding anything to the contrary and without prejudice to other explicit or implied restrictions hereunder, (i) all the proceeds from the private equity funding or public stock offering of T2CN contemplated by this Agreement shall be remitted to accounts designated by, under the name of and for the interest of T2CN before any allocation or application, (ii) terms of private equity funding of T2CN of a total amount of more than US$2.6 million shall require prior written consent of T2CN, including without limitation and in particular with respect to the share subscription price, and (iii) CALNEVA shall obtain prior written approval of T2CN before contacting any potential private investor in T2CN(pound) and such approval may be withheld if the potential investor is regarded as in competition of T2CN or otherwise unsuitable to invest in T2CN at the discretion of T2CN. 8. INDEMNIFICATION - Subject to the provisions herein, T2CN and CALNEVA agree to indemnify, defend and hold each other harmless from and against all demands, claims, actions, losses, damages, liabilities, costs and expense (including without limitation, interest, penalties and attorneys' fees and expenses) asserted against or imposed or incurred by either party by reason of or resulting from any action by (or the breach of any representation, warranty, covenant, condition, or agreement by) the other party to this Agreement. 9. REMEDIES - CALNEVA and T2CN acknowledge that in the event of a breach of this Agreement, by either party, money damages would be inadequate, and the non-breaching party would have no adequate remedy at law. Accordingly, in the event of any controversy concerning the rights or obligations under this Agreement, such rights or obligations shall be enforceable in a court of equity by a decree of specific performance. Such remedy, however, shall be cumulative and non-exclusive, and shall be in addition to any other remedy to which the parties may be entitled. 10. MISCELLANEOUS - (a) Subsequent Events. CALNEVA and T2CN each agree to notify the other party if, Subsequent to the date of this Agreement, either party incurs obligations which could compromise its effects and obligations under this Agreement. (b) Amendment. This Agreement may be amended or modified at any time and in any manner only by an instrument in writing executed by the parties hereto. (c) Further Actions and Assurances. At any time to time, each party agrees, at its or their expense, to take actions and to execute and deliver documents as may be reasonably necessary to effectuate the purpose of this Agreement. (d) Waiver. Any failure of any party to this Agreement to comply with any of its obligations, Agreements, or conditions hereunder may be waived in writing by the party to whom such compliance is owed. The failure of any party to this Agreement to enforce at any time any of 4 the provisions of this Agreement shall in no way be construed to be a waiver of any such provision or a waiver of the right of such party thereafter to enforce each and every such provision. No waiver of any breach of or non-compliance with this Agreement shall be held to be a waiver of any other or subsequent breach or non-compliance. (e) Assignment. Neither this Agreement nor any right created by it shall be assignable by either party without the prior written consent of the other. (f) Notice. Any notice or other communication required or permitted by this Agreement must be in writing and shall be deemed to be properly given when delivered in person to an officer of the party; when deposited in the mail for transmittal by certified or registered mail, postage prepaid; when deposited with a public telegraph company for transmittal; or when sent by facsimile transmission., provided that the communication is addressed: (g) In the case of T2CN: T2CN HOLDING LIMITED C/O S-HR&M FINANCIAL SERVICES LIMITED KINGSTON CHAMBERS, P.O. BOX 173 ROAD TOWN, TORTOLA BRITISH VIRGIN ISLANDS (h) In the case of CALNEVA: THE CALNEVA FINANCIAL GROUP, LTD 2443 ALDER STREET VANCOUVER, BRITISH COLUMBIA CANADA, V6H 4A4 i. Or to such person or address designed in writing by T2CN or CALNEVA to receive notice. (i) Heading. The section and subsection heading in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. (j) Governing Law. This Agreement was negotiated in and is being contracted for in British Columbia, and shall be governed by the laws of the Province of British Columbia. (k) Binding Effect. This Agreement shall be binding upon the parties hereto and inure to the benefit of the parties, their respective heirs, administrators, executors, successors, and assigns. (l) Entire Agreement. This Agreement contains the entire agreement between the parties hereto and supersedes any and all prior agreements, arrangements, or understandings between the parties relating to the subject matter of this Agreement. No oral understanding, statements, promises, or inducements contrary to the terms of this Agreement exist. 5 No representations, warranties, covenants, or conditions, express or implied, other than as set forth herein, have been made by any party. (m) Severability. If any part of this Agreement is deemed to be unenforceable, the balance of the Agreement shall remain in full force and effect. (n) Counterparts. If facsimile, telecopy, or other reproduction of 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, by one or more parties hereto and such executed copy may be delivered by facsimile or similar instantaneous electronic transmission device pursuant to which the signature of or on behalf of such party can be seen. In this event, such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of any party hereto, all parties agree to execute an original of this Agreement as well as any facsimile, telecopy or other reproduction hereof. (o) Time is of the Essence. Time is of the Essence of this Agreement and of each and every provision hereof. IN WITNESS WHEREOF, the parties have executed this Agreement on the date above written. T2CN HOLDING Limited The Calneva Financial Group, Ltd. By: /s/ Ji Wang By: /s/ D. Bruce Horton ----------------------- -------------------------- Ji WANG D. Bruce Horton President & Director Director EX-10 8 f1ex104aug05.txt 10.4 EXHIBIT 10.4 Private and Confidential Execution Copy T2CN INFORMATION TECHNOLOGY (SHANGHAI) CO., LTD. SHANGHAI T2 ENTERTAINMENT CO., LTD. SHANGHAI NEWMARGIN VENTURE CAPITAL CO., LTD MR. FENG TAO (??) ------------------------------------------------------- OPERATION AGREEMENT Concerning SHANGHAI T2 ENTERTAINMENT CO., LTD. ------------------------------------------------------- Dated November 4, 2004 FANGDA PARTNERS 22/F, Kerry Center 1515 Nan Jing West Road Shanghai 200040, PRC OPERATION AGREEMENT This Operation Agreement (hereinafter this "Agreement") is entered into in Shanghai of the People's Republic of China (hereinafter "PRC") as of 4 November, 2004 by and between the following Parties: (1) T2CN Information Technology (Shanghai) Co., Ltd. ("WFOE") Registered address: Suite 22301-526, Pudong Software Park, Guo Shou Jing Road, Pudong New District, Shanghai, PRC (201203) Legal representative: TENG Jun-Tse (???) (2) Shanghai T2 Entertainment Co., Ltd. ("T2 Entertainment") Registered address: 5th Floor, No.88, Qinjiang Road, Xuhui District, Shanghai, PRC. Legal representative: FENG Tao (??) (3) Shanghai Newmargin Venture Capital Co., Ltd. ("Shanghai Newmargin") Registered address: No. 99, Yin Qiao Road, Pudong New Area, Shanghai, PRC Legal representative: DONG Yeshun (???) (3) FENG Tao Address: Building 3 Xing Guo Hotel, 78 Xing Guo Road, Shanghai, PRC ID card no.: 310106670509323 (Shanghai Newmargin and Mr. FENG Tao are hereinafter individually referred to as a "Shareholder" and collectively "Shareholders".) Whereas: 1. Shareholders are the only shareholders of T2 Entertainment as of now, holding the total equity of T2 Entertainment. 2. T2 Entertainment has entered and/or will enter into a series of agreements with WFOE, including but not limited to Shareholders' Voting Rights Proxy Agreement (the "Proxy Agreement"), Exclusive Technical Service and Consultancy Agreement (the "Service Agreement") and an Equity Pledge Agreement (the "Equity Pledge Agreement") (the 3 abovementioned agreements shell be known as the "Transaction Agreements"), all dated 4 November 2004; pursuant to the Transaction Agreements, T2 Entertainment will promote its business performance relying on such information, technology, personnel and other supports as provided by WFOE, who has dedicated and will continue to dedicate considerable labor and resources to the performance of such Transaction Agreement. 3. WFOE and T2 Entertainment intend to enter into strategic cooperation of their business operation and, based on the terms and conditions hereof, to reorganize the daily operation and decision-making mechanism of T2 Entertainment. The parties hereby have reached the following agreement upon mutual consultations: Article 1 Interpretation 1.1 Except as otherwise stated in the context herein: 1.1.1 all references to a person shall refer to a natural person or an organization; 1.1.2 all references to any person, company, governmental authority or organization shall be deemed to include its successor; 1.1.3 all references to a contract or agreement shall be deemed to include its appendices and any amendment, alteration and/or supplement; 1.1.4 all references to a term, condition or appendix shall refer to the relevant part of this Agreement. 1.2 Titles in this Agreement are for convenience only, and may not be used for or affect the interpretation of this Agreement under any circumstance. Article 2 Arrangement regarding Operation of T2 Entertainment 2.1 Undertakings of Shareholders Shareholders hereby jointly and severally undertake that: 2.1.1 In order to guarantee all rights and interests of WFOE under the Transaction Agreements, Shareholders hereby irrevocably undertake and warrant that, without prior written consent from WFOE, Shareholders will not in any manner make or authorize any other person (including without limitation directors of T2 Entertainment appointed by them) to make any resolution, instruction, consent or order for the purpose of causing T2 Entertainment to do any trading that will or may substantially affect the assets, rights, obligations or business of T2 Entertainment (including its branches and/or subsidiaries) ("Prohibited Trading"), or to enter into any contract, agreement, memorandum or trading document in other manners in respect of such Prohibited Trading (the "Prohibited Documents"), or to tolerate the carry-out of any Prohibited Trading or execution of any Prohibited Document by any omission of acts; 2.1.2 without written consent or instruction of WFOE, Shareholders may 2 not appoint or nominate any member of the board of directors of T2 Entertainment, nor cancel the appointment of any such member; and 2.1.3 they will cause directors of T2 Entertainment nominated by them and other management personnel (if any) of T2 Entertainment recommended by them to strictly comply with the foregoing undertakings during their performance of duties as directors or management of the company, and to have no act or omission of act in any manner in violation of any of the foregoing undertakings. 2.2 Undertakings of T2 Entertainment T2 Entertainment hereby undertakes to WFOE as follows: 2.2.1 If Shareholders have, or, in the reasonable opinion of T2 Entertainment, Shareholders are likely to have any act in violation of their undertakings in section 2.1 above, T2 Entertainment will notify WFOE of the same without delay. 2.2.2 It will not enter into any Prohibited Trading or any Prohibited Document in any manner, nor tolerant the carry-out of any Prohibited Trading or execution of any Prohibited Document by any omission of acts. 2.2.3 Without written consent or instruction from WFOE, the board of directors of T2 Entertainment will not engage or dismiss its general management or any other management personnel. 2.2.4 During the effective term of this Agreement, its daily operation activities and financial and personnel management are under the supervision and direction of WFOE; WFOE is entitled to take all necessary or proper measures, including without limitation to appointment of one or two supervisors with good experience of company operation, supervision and direction the operation, management, finance, personnel and etc. of T2 Entertainment. 2.2.5 Without prejudice to the generality of the above section 2.2.4, it will require its general manager to (a) report situations of its operation, management, finance and personnel and other major operating activities to WFOE on a monthly basis, and (b) provide a written report of its operation, management, finance and personnel and other major operating activities of every quarter to WFOE on a quarterly basis, which reports shall be acceptable to WFOE both in content and in form. 2.2.6 In view that it has entered into the Service Agreement with WFOE, in order to carry out the obligations of payment of service fees thereunder, T2 Entertainment hereby undertakes that, once 3 required by WFOE in writing, it will pledge all of its then receivable accounts and mortgage all of the assets legally owned and disposable by it, as security for the aforesaid obligations of payments. 2.2.7 It will notify WFOE in advance of the decision-making, implementation and financial arrangement of any major operation activities of T2 Entertainment not mentioned in this Agreement, and WFOE shall decide at its own discretion whether such activities shall be approved in advance by WFOE. With respect to such decision-making, implementation and financial arrangement of any major operation activities for which WFOE's prior approval is necessary as decided by WFOE, WFOE shall issue notice to Shareholders and T2 Entertainment within reasonable time, and Shareholders and T2 Entertainment may not make any resolution, instruction, consent or order regarding such activities before receipt of formal approval in writing from WFOE. No written approval given by WFOE within reasonable time shall be deemed as disapproval. Any resolution, instruction, consent or order concerning such major operation activities without prior written approval by WFOE shall be deemed as void. 2.2.8 It will establish and implement an internal control system to guarantee that all of its directors and other management personnel strictly comply with the foregoing undertakings when performing their duties, and commit no act or omission of act in violation of any of such undertakings in whatever manner. 2.2.9 Except for the transfer of any equity in T2 Entertainment held by Shareholders to T2CN Holding Limited and/or any third party designated by it pursuant to an Exclusive Equity Transfer Call Agreement (the "Call Agreement") entered into by Shareholders and T2 Entertainment and T2CN Holding Limited dated 4 November 2004, if either Shareholder intends to transfer all or part of its holding in T2 Entertainment's equity to others, such Shareholder shall issue corresponding confirmation letter to WFOE and T2 Entertainment, certifying that the transferee agrees to become a party hereto according to the terms and conditions hereof, and only upon WFOE's confirmation in writing of such certification, will T2 Entertainment acknowledge such equity transfer and go through relevant registration or filing of such equity transfer, provided no Transaction Agreement shall be violated. 2.3 Shareholders and T2 Entertainment acknowledge and undertake to be liable for any legal consequence of WFOE's exercise of the foregoing rights. In case of any violation of any undertaking above by Shareholders or T2 Entertainment, Shareholders and T2 Entertainment shall be obliged to take every possible measure to correct such act of default, and shall minimize such losses as may be incurred by T2 Entertainment or WFOE thereby. 4 2.4 Shareholders and T2 Entertainment are severally and jointly liable under this Article 2. Article 3 Information Right Without limitation to other particular rights of WFOE hereunder, for the purpose of this Agreement WFOE shall be entitled to know various information about the operation, business, clients, finance and staff of T2 Entertainment, examine relevant materials, documents and information of T2 Entertainment (including without limitation any resolution of the shareholders' meeting, financial statement and report, auditing report and other materials, documents and information, that, in WFOE's opinion, WFOE needs to know), and T2 Entertainment shall fully cooperate and provide all facilities needed in this regard. Article 4 Exercise of Rights 4.1 Shareholders hereby acknowledge that WFOE need not to consult with Shareholders in advance when exercising the foregoing rights. However, after issuing any written notice or instruction, WFOE shall notify Shareholders in a timely manner. 4.2 WFOE may, when it deems necessary or proper, authorize its internal personnel (one or more) to act as the representative(s) of WFOE and to actually exercise any or all of its rights hereunder. 4.3 Shareholders and T2 Entertainment shall provide sufficient assistance to WFOE's exercise of its rights hereunder, including promptly executing resolutions of shareholders' meeting, going through formalities of examination and approval, registration or filing and execution of particular agreement or other legal document, if so required (e.g. requirement of submission of documents for examination and approval, registration and filing from or with the governmental authorities). 4.4 If at any time during the term of this Agreement, any right of WFOE hereunder is not exercisable due to whatever reason (except for default by Shareholders or T2 Entertainment), the parties hereto shall promptly seek a replacing plan with the most similar effect with the right not exercisable, and shall enter into supplementary agreements to amend or adjust terms hereunder when necessary, in order to ensure the realization of the purpose of this Agreement. Article 5 Exemption and Compensation 5.1 All parties hereto acknowledge that WFOE shall not be required to be liable to or make any economic or other compensation for other parties hereto or 5 any third party, due to its exercise of its rights hereunder. 5.2 Shareholders and T2 Entertainment agree to compensate WFOE for and hold WFOE harmless against all losses that are incurred or are likely to be incurred due to WFOE's exercise of its rights hereunder, including without limitation any loss arising from any action, claim, arbitration, demand brought by any third party against it or any administrative investigation or penalty by governmental authorities. However, losses incurred due to misconduct or gross negligence of WFOE will not be compensated for. Article 6 Representations and Warranties 6.1 Shareholders' representations and warranties concerning themselves Shareholders hereby severally and jointly represent and warrant that: 6.1.1 FENG Tao is a PRC citizen with full capacity and with full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and may act independently as a subject of actions; 6.1.2 Shanghai Newmargin is a company with limited liability properly registered and legally existing under the RPC Law, with an independent corporate legal person status, and has full and independent legal status and legal capacity to execute, deliver and perform this Agreement and may act independently as a subject of actions; 6.1.3 Shareholders have the full power and authority to execute and deliver this Agreement and all the other documents to be entered into by them in relation to the transaction hereunder, and have the full power and authority to complete the transaction hereunder; 6.1.4 this Agreement has been legally and properly executed and delivered by the Shareholders, and constitutes their legal and binding obligations, which are enforceable against them according to the provisions hereof; 6.1.5 they are the enrolled legal shareholders of T2 Entertainment as of the effective date of this Agreement, and except the rights created by the Equity Pledge Agreement, the Proxy Agreement and the Call Agreement,, there is no guarantee, lien, pledge, charge, earnest money or other encumbrances or joint ownership or other third party rights in whatever manner on the equity shares held by them respectively; WFOE may fully and sufficiently exercise its rights hereunder according to the then effective Articles of Association of T2 Entertainment; and 6 6.1.6 Shareholders will cause and warrant T2 Entertainment to comply with and perform all of its obligations hereunder, and will make all adequate actions and provide all necessary assistance (including without limitation the provision of all required documentation, issuance of necessary undertaking or statement, adoption of necessary resolution and communication with relevant governmental authorities), in order to guarantee the full and effective implementation of all arrangements hereunder and the realization of the purposes, terms and conditions of this Agreement. 6.2 Representations and warranties of Shareholders and T2 Entertainment concerning T2 Entertainment Shareholders and T2 Entertainment hereby severally and jointly represent and warrant that: 6.2.1 T2 Entertainment is a company with limited liability properly registered and legally existing under the law of its incorporation place, with an independent corporate legal person status; 6.2.2 T2 Entertainment has full and independent legal status and legal capacity to execute, deliver and perform this Agreement and may act independently as a subject of actions; 6.2.3 Shareholders are the only enrolled legal shareholders of T2 Entertainment as of the effective date of this Agreement, and except the rights created by the Equity Pledge Agreement, the Proxy Agreement and the Call Agreement, there is no guarantee, lien, pledge, charge, earnest money or other encumbrances or joint ownership or other third party rights in whatever manner on the equity shares held by them respectively; WFOE may fully and sufficiently exercise its rights hereunder according to the then effective Articles of Association of T2 Entertainment; 6.2.4 T2 Entertainment has the full corporate power and authority to execute and deliver this Agreement and all the other documents to be entered into by it in relation to the transaction hereunder, and has the full power and authority to complete the transaction hereunder; 6.2.5 this Agreement has been legally and properly executed and delivered by T2 Entertainment, and constitutes its legal and binding obligations, which are enforceable against it according to the provisions hereof; 6.2.6 all documents, materials and information supplied by T2 Entertainment to WFOE before and after the execution hereof are true, complete and accurate, without any false statement, gross omission or materially misleading statement; 7 6.2.7 information of T2 Entertainment's indebtedness disclosed by Shareholders and T2 Entertainment to WFOE is true, complete and accurate, and except for those already disclosed, T2 Entertainment has no other major indebtedness which may affect its normal business operation; and 6.2.8 the re-arrangement contemplated hereunder by Shareholders or T2 Entertainment of the daily operation and decision-making mechanism of T2 Entertainment will not violate any law, regulation, rule or order applicable on it, and has required or will require all necessary approval, registration and/or filing (if applicable) from or with governmental authorities; such reorganization will not violate any contract, agreement or other document in which a Shareholder or T2 Entertainment is an object or a party or which is binding on their assets, and has obtained all necessary third party consents (if applicable). 6.3 WFOE's representations and warraties WFOE hereby represents and warrants that: 6.3.1 it is a wholly foreign owned enterprise legally incorporated under the PRC Law, with full legal capacity to enter into this Agreement, and has all rights, powers and authorizations required for exercising any right and performing any obligation hereunder; 6.3.2 its performance of the obligations hereunder will not violate any current and prevailing laws, regulations and rules; and 6.3.3 it will make all effort to actively cooperate other parties hereto in order to consummate the arrangement to be made by the parties hereunder in respect of T2 Entertainment's daily operation and decision-making mechanism. Article 7 Term of Agreement 7.1 This Agreement shall take effect from the date of formal execution by the parties hereto, and shall remain effective without time limit as far as either Shareholder remains to be a shareholder of T2 Entertainment, unless terminated by written agreement of all parties hereto. 7.2 Subject to section 2.2.9 hereof, in case either Shareholder transfers all of the equity held by it in T2 Entertainment with prior consent of WFOE, such Shareholder will no longer be a party to this Agreement, while the obligations and undertakings hereunder of other parties hereto will not be 8 adversely affected thereby. Article 8 Notice 8.1 Any notice, request, demand and other correspondences made as required by or in accordance with this Agreement shall be made in writing and delivered to address or fax number set forth below of the relevant party: T2CN Information Technology (Shanghai) Co., Ltd. Attention: TENG Jun-Tse (???) Address: 5th Floor, No.88, Qinjiang Road, Xuhui District, Shanghai, PRC. Fax: 54262830 Telephone: 54278388 Shanghai T2 Entertainment Co., Ltd. Attention: WANG Ji (??) Address: 5th Floor, No.88, Qinjiang Road, Xuhui District, Shanghai, PRC. Fax: 54262830 Telephone: 54278388 Shanghai Newmargin Venture Capital Co., Ltd. Attention: FENG Tao (??) Address: No. 99, Yin Qiao Road, Pudong New Area, Shanghai, PRC Fax: 62137000 Telephone: 62138000 FENG Tao (??) Address: No. 99, Yin Qiao Road, Pudong New Area, Shanghai, PRC Fax: 62137000 Telephone: 62138000 8.2 The abovementioned notice or other correspondences shall be deemed to have been delivered when it is transmitted if transmitted by e-mail, facsimile or telex; or when it is delivered if delivered in person; or when forty-eight (48) hours (exclusive of public holidays) have elapsed after posting if sent out by express; or when twenty-four (24) hours (exclusive of public holidays) have elapsed after sending out if sent out by telegraph; or when five (5) days have elapsed after posting if posed by mail. 9 Article 9 Confidentiality 9.1 Unless required by laws or governmental or court orders pr approved by all parties hereto, none of the parties hereto may disclose or leak any content hereof, any information in connection herewith or any document, material, information, technical secrets or trade secrets obtained from other parties, to any individual, enterprise, unit or governmental authority other than the parties hereto. Any party hereto may, where necessary, disclose the abovementioned document, material and information without breaching its obligation of confidentiality hereunder, provided that: 9.1.1 such disclosure has been approved by all parties hereto; 9.1.2 it is to its manager, management personnel, technical personnel and employees on a need-to-know basis for the purpose of its performance of the cooperation hereunder; 9.1.3 it is to its lawyer and accountants on a need-to-know basis; 9.1.4 it is to relevant professional institutions and persons for the purpose of consultation of professional issues, on a need-to-know basis and upon approval of other parties hereto; 9.1.5 the above disclosure is within a necessary scope, and the disclosing party shall take measures to cause the persons or institutions to whom the aforesaid documents, materials and information are disclosed to keep the same confidential; and 9.1.6 disclosure under this article by any party hereto may not harm the rights and interests of other parties. 9.2 The obligation of confidentiality under this article shall survive the termination of this Agreement. Article 10 Default Liability 10.1 The parties hereto agree and confirm that, if any of the parties (the "Defaulting Party") breaches substantially any of the provisions herein or omits substantially to perform any of the obligations hereunder, or fails substantially to perform any of the obligations under this Agreement, such a breach or omission shall constitute a default under this Agreement (a "Default"), then other parties (the "Non-defaulting Parties") shall have the right to require the Defaulting Party to rectify such Default or take remedial measures within a reasonable period. If the Defaulting Party fails to rectify such Default or take remedial measures within such reasonable period or within ten (10) days of the Non-defaulting Parties' notifying the Defaulting Party in writing and requiring it to rectify the Default, then: 10 (1) if the Defaulting Party is a Shareholder or T2 Entertainment, WFOE is entitled to terminate this Agreement and require the Defaulting Party to indemnify it for damages; or (2) if the Defaulting Party is WFOE, the Shareholders and T2 Entertainment, being Non-defaulting Parties, are entitled to require the Defaulting Party to indemnify it for damages, but have no right to terminate or cancel this Agreement under any circumstances. 10.2Obligations of all parties hereunder are special and specific instead of general, therefore in case of default by any party, if the indemnification for damages are not sufficient to cover losses, the Non-defaulting Parties are entitled to require the Defaulting Party to carry out performance hereof. 10.3Any waiver of any act of default of the Defaulting Party by the Non-defaulting Parties will be valid only if made in writing. 10.4Notwithstanding any other provisions herein, the validity of this Article shall stand disregarding the suspension or termination of this Agreement. Article 11 Force Majeure If a party hereto fails to perform or perform as stipulated hereunder, this Agreement, directly due to earthquake, typhoon, flood, fire, war, computer virus, leak in design of tool software, hacker attack of internet, change in policy or law or any other force majeure event that cannot be foreseen or the results of which cannot be prevented or avoided, the party encountering such force majeure event shall immediately issue a notice thereof by fax, and submit certificates issued by relevant governmental authority stating details of such event and reasons for the failure to perform or delay in performing this Agreement to other parties for confirmation within fifteen (15) days. If a force majeure event lasts for more than thirty (30) days, parties hereto shall determine whether the performance of this Agreement shall be partially exempted or delayed or otherwise, through friendly negotiations according to the degree of impact of such event on the performance hereof. The party failing to perform hereunder is not liable for the economic losses of other parties resulted from its failure solely due to force majeure. Article 12 Miscellaneous 12.1 This Agreement shall be prepared in the Chinese language in four (4) original copies, with each involved party holding one (1) copy hereof. 12.2 The formation, validity, execution, amendment, interpretation and 11 termination of this Agreement shall be subject to the PRC Laws. 12.3 Any disputes arising hereunder and in connection herewith shall be settled through consultations among the parties, and if the parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such disputes shall be submitted to China International Economic and Trade Arbitration Commission Shanghai Branch for arbitration in Shanghai in accordance with its arbitration rules, and the arbitration award shall be final and binding on all parties. 12.4 Any rights, powers and remedies empowered to any party by any provisions herein shall not preclude any other rights, powers and remedies enjoyed by such party in accordance with laws and other provisions under this Agreement, and the exercise of its rights, powers and remedies by a party shall not preclude its exercise of its other rights, powers and remedies by such party. 12.5 Any failure or delay by a party in exercising any of its rights, powers and remedies hereunder or in accordance with laws (hereinafter the "Party's Rights") shall not lead to a waiver of such rights, and the waiver of any single or partial exercise of the Party's Rights shall not preclude such party from exercising such rights in any other way and exercising the remaining part of the Party's Rights. 12.6 Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one or more articles herein become invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions herein shall not be affected as a result thereof. 12.7 Any amendments or supplements to this Agreement shall be made in writing and shall take effect only when properly signed by the parties to this Agreement. 12.8 None of the parties hereto shall assign any of its rights and/or obligations hereunder to any third parties without the prior written consent from other parties. 12.9 This Agreement shall be binding on the legal successors of the parties. [The remainder of this page is intentionally left blank] 12 (Execution Page) IN WITNESS HEREOF, the parties hereto have caused this Agreement to be executed as of the date and in the place first here above mentioned. T2CN INFORMATION TECHNOLOGY (SHANGHAI) CO., LTD. (Seal) Signature: /s/ TENG Jun-Tse ------------------------ Name: TENG Jun-Tse (???) Title: Legal Representative SHANGHAI T2 ENTERTAINMENT CO., LTD. (Seal) Signature: /s/ FENG Tao ------------------------ Name: FENG Tao (??) Title: Legal Representative SHANGHAI NEWMARGIN VENTURE CAPITAL CO., LTD. (Seal) Signature: /s/ FENG Tao ------------------------ Name: FENG Tao (??) Title: Legal Representative MR. FENG TAO (??) Signature: /s/ FENG Tao ----------------------- EX-10 9 f1ex105aug05.txt 10.5 EXHIBIT 10.5 NOVATION AGREEMENT THIS NOVATION AGREEMENT (this "Agreement") is made on June 6, 2005 BETWEEN: (1) Mr. JI WANG, a citizen of the People's Republic of China (the "PRC") with his I.D. card number of 330102197106260617 (the "Transferee"); (2) Mr. TAO FENG (o eII), a citizen of the PRC with his ID card number of 310106670509323 (the "Transferor"); (3) Shanghai Newmargin Venture Capital Co., Ltd., a limited liability company incorporated under the laws of the PRC with its registered address at 99 Yinqiao Road, Pudong New District, Shanghai, PRC ("Shanghai Newmargin"); (4) Shanghai T2 Entertainment Co., Ltd., a limited liability company incorporated under the laws of the PRC with its registered address at 5th Floor 88 Qinjiang Road, Xuhui District, Shanghai, PRC (200233) ("T2 Entertainment"); and (5) T2CN Information Technology (Shanghai) Co., Ltd., a company incorporated under the laws of the PRC with its communication address at 5th Floor 88 Qinjiang Road, Xuhui District, Shanghai, PRC (200233) ("T2CN Information Technology"). Shanghai Newmargin, T2 Entertainment and T2CN Information Technology may hereinafter collectively be referred to as the "Contractors" and respectively referred to as a "Contractor". The Transferee, the Transferor and the Contractors may hereinafter collectively be referred to as the "Parties" and respectively referred to as a "Party". INTRODUCTION: (A) The Transferor and the Contractors are parties to an Operation Agreement, dated November 4, 2004, whereby TAO FENG and Shanghai Newmargin entered into certain arrangements regarding the operation and management of T2 Entertainment. 1 (B) As agreed by T2CN Information Technology and Shanghai Newmargin, the Transferee has acquired from the Transferor 20% equity interest in T2 Entertainment and Transferor is no longer a shareholder of Shanghai (C) The Parties have agreed to novate the aforesaid Operation Agreement to the Transferee. THE PARTIES AGREE as follows: 1. INTERPRETATION 1.1 In this Agreement "Original Agreement" means the Operation Agreement made by and among the Contractors and the Transferor, whereby TAO FENG and Shanghai Newmargin authorize the WFOE or its designated persons to exercise all the shareholder's rights enjoyed by TAO FENG and Shanghai Newmargin as shareholders of T2 Entertainment. 1.2 The headings in this Agreement do not affect its interpretation. 2. NOVATION With effect from June 6, 2005: 2.1 the Transferee shall perform the Transferor's obligations under the Original Agreement and is bound by the terms of the Original Agreement in every way as if the Transferee had at all times been a party to the Original Agreement in place of the Transferor; 2.2 each of the Contractors releases and discharges the Transferor from further performance of the Original Agreement and all liabilities, claims and demands howsoever arising under the Original Agreement, whether in contract, tort or otherwise, and accepts the liability of the Transferee under the Original Agreement in place of the liability of the Transferor; and 2.3 each of the Contractors shall perform its obligations under the Original Agreement and be bound by the terms of the Original Agreement in every way as if the Transferee had at all times been a party to the Original Agreement in place of the Transferor. 3. GOVERNING LAW This Agreement is governed by the PRC law. 2 4. ARBITRATION 4.1 If any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity hereof cannot be resolved through consultation, the dispute shall be submitted to arbitration. 4.2 The arbitration shall be conducted in Shanghai under the auspices of the China International Economic and Trade Arbitration Commission, Shanghai Sub-commission ("CIETAC") according to its then arbitration rules. The Parties shall jointly appoint a sole arbitrator to hear the case and if the Parties do not agree on the choice of the aforesaid sole arbitrator within twenty (20) days from the date on which the respondent receives the notice of arbitration, the Chairman of the CIETAC will make the appointment. 4.3 The award of the arbitration tribunal shall be final and binding upon the disputing parties and, in the case where the subdued party does not perform the award, the prevailing party may apply to a court of competent jurisdiction for enforcement of such award. 5. MISCELLANEOUS 5.1 This Agreement may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of this Agreement. 5.2 This Agreement shall take effect from the date of formal execution by the Parties. [Remainder of this page intentionally left blank] 3 [Signature Page] IN WITNESS of which the Parties hereto have executed this Agreement on the date first mentioned above. /s/ Ji Wang ----------------------- By Mr. JI WANG (IoU(Y)) /s/ Tao Feng ----------------------- By Mr. TAO FENG (o eII) For and on behalf of Shanghai Newmargin Venture Capital Co., Ltd. SIGNED by /s/ Tao Feng --------------------- Name: Mr. TAO FENG(o eII) Position: Chief Executive Officer For and on behalf of Shanghai T2 Entertainment Co., Ltd. SIGNED by /s/ ------------------- Name: Position: For and on behalf of T2CN Information Technology (Shanghai) Co., Ltd. SIGNED by /s/ Jun-Tse Teng ------------------- Name: Position: Chief Executive Officer EX-10 10 f1ex106aug05.txt 10.6 EXHIBIT 10.6 Private and Confidential Execution Copy PROXY AGREEMENT Regarding Shareholders' Voting Rights In Shanghai T2 Entertainment Co., Ltd. among T2CN Information Technology (Shanghai) Co., Ltd. Shanghai T2 Entertainment Co., Ltd. Shanghai Newmargin Venture Capital Co., Ltd. and Feng Tao November 4, 2004 FANGDA PARTNERS Room 2202-2207, Kerry Center 1515 Nan Jing West Road Shanghai 200040 SHAREHOLDERS' VOTING RIGHTS PROXY AGREEMENT This Shareholders' Voting Rights Proxy Agreement (hereinafter this "Agreement") is entered into in Shanghai of the People's Republic of China (hereinafter "PRC") as of November 4, 2004 by and among the following Parties: (1) T2CN Information Technology (Shanghai) Co., Ltd. (hereinafter the "Wholly-Owned Company") Registered Address: Suite 22301-526, Pudong Software Park, 498 Guo Shoujing Road, Pudong New District, Shanghai Legal Representative: Teng Jun-Tse (2) Shanghai T2 Entertainment Co., Ltd., (hereinafter "T2 Entertainment") Registered Address: 5th Floor 88 Qinjiang Road, Xuhui District, Shanghai Legal Representative: Feng Tao (3) Shanghai Newmargin Venture Capital Co., Ltd. (hereinafter "Shanghai Newmargin") Registered Address: 99 Yinqiao Road, Pudong New District, Shanghai Legal Representative: Dong Yeshun (4) Feng Tao Domicile: Building 3 Xingguo Hotel, 78 Xingguo Road, Shanghai Identity Card Number: 310106670509323 (Shanghai Newmargin and Feng Tao hereinafter are individually and collectively referred to as the "Shareholder(s)") WHEREAS: 1. The Shareholders are currently the only shareholders of T2 Entertainment, legally holding all the equity in T2 Entertainment; 2. The Shareholders intend to severally entrust Wholly-Owned Company with the exercises of their voting rights in T2 Entertainment while Wholly-Owned Company is willing to accept such entrustment. The Parties hereby have reached the following agreement upon mutual consultations: Article 1 Voting Rights Entrustment 1.1 The Shareholders hereby irrevocably entrust Wholly-Owned Company with the full exercise of the following rights respectively enjoyed by them as shareholders of T2 Entertainment in accordance with the then effective 1 articles of association of T2 Entertainment (collectively the "Entrusted Rights"): (1) Attending shareholders' meetings of T2 Entertainment as proxy for the Shareholders; (2) Exercising on behalf of the Shareholders voting rights on all issues required to be discussed and resolved by the shareholders' meeting; (3) Proposing to convene interim shareholders' meetings; and (4) Other voting rights of Shareholders under the articles of association of T2 Entertainment (including such other voting rights of Shareholders as provided after amendment to such articles of association). 1.2 The Shareholders acknowledge and assume relevant liabilities for any legal consequences of Wholly-Owned Company's exercise of the foregoing Entrusted Rights. 1.3 The Shareholders hereby acknowledge that Wholly-Owned Company needs no advice from the Shareholders prior to its exercise of the foregoing Entrusted Rights. However, Wholly-Owned Company shall inform the Shareholders in a timely manner of any resolution or proposal on convening interim shareholders' meeting after such resolution or proposal is made. Article 2 Right to Information 2.1 For the purpose of exercising the Entrusted Rights under this Agreement, Wholly-Owned Company is entitled to know the information with regard to T2 Entertainment's operation, business, clients, finance, staff, etc., and shall have access to relevant materials of T2 Entertainment. T2 Entertainment shall adequately cooperate with WFIE Company in this regard. Article 3 Exercise of Entrusted Rights 3.1 Wholly-Owned Company may appoint by itself or entrust its particular personnel (one person or more) with the exercise of any or all Entrusted Rights to the extent as agreed in Article 1 hereof. The Shareholders acknowledge and agree to assume relevant legal consequences of such entrustment. 3.2 The Shareholders will provide adequate assistance to the exercise of the Entrusted Rights of Wholly-Owned Company, including execution of the resolutions of the shareholders' meeting of T2 Entertainment or other pertinent legal documents made by Wholly-Owned Company when necessary (e.g., when it is necessary for examination and approval of or registration or filing with governmental departments). 3.3 If at any time during the term of this Agreement, the entrustment or exercise of the Entrusted Rights under this Agreement is unenforceable for 2 any reason except for default of any Shareholder or T2 Entertainment, the Parties shall immediately seek a most similar substitute for the provision unenforceable and, if necessary, enter into supplementary agreement to amend or adjust the provisions herein, in order to ensure the realization of the purpose of this Agreement. Article 4 Exemption and Compensation 4.1 The Parties acknowledge that Wholly-Owned Company shall not be requested to be liable for or compensate (by money or otherwise) other Parties or any third party due to its exercise of Entrusted Rights under this Agreement. 4.2 T2 Entertainment and the Shareholders agree to compensate Wholly-Owned Company for and hold it harmless against all losses incurred or likely to be incurred by it due to its exercise of the Entrusted Rights, including without limitation any loss resulting from any litigation, demand arbitration or claim initiated or raised by any third party against it or from administrative investigation or penalty of governmental authorities. However, the Shareholders and T2 Entertainment will not compensate for losses incurred due to misconduct or gross negligence of Wholly-Owned Company. Article 5 Representations and Warranties 5.1 Each of the Shareholders hereby severally and jointly with the other Shareholder represents and warrants that: 5.1.1 Feng Tao is a PRC citizen with full capacity and with full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and may act independently as a subject of actions; 5.1.2 Shanghai Newmargin is a limited liability corporation duly incorporated and validly existing under the PRC laws; it has independent status as a legal person; it has full and independent legal status and capacity to execute, deliver and perform this Agreement and can independently be one litigant party. 5.1.3 Each of them has full right and authorization to execute and deliver this Agreement and other documents that are related to the transaction stipulated in this Agreement and to be executed by them. They have full right and authorization with respect to completing the transaction stipulated in this Agreement. 5.1.4 This Agreement shall be executed and delivered by the Shareholders lawfully and properly. This Agreement constitutes the legal and binding obligations on them and is enforceable on 3 them in accordance with its terms and conditions hereof. 5.1.5 The Shareholders are enrolled and legal Shareholders of T2 Entertainment as of the effective date of this Agreement, and except the rights created by this Agreement, the Equity Pledge Agreement entered into by them and Wholly-Owned Company, and the Exclusive Equity Transfer Call Agreement entered into by them and T2 Entertainment and T2CN Holding Limited (a limited liability corporation incorporated under British Virgin Islands laws) as of November 4, 2004 (hereinafter "Call Agreement"), there exists no third party rights on the Entrusted Rights. Pursuant to this Agreement, Wholly-Owned Company is able to completely and sufficiently exercise the Entrusted Rights in accordance with the then effective articles of association of T2 Entertainment. 5.2 Wholly-Owned Company and T2 Entertainment hereby severally represents and warrants that: 5.2.1 each of them is a company with limited liability properly registered and legally existing under the PRC laws, with an independent corporate legal person status, and has full and independent legal status and legal capacity to execute, deliver and perform this Agreement and may act independently as a subject of actions; and 5.2.2 each of them has the full company power and authority to execute and deliver this Agreement and all the other documents to be entered into by it in relation to the transaction contemplated hereunder, and has the full power and authority to consummate such transaction. 5.3 T2 Entertainment further represents and warrants that the Shareholders are the only enrolled and legal shareholders of T2 Entertainment as of the effective date of this Agreement. Pursuant to this Agreement, Wholly-Owned Company is able to completely and sufficiently exercise the Entrusted Rights in accordance with the then effective articles of association of T2 Entertainment. Article 6 Term of Agreement 6.1 This Agreement takes effect from the date of due execution of all the Parties hereto, and shall maintain its effect indefinitely as long as any of the Shareholders remains as a shareholder of T2 Entertainment, unless terminated by written agreement of all the Parties. 6.2 Subject to Article 6.3 below, in case a Shareholder transfers all of the equity held by it in T2 Entertainment with prior consent of Wholly-Owned Company, such Shareholder shall no longer be a Party to this Agreement whilst the obligations and commitments of the other Parties under this 4 Agreement shall not be adversely affected thereby. 6.3 Except for transferring equity according to Call Agreement, in case that any party of the Shareholders transfers its equity in T2 Entertainment to a third party, such party shall obtain written consent from Wholly-Owned Company and provide Wholly-Owned Company with written undertaking letter issued by transferee undertaking to fulfil all the obligations applying to the transferor under this Agreement. Article 7 Notice 7.1 Any notice, request, demand and other correspondences made as required by or in accordance with this Agreement shall be made in writing and delivered to the relevant Party. 7.2 The abovementioned notice or other correspondences shall be deemed to have been delivered when (i) it is transmitted if transmitted by facsimile or telex, or (ii) it is delivered if delivered in person, or (iii) when five (5) days have elapsed after posting the same if posted by mail. Article 8 Default Liability 8.1 The Parties agree and confirm that, if any of the Parties (hereinafter the "Defaulting Party") breaches substantially any of the provisions herein or fails substantially to perform any of the obligations hereunder, such a breach or failure shall constitute a default under this Agreement (hereinafter a "Default"). In such event any of the other Parties without default (a "Non-defaulting Party") shall have the right to require the Defaulting Party to rectify such Default or take remedial measures within a reasonable period. If the Defaulting Party fails to rectify such Default or take remedial measures within such reasonable period or within ten (10) days of a Non-defaulting Party's notifying the Defaulting Party in writing and requiring it to rectify the Default, then (1) Wholly-Owned Company shall be entitled to terminate this Agreement and require the Defaulting Party to indemnify damages in case the Defaulting Party is a Shareholder or T2 Entertainment, or (2) the Non-defaulting Party is entitled to require the Defaulting Party to indemnify damages in case such Defaulting Party is Wholly-Owned Company. The Shareholders or T2 Entertainment shall in no circumstance be entitled to terminate or cancel this Agreement or the trust hereunder. 8.2 The rights and remedies set out herein shall be cumulative, and shall not preclude any other rights or remedies provided by law. 8.3 Notwithstanding any other provisions herein, the validity of this Article shall stand disregarding the suspension or termination of this Agreement. 5 Article 9 Miscellaneous 9.1 This Agreement shall be prepared in Chinese language in four (4) original copies, with each involved Party holding one (1) copy hereof. 9.2 The conclusion, validity, execution, amendment, interpretation and termination of this Agreement shall be governed by laws of the PRC. 9.3 Any disputes arising from and in connection with this Agreement shall be settled through consultations among the Parties, and if the Parties fail to reach an agreement regarding such a dispute within thirty (30) days of its occurrence, such dispute shall be submitted to China International Economic and Trade Arbitration Commission Shanghai Branch for arbitration in Shanghai in accordance with the arbitration rules of such commission, and the arbitration award shall be final and binding on all Parties. 9.4 Any rights, powers and remedies empowered to any Party by any provisions herein shall not preclude any other rights, powers and remedies enjoyed by such Party in accordance with laws and other provisions under this Agreement, and a Party's exercise of any of its rights, powers and remedies shall not preclude its exercise of other rights, powers and remedies of it. 9.5 Any failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws (hereinafter the "Party's Rights") shall not lead to a waiver of such rights, and the waiver of any single or partial exercise of the Party's Rights shall not preclude such Party from exercising such rights in any other way or exercising the remaining part of the Party's Rights. 9.6 The titles of the Articles contained herein are for reference only, and in no circumstances shall such titles be used for or affect the interpretation of the provisions hereof. 9.7 Each provision contained herein shall be severable and independent from each of other provisions. If at any time any one or more articles herein become invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions herein shall not be affected thereby. 9.8 Any amendments or supplements to this Agreement shall be made in writing and shall take effect only when properly signed by the Parties to this Agreement. 9.9 No Party shall assign any of its rights and/or transfer any of its obligations hereunder to any third parties without prior written consent from other Parties. 9.10 This Agreement shall be binding on the legal successors of the Parties. 6 [Execution Page] IN WITNESS HEREOF, the following Parties have caused this Shareholders' Voting Rights Proxy Agreement to be executed as of the date and at the place first above mentioned. T2CN Information Technology (Shanghai) Co., Ltd. (Company chop) Signature: /s/ Jun-Tse Teng ------------------------------------- Name: Position: Authorized Representative Shanghai T2 Entertainment Co., Ltd. (Company chop) Signature: /s/ Tao Feng ------------------------------------- Name: Position: Authorized Representative Shanghai Newmargin Venture Capital Co., Ltd. (Company chop) Signature: /s/ Tao Feng ------------------------------------- Name: Position: Authorized Representative Feng Tao Signature: /s/ Tao Feng ------------------------------------- EX-10 11 f1ex107aug05.txt 10.7 EXHIBIT 10.7 NOVATION AGREEMENT THIS NOVATION AGREEMENT (this "Agreement") is made on June 6, 2005 BETWEEN: (1) Mr. JI WANG, a citizen of the People's Republic of China (the "PRC") with his I.D. card number of 330102197106260617 (the "Transferee"); (2) Mr. TAO FENG, a citizen of the PRC with his ID card number of 310106670509323 (the "Transferor"); (3) Shanghai Newmargin Venture Capital Co., Ltd., a limited liability company incorporated under the laws of the PRC with its registered address at 99 Yinqiao Road, Pudong New District, Shanghai, PRC ("Shanghai Newmargin"); (4) Shanghai T2 Entertainment Co., Ltd., a limited liability company incorporated under the laws of the PRC with its registered address at 5th Floor 88 Qinjiang Road, Xuhui District, Shanghai, PRC (200233) ("T2 Entertainment"); and (5) T2CN Information Technology (Shanghai) Co., Ltd., a company incorporated under the laws of the PRC with its communication address at 5th Floor 88 Qinjiang Road, Xuhui District, Shanghai, PRC (200233) ("T2CN Information Technology"). Shanghai Newmargin, T2 Entertainment and T2CN Information Technology may hereinafter collectively be referred to as the "Contractors" and respectively referred to as a "Contractor". The Transferee, the Transferor and the Contractors may hereinafter collectively be referred to as the "Parties" and respectively referred to as a "Party". INTRODUCTION: (A) The Transferor and the Contractors are parties to a Shareholders' Voting Rights Proxy Agreement, dated November 4, 2004, whereby TAO FENG and Shanghai Newmargin authorize the WFOE or its designated persons to exercise all the shareholder's rights enjoyed by TAO FENG and Shanghai Newmargin as shareholders of T2 Entertainment. 1 (B) As agreed by T2CN Information Technology and Shanghai Newmargin, the Transferee has acquired from the Transferor 20% equity interest in T2 Entertainment and Transferor is no longer a shareholder of Shanghai (C) The Parties have agreed to novate the aforesaid Shareholders' Voting Rights Proxy Agreement to the Transferee. THE PARTIES AGREE as follows: 1. INTERPRETATION 1.1 In this Agreement "Original Agreement" means the Shareholders' Voting Rights Proxy Agreement made by and among the Contractors and the Transferor, whereby TAO FENG and Shanghai Newmargin authorize the WFOE or its designated persons to exercise all the shareholder's rights enjoyed by TAO FENG and Shanghai Newmargin as shareholders of T2 Entertainment 1.2 The headings in this Agreement do not affect its interpretation. 2. NOVATION With effect from June 6, 2005: 2.1 the Transferee shall perform the Transferor's obligations under the Original Agreement and is bound by the terms of the Original Agreement in every way as if the Transferee had at all times been a party to the Original Agreement in place of the Transferor; 2.2 each of the Contractors releases and discharges the Transferor from further performance of the Original Agreement and all liabilities, claims and demands howsoever arising under the Original Agreement, whether in contract, tort or otherwise, and accepts the liability of the Transferee under the Original Agreement in place of the liability of the Transferor; and 2.3 each of the Contractors shall perform its obligations under the Original Agreement and be bound by the terms of the Original Agreement in every way as if the Transferee had at all times been a party to the Original Agreement in place of the Transferor. 3. GOVERNING LAW This Agreement is governed by the PRC law. 2 4. ARBITRATION 4.1 If any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity hereof cannot be resolved through consultation, the dispute shall be submitted to arbitration. 4.2 The arbitration shall be conducted in Shanghai under the auspices of the China International Economic and Trade Arbitration Commission, Shanghai Sub-commission ("CIETAC") according to its then arbitration rules. The Parties shall jointly appoint a sole arbitrator to hear the case and if the Parties do not agree on the choice of the aforesaid sole arbitrator within twenty (20) days from the date on which the respondent receives the notice of arbitration, the Chairman of the CIETAC will make the appointment. 4.3 The award of the arbitration tribunal shall be final and binding upon the disputing parties and, in the case where the subdued party does not perform the award, the prevailing party may apply to a court of competent jurisdiction for enforcement of such award. 5. MISCELLANEOUS 5.1 This Agreement may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of this Agreement. 5.2 This Agreement shall take effect from the date of formal execution by the Parties. [Remainder of this page intentionally left blank] 3 [Signature Page] IN WITNESS of which the Parties hereto have executed this Agreement on the date first mentioned above. /s/ Ji Wang ----------------------- By Mr. JI WANG (IoU(Y)) /s/ Tao Feng ----------------------- By Mr. TAO FENG (o eII) For and on behalf of Shanghai Newmargin Venture Capital Co., Ltd. SIGNED by /s/ Tao Feng Name: Mr. TAO FENG(o eII) Position: Chief Executive Officer For and on behalf of Shanghai T2 Entertainment Co., Ltd. SIGNED by /s/ ------------------- Name: Position: For and on behalf of T2CN Information Technology (Shanghai) Co., Ltd. SIGNED by /s/ ------------------- Name: Position: Chief Executive Officer EX-10 12 f1ex108aug05.txt 10.8 EXHIBIT 10.8 Private and Confidential Execution Copy Exclusive Equity Transfer Call Agreement among Feng Tao Shanghai NewMargin Venture Capital Co., Ltd. Shanghai T2 Entertainment Co., Ltd. and T2CN Holding Limited Regarding Shanghai T2 Entertainment Co., Ltd. November 4, 2004 FANGDA PARTNERS 22/F, Kerry Center 1515 Nan Jing West Road Shanghai 200040, PRC 1 Exclusive Equity Transfer Call Agreement This Exclusive Equity Transfer Call Agreement (hereinafter this "Agreement") is entered into in Shanghai of the People's Republic of China (hereinafter "PRC") as of November 4, 2004 by and between the following Parties: (1) Feng Tao Address: Building 3 Xingguo Hotel, 78 Xingguo Road, Shanghai Identity Card Number: 310106670509323 (2) Shanghai NewMargin Venture Capital Co., Ltd. (hereinafter "Shanghai NewMargin") Registered Address: 99 Yinqiao Road, Pudong New District, Shanghai, PRC Legal Representative: Dong Yeshun (Feng Tao and Shanghai NewMargin hereinafter individually and collectively the "Existing Shareholder(s)"); (3) Shanghai T2 Entertainment Co., Ltd., (hereinafter "T2 Entertainment") Registered Address: 5th Floor 88 Qinjiang Road, Xuhui District, Shanghai, PRC Legal Representative: Feng Tao and (4) T2CN Holding Limited (hereinafter "Company") Registered Address: Offices of S-HR&M Financial Services Limited of Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands Whereas: (1) The Existing Shareholders are the enrolled shareholders of T2 Entertainment, legally holding all the equity of T2 Entertainment, and their contributions to and their equity shares in the registered capital of T2 Entertainment as of the date of this Agreement are as set out in Appendix I hereto. (2) The Existing Shareholders intend to transfer to the Company, and the Company is willing to accept, all their respective equity share in T2 Entertainment, subject to PRC Law. (3) In order to realize the above equity transfer, the Existing Shareholders agree to jointly grant the Company with an irrevocable right for equity transfer (hereinafter the "Transfer Right"), under which and to the extent as permitted by the PRC Law, the Existing Shareholders shall on demand of the Company transfer the Refined Equity (as defined below) to the Company 2 and/or any other entity or individual designated by it in accordance with the provisions contained herein. (4) T2 Entertainment consents that the Existing Shareholders grant the Company the Transfer Right according to this Agreement. The Parties hereby have reached the following agreement upon mutual consultations: Article 1 - Definition 1.1 Except as otherwise construed in the context, the following terms in this Agreement shall be interpreted to have the following meanings: "PRC Law" shall mean the then valid laws, administrative regulations, administrative rules, local regulations, judicial interpretations and other binding regulatory documents of the People's Republic of China. "Refined Equity" shall mean, in respect of each of the Existing Shareholders, all its respective equity share in the T2 Entertainment Registered Capital (as defined below); and in respect of both Existing Shareholders, the equity accounting for 80% of the T2 Entertainment Registered Capital. "T2 Entertainment Registered Capital" shall mean the registered capital of T2 Entertainment on the date of this Agreement, i.e., RMB1,000,000, and shall include any expanded registered capital as the result of any capital increase within the term of this Agreement. "Transferred Equity" shall mean the equity of T2 Entertainment which the Company has the right to require the Existing Shareholders to transfer to it or its designated entity or individual when the Company exercises its Transfer Right (hereinafter the "Exercise of Call") in accordance with Article 3.2 herein, the amount of which may be all or part of the Refined Equity and the details of which shall be determined by the Company at its own discretion in accordance with the then valid PRC Law and from its commercial consideration. "Transfer Price" shall mean all the considerations that the Company or its designated entity or individual is required to pay to the Existing Shareholders in order to obtain the Transferred Equity upon each Exercise of Option. "Business Permits" shall mean any approvals, permits, filings, registrations etc. which T2 Entertainment is required to have for legally and validly operating its eight technical services in the field of computer hardware and software development and all such other businesses, including but not limited to the Business License of the Corporate Legal Person, the Tax Registration Certificate, the Permit for Operations of Value-added Telecommunication Businesses in respect of the business operations in internet information services, the filing of internet electronic announcement services, the filing of 3 computer network safety and such other relevant licenses and permits as required then by PRC Laws; "T2 Entertainment Assets" shall mean all the tangible and intangible assets which T2 Entertainment owns or has the right to use during the term of this Agreement, including but not limited to any immoveable and moveable assets, and such intellectual property rights as trademarks, copyrights, patents, proprietary know-how, domain name, software use right; "Wholly-Owned Company" shall mean T2CN Information Technology (Shanghai) Co., Ltd., a wholly foreign owned enterprise duly incorporated and validly existing under the PRC laws, with its legal address at Suite 22301-526, Pudong Software Park, 498 Guo Shoujing Road, Pudong New District, Shanghai; "Material Agreement" shall mean an agreement to which T2 Entertainment is a party and which has a material impact on the businesses or assets of T2 Entertainment, including but not limited to the Exclusive Technical Service and Consultancy Agreement between T2 Entertainment and the Wholly-Owned Company and other agreements regarding T2 Entertainment's business; "Shareholding Limit" shall have the meaning stipulated in Article 3.2 of this Agreement. "Exercise Notice" shall have the meaning stipulated in Article 3.5 of this Agreement. "Power of Attorney" shall have the meaning stipulated in Article 3.7 of this Agreement. "Confidential Information" shall have the meaning stipulated in Article 8.1 of this Agreement. "Defaulting Party" shall have the meaning stipulated in Article 11.1 of this Agreement. "Default" shall have the meaning stipulated in Article 11.1 of this Agreement. Party's Rights shall have the meaning stipulated in Article 12.5 of this Agreement. 1.2 The references to any PRC Law herein shall be deemed (1) to include the references to the amendments, changes, supplements and reenactments of such law, irrespective of whether they take effect before or after the formation of this Agreement; and (2) to include the references to other decisions, notices or regulations enacted in accordance therewith or effective as a result thereof. 1.3 Except as otherwise stated in the context herein, all references to an Article, clause, item or paragraph shall refer to the relevant part of this 4 Agreement. Article 2 - Grant of Transfer Call 2.1 The Existing Shareholders hereby separately and jointly agree to exclusively grant the Company hereby irrevocably and without any additional conditions with a Transfer Right, under which the Company shall have the right to require the Existing Shareholders to transfer the Refined Equity to the Company or its designated entity or individual in such method as set out herein and as permitted by the PRC Law. The Company also agrees to accept such Transfer Right. 2.2 T2 Entertainment hereby consents that the Existing Shareholders grant the Company such Transfer Right according to Article 2.1 above and other provisions in this Agreement. Article 3 - Method for Exercise of Call 3.1 To the extent as permitted by the PRC Law, the Company shall have the absolute discretionary right to determine the specific time, method and times of its Exercise of Option. 3.2 If the then PRC Law permits the Company and/or other entity or individual designated by it to hold all the equity of T2 Entertainment, then the Company shall have the right to elect to exercise all of its Transfer Right at once, where the Company and/or other entity or individual designated by it shall accept all the Refined Equity from the Existing Shareholders at once; if the then PRC Law permits the Company and/or other entity or individual designated by it to hold only part of the equity in T2 Entertainment, the Company shall have the right to determine the amount of the Transferred Equity within the extent not exceeding the upper limit of shareholding ratio set out by the then PRC Law (hereinafter the "Shareholding Limit"), where the Company and/or other entity or individual designated by it shall accept such amount of the Transferred Equity from the Existing Shareholders. In the latter case, the Company shall have the right to exercise its Transfer Right at multiple times in line with the gradual deregulation of the PRC Law on the permitted Shareholding Limit, with a view to ultimately acquiring all the Refined Equity. 3.3 At each Exercise of Option by the Company, the Company shall have right to determine the amount of the Transferred Equity transferred by each of the Existing Shareholders to the Company and/or any other designated entity or individual in such Exercise of Option. Each of the Existing Shareholders shall transfer the Transferred Equity to the Company and/or other entity or individual designated by it respectively in accordance with the amount required by the Company. The Company and other entity or individual designated by it shall pay the Transfer Price to each of the Existing Shareholders who transferred the Transferred Equity for the Transferred Equity accepted in each Exercise of Option. 5 3.4 In each Exercise of Option, the Company may accept the Transferred Equity by itself or designate any third party to accept all or part of the Transferred Equity. 3.5 On deciding each Exercise of Option, the Company shall issue to both Existing Shareholders a notice for exercising the Transfer Right (hereinafter the "Exercise Notice", the form of the Exercise Notice is set out as Appendix II hereto). The Existing Shareholders shall, upon receipt of the Exercise Notice, forthwith transfer all the Transferred Equity in accordance with the Exercise Notice in a lump sum to the Company and/or other entity or individual designated by the Company in such method as described in Article 3.3 herein. 3.6 The Existing Shareholders hereby jointly and severally undertake and guarantee that once the Company issues the Exercise Notice: (1) it shall immediately hold a shareholders' meeting and adopt a resolution through the shareholders' meeting, and take all other necessary actions to agree to the transfer of all the Transfer Right to the Company and/or other entity or individual designated by it at the Transfer Price; (2) it shall immediately enter into an equity transfer agreement with the Company and/or other entity or individual designated by it for transfer of all the Transferred Equity to the Company and/or other entity or individual designated by it at the Transfer Price; and (3) it shall provide the Company with necessary support (including providing and executing all the relevant legal documents, processing all the procedures for government approvals and registrations and bearing all the relevant obligations) in accordance with the requirements of the Company and of the laws and regulations, in order that the Company and/or other entity or individual designated by it may take all the Transferred Equity free from any legal defect. 3.7 At the meantime of this Agreement, both Existing Shareholders shall respectively enter into a power of attorney (hereinafter the "Power of Attorney", the form of which is set out as Appendix III hereto), authorizing in writing any person designated by the Company to, on behalf of such Existing Shareholder, to enter into any and all of the legal documents in accordance with this Agreement so as to ensure that the Company and/or other entity or individual designated by it take all the Transferred Equity free from any legal defect. Such Power of Attorney shall be delivered for custody by the Company and the Company may, at any time if necessary, require both Existing Shareholders to enter into multiple copies of the Power of Attorney respectively and deliver the same to the relevant government department. 6 Article 4 - Transfer Price At each Exercise of Option by the Company, all the Transfer Price to be paid by the Company or the entity or individual designated by it to each of the Existing Shareholders shall be equal to the applicable lowest price then permitted under PRC laws. Article 5 - Representations and Warranties 5.1 Each of the Existing Shareholders hereby jointly and severally represents and warrants as follows, and such representations and warrants shall be continuously valid as if made upon the transfer of the Transferred Equity: 5.1.1 Feng Tao is a PRC citizen with full capacity, with full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and may act independently as a litigant party. 5.1.2 Shanghai NewMargin is a limited liability corporation duly registered and validly existing under the PRC laws, with independent status as a legal person; it has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and may act independently as a litigant party. 5.1.3 It has full power and authorization to execute and deliver this Agreement and all the other documents to be entered into by it in relation to the transaction referred to herein, and it has the full power and authorization to complete the transaction referred to herein. 5.1.4 This Agreement is executed and delivered by the Existing Shareholder legally and properly. This Agreement constitutes the legal and binding obligations on it and is enforceable on it in accordance with its terms and conditions. 5.1.5 The Existing Shareholder is the enrolled legal owner of the Refined Equity as of the effective date of this Agreement, and except the rights created by this Agreement, the Equity Pledge Agreement entered into by it and the Wholly-Owned Company, and the Shareholders' Voting Rights Proxy Agreement entered into by it and the Wholly-Owned Company and T2 Entertainment, there is no lien, pledge, claim and other encumbrances and third party rights on the Refined Equity. In accordance with this Agreement, the Company and/or other entity or individual designated by it may, upon the Exercise of Option, obtain the proper title to the Transferred Equity free from any lien, pledge, claim and other encumbrances and third party rights. 5.2 T2 Entertainment hereby represents and warrants as follows: 5.2.1 T2 Entertainment is a limited liability corporation duly registered and validly existing under the PRC laws, with independent status as a 7 legal person; T2 Entertainment has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and may act independently as a litigant party. 5.2.2 T2 Entertainment has full power and authorization to execute and deliver this Agreement and all the other documents to be entered into by it in relation to the transaction referred to herein, and it has the full power and authorization to complete the transaction referred to herein. 5.2.3 This Agreement is executed and delivered by T2 Entertainment legally and properly. This Agreement constitutes legal and binding obligations on it. 5.2.4 The Existing Shareholders are the only enrolled legal shareholders of T2 Entertainment when this Agreement comes into effect. In accordance with this Agreement, the Company and/or other entity or individual designated by it may, upon the Exercise of Option, obtain the proper title to the Transferred Equity free from any lien, pledge, claim and other encumbrances and third party rights. 5.2.5 T2 Entertainment shall obtain complete Business Permits as necessary for its operations upon this Agreement taking effect or November 15, 2004 at the latest, and T2 Entertainment shall have sufficient rights and qualifications to operate within PRC the businesses of eight technical services in the field of computer hardware and software development, internet information, operations of network games and other business relating to its current business structure. T2 Entertainment has conducted its business legally since its establishment and has not incurred any cases which violate or may violate the regulations and requirements set forth by the departments of commerce and industry, tax, telecommunication, quality technology supervision, labor and social security and other governmental departments or any disputes in respect of breach of contract. 5.3 the Company hereby represents and warrants as follows: 5.3.1 the Company is a company with limited liability properly registered and legally existing under the British Virgin Islands law, with an independent status as a legal person and solely taking responsibility to the extent of the issued shares. The Company has full and independent legal status and legal capacity to execute, deliver and perform this Agreement and may act independently as a litigant party. 5.3.2 the Company has full power and authorization to execute and deliver this Agreement and all the other documents to be entered into by it in relation to the transaction referred to herein, and it has the full power and authorization to complete the transaction referred to herein. 8 5.3.3 This Agreement is executed and delivered by the Company legally and properly. This Agreement constitutes the legal and binding obligations on it. Article 6 - Undertakings by Existing Shareholders The Existing Shareholders hereby individually undertake as follows: 6.1 it must take all necessary measures during the term of this Agreement to ensure that T2 Entertainment is able to obtain all the Business Permits necessary for its business in a timely manner and all the Business Permits remain in effect at any time. 6.2 Without the prior written consent by the Company during the term of this Agreement, 6.2.1 no Existing Shareholders shall transfer or otherwise dispose of any Refined Equity or create any encumbrance or other third party rights on any Refined Equity; 6.2.2 it shall not increase or decrease the T2 Entertainment Registered Capital; 6.2.3 it shall not dispose of or cause the management of T2 Entertainment to dispose of any of the T2 Entertainment Assets (except as occurs during the arm's length operations); 6.2.4 it shall not terminate or cause the management of T2 Entertainment to terminate any Material Agreements entered into by T2 Entertainment, or enter into any other Material Agreements in conflict with the existing Material Agreements; 6.2.5 it shall not appoint or cancel or replace any executive directors, supervisors or any other management personnel of T2 Entertainment to be appointed or dismissed by the Existing Shareholders; 6.2.6 it shall not announce the distribution of or in practice release any distributable profit, dividend or share profit or capital bonus; 6.2.7 it shall ensure that T2 Entertainment shall validly exist and prevent it from being terminated, liquidated or dissolved; 6.2.8 it shall not amend the Articles of Association of T2 Entertainment; and 6.2.9 it shall ensure that T2 Entertainment shall not lend or borrow any money, or provide guarantee or engage in security activities in any other forms, or bear any substantial obligations other than on the 9 arm's length basis. 6.3 It must make all its efforts during the term of this Agreement to develop the business of T2 Entertainment, and ensure that the operations of T2 Entertainment are legal and in compliance with the regulations and that it shall not engage in any actions or omissions which might harm the T2 Entertainment Assets or its credit standing or affect the validity of the Business Permits of T2 Entertainment. Article 7 - Undertakings by T2 Entertainment 7.1 If any consent, permission, waive or authorization by any third person, or any approval, permission or exemption by any government authority, or any registration or filing formalities (if required by laws) with any government authority shall be handled or obtained in respect of the execution and performance hereof and the grant of the Transfer Right hereunder, T2 Entertainment shall nake its best endeavour to fulfill the above conditions. 7.2 Without prior written consent by the Company, T2 Entertainment shall not assist or permit the Existing Shareholders to transfer or otherwise dispose of any Refined Equity or create any encumbrance or other third party rights on any Refined Equity. 7.3 T2 Entertainment shall not conduct or permit any behavior or activity that may adversely affect the interest of the Company under this Agreement. Article 8 - Confidentiality Obligation 8.1 Notwithstanding the termination of this Agreement, the Existing Shareholders shall be obligated to keep in confidence the following information: (i) the execution, performance and the contents of this Agreement; (ii) the commercial secret, proprietary information and customer information in relation to the Company known to or received by it as the result of execution and performance of this Agreement; and (iii) the commercial secrets, proprietary information and customer information in relation to T2 Entertainment known to or received by it as the shareholder of T2 Entertainment (hereinafter collectively the "Confidential Information"). The Existing Shareholders may use such Confidential Information only for the purpose of performing its obligations under this Agreement. No Existing Shareholders shall disclose the above Confidential Information to any third parties without the written consent from the Company, or they shall bear the default liability and indemnify the losses. 8.2 Upon termination of this Agreement, both Existing Shareholders shall, upon demand by the Company, return, destroy or otherwise dispose of all the 10 documents, materials or software containing the Confidential Information and suspend using such Confidential Information. 8.3 Notwithstanding any other provisions herein, the validity of this Article shall not be affected by the suspension or termination of this Agreement. Article 9 - Term of Agreement This Agreement shall take effect as of the date of formal execution by the Parties, and shall terminate when all the Refined Equity is legally transferred under the name of the Company and/or other entity or individual designated by it in accordance with the provisions of this Agreement. Article 10 - Notice 10.1 Any notice, request, demand and other correspondences made as required by or in accordance with this Agreement shall be made in writing and delivered to the relevant Party. 10.2 The abovementioned notice or other correspondences shall be deemed to have been delivered when it is transmitted if transmitted by facsimile or telex; it shall be deemed to have been delivered when it is delivered if delivered in person; it shall be deemed to have been delivered five (5) days after posting the same if posted by mail. Article 11 - Liability for Breach of Contract 11.1 The Parties agree and confirm that, if any party (hereinafter the "Defaulting Party") breaches substantially any of the provisions herein or omits substantially to perform any of the obligations hereunder, or fails substantially to perform any of the obligations under this Agreement, such a breach or omission shall constitute a default under this Agreement (hereinafter a "Default"), then non-defaulting Party shall have the right to require the Defaulting Party to rectify such Default or take remedial measures within a reasonable period. If the Defaulting Party fails to rectify such Default or take remedial measures within such reasonable period or within ten (10) days of non-defaulting Party's notifying the Defaulting Party in writing and requiring it to rectify the Default, then non-defaulting Party shall have the right at its own discretion to select any of the following remedial measures: 11.1.1 If the Defaulting Party is either the Existing Shareholders or T2 Entertainment, the Company shall be entitled to: (1) to terminate this Agreement and require the Defaulting Party to indemnify it for all the damage; (2) mandatory performance of the obligations of the Defaulting Party hereunder and require the Defaulting Party to indemnify it for all the damage. 11.1.2 If the Defaulting Party is the Company,the Existing Shareholders or T2 11 Entertainment shall have right to require mandatory performance of the obligations of the Defaulting Party hereunder and require the Defaulting Party to indemnify it for all the damage. 11.2 The Parties agree and confirm that in no circumstances shall the Existing Shareholders and T2 Entertainment request the termination of this Agreement for any reason. 11.3 The rights and remedies set out herein shall be cumulative, and shall not preclude any other rights or remedies provided by law. 11.4 Notwithstanding any other provisions herein, the validity of this Article shall stand disregarding the suspension or termination of this Agreement. Article 12 - Miscellaneous 12.1 This Agreement shall be prepared in the Chinese language in four (4) original copies, with each involved Party holding one (1) copy hereof. 12.2 The formation, validity, execution, amendment, interpretation and termination of this Agreement shall be subject to the Laws of the People's Republic of China. 12.3 Any disputes arising hereunder and in connection herewith shall be settled through consultations among the Parties, and if the Parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such disputes shall be submitted to China International Economic and Trade Arbitration Commission Shanghai Branch for arbitration in Shanghai in accordance with the arbitration rules of such Commission, and the arbitration award shall be final and binding on all Parties. 12.4 Any rights, powers and remedies empowered to any Party by any provisions herein shall not preclude any other rights, powers and remedies enjoyed by such Party in accordance with laws and other provisions under this Agreement, and the exercise of its rights, powers and remedies by a Party shall not preclude its exercise of its other rights, powers and remedies by such Party. 12.5 Any failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws (hereinafter the "Party's Rights") shall not lead to a waiver of such rights, and the waiver of any single or partial exercise of the Party's Rights shall not preclude such Party from exercising such rights in any other way and exercising the remaining part of the Party's Rights. 12.6 The titles of the Articles contained herein shall be for reference only, and in no circumstances shall such titles be used in or affect the 12 interpretation of the provisions hereof. 12.7 Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one or more articles herein become invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions herein shall not be affected as a result thereof. 12.8 Upon execution, this Agreement shall substitute any other legal documents previously executed by the Parties on the same subject. Any amendments or supplements to this Agreement shall be made in writing and shall take effect only when properly signed by the Parties to this Agreement. 12.9 Neither Existing Shareholders or T2 Entertainment shall assign any of its rights and/or obligations hereunder to any third parties without the prior written consent of the Company, and the Company shall have the right to assign any of its rights and/or obligations hereunder to any of its designated third parties upon notice to the Existing Shareholders and T2 Entertainment. 12.10 This Agreement shall be binding on the legal successors of the Parties. [The following is intended to be blank] 13 (Execution Page) IN WITNESS HEREOF, the following Parties have caused this Exclusive Equity Transfer Call Agreement to be executed as of the date and in the place first here above mentioned. Feng Tao Signature: _____________ Shanghai NewMargin Venture Capital Co., Ltd. (Company chop) Signature by Authorized Representative: _____________ Name: Position: Authorized Representative Shanghai T2 Entertainment Co., Ltd. (Company chop) Signature by Authorized Representative: _____________ Name: Position: Authorized Representative T2CN HOLDING LIMITED (Company chop) Signature by Authorized Representative: _____________ Name: Position: Authorized Representative 14 Appendix I: Basic Information of T2 Entertainment ------------------------------------------ Company Name: Shanghai T2 Entertainment Co., Ltd. Registered Address: 5th Floor 88 Qinjiang Road, Xuhui District, Shanghai Registered Capital: RMB1,000,000 Legal Representative: Feng Tao Equity Structure: - ------------------------------------------------------------------------ Shareholder's Name Contribution (RMB) Equity Contribution Share Method - ------------------------------------------------------------------------ Shanghai NewMargin RMB800,000 80% Currency Venture Capital Co., Ltd. - ------------------------------------------------------------------------ Feng Tao RMB200,000 20% Currency - ------------------------------------------------------------------------ Total RMB1,000,000 100% / - ------------------------------------------------------------------------ Executive Director: Feng Tao Manager: Wang Ji Financial Year: From January 1 to December 31 (Calendar Year) 15 Appendix II: Format of the Option Exercise Notice ------------------------------------------- To: [Name of the Existing Shareholder(s)] As the Company and you/your company and Shanghai T2 Entertainment Co., Ltd. (hereinafter "T2 Entertainment") signed an Exclusive Equity Transfer Call Agreement as of November 4, 2004 (hereinafter the "Call Agreement"), and reached an agreement that you/your company shall transfer the equity you/your company hold in T2 Entertainment to this Company or any third parties designated by the Company on demand of the Company to the extent as permitted by the PRC Law and regulations, The Company hereby gives this Notice to you/your Company as follows: This Company hereby requires to exercise the Transfer Option under the Call Agreement and the Company/[name of company/individual] designated by the Company shall accept the equity you/your company hold accounting for ______% of the T2 Entertainment Registered Capital (hereinafter the "Proposed Accepted Equity"). You/Your company is required to forthwith transfer all the Proposed Accepted Equity to the Company/[name of designated company/individual] upon receipt of this Notice in accordance with the agreed terms in the Call Agreement. Best regards, T2CN Holding Limited (Company chop) Authorized Representative: ____________ Date: ____________ 16 Appendix III: Format of the Power of Attorney I/The company, __________________, hereby irrevocably entrust __________________ [with his/her identity card number of __________________] , as the authorized representative of me/the company, to sign the Exclusive Equity Transfer Call Agreement and other relevant legal documents among me/the company, Shanghai T2 Entertainment Co., Ltd. and T2CN Holding Ltd. regarding the Equity Transfer of Shanghai T2 Entertainment Co., Ltd. Signature: /s/ Tao Feng Date: ___________________ 17 EX-10 13 f1ex109aug05.txt 10.9 EXHIBIT 10.9 NOVATION AGREEMENT THIS NOVATION AGREEMENT (this "Agreement") is made on May 13, 2005 BETWEEN: (1) Mr. WANG Ji (IoU(Y)), a citizen of the People's Republic of China (the "PRC") with his I.D. card number of 330102197106260617 (the "Transferee"); (2) Mr. FENG Tao (o eII), a citizen of the PRC with his ID card number of 310106670509323 (the "Transferor"); (3) Shanghai Newmargin Venture Capital Co., Ltd. a limited liability company incorporated under the laws of the PRC with its registered address at 99 Yinqiao Road, Pudong New District, Shanghai, PRC ("Shanghai Newmargin"); (4) Shanghai T2 Entertainment Co., Ltd., a limited liability company incorporated under the laws of the PRC with its registered address at 5th Floor 88 Qinjiang Road, Xuhui District, Shanghai, PRC ("Shanghai T2"); and (5) T2CN Holding Limited, a company incorporated under the laws of the British Virgin Islands with its registered address at offices of S-HR&M Financial Services Limited of Kingston Chambers, P.O. Box 173, Road Town, Tortola, British Virgin Islands ("T2CN Holding"). Shanghai Newmargin, Shanghai T2 and T2CN Holding may hereinafter collectively be referred to as the "Contractors" and respectively referred to as a "Contractor". The Transferee, the Transferor and the Contractors may hereinafter collectively be referred to as the "Parties" and respectively referred to as a "Party" INTRODUCTION: (A) The Transferor and the Contractors are parties to an Exclusive Equity Transfer Call Agreement, dated November 4, 2004, in relation to the equity interests in Shanghai T2 held by the Transferor and Shanghai Newmargin respectively. According to that Exclusive Equity Transfer Call Agreement, T2CN Holding shall be entitled to request the Transferor and Shanghai Newmargin to transfer all or part of the equity interest held by them respectively in Shanghai T2 to T2CN Holding or any third person then designed by T2CN Holding, to the extent permitted by PRC law. (B) As agreed by T2CN Holding and Shanghai Newmargin, the Transferee has acquired from the Transferor 20% equity interest in Shanghai T2 and Transferor is no longer a shareholder of Shanghai (C) The Parties have agreed to novate the aforesaid Exclusive Equity Transfer Call Agreement to the Transferee. THE PARTIES AGREE as follows: 1. INTERPRETATION 1.1 In this Agreement "Original Agreement" means the Exclusive Equity Transfer Call Agreement made between the Transferor and the Contractor on November 4, 2004, in relation to the equity interests in Shanghai T2 held by the Transferor and Shanghai Newmargin respectively. 1.2 The headings in this Agreement do not affect its interpretation. 2. NOVATION With effect from May 13, 2005: 2.1 the Transferee shall perform the Transferor's obligations under the Original Agreement and is bound by the terms of the Original Agreement in every way as if the Transferee had at all times been a party to the Original Agreement in place of the Transferor; 2.2 each of the Contractors releases and discharges the Transferor from further performance of the Original Agreement and all liabilities, claims and demands howsoever arising under the Original Agreement, whether in contract, tort or otherwise, and accepts the liability of the Transferee under the Original Agreement in place of the liability of the Transferor; and 2.3 each of the Contractors shall perform its obligations under the Original Agreement and be bound by the terms of the Original Agreement in every way as if the Transferee had at all times been a party to the Original Agreement in place of the Transferor. 3. GOVERNING LAW This Agreement is governed by the PRC law. 4. ARBITRATION 4.1 If any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity hereof cannot be resolved through consultation, the dispute shall be submitted to arbitration. 4.2 The arbitration shall be conducted in Shanghai under the auspices of the China International Economic and Trade Arbitration Commission, Shanghai Sub-commission according to its then arbitration rules. The Parties shall jointly appoint a sole arbitrator to hear the case and if the Parties do not agree on the choice of the aforesaid sole arbitrator within twenty (20) days from the date on which the respondent receives the notice of arbitration, the Chairman of the CIETAC will make the appointment. 4.3 The award of the arbitration tribunal shall be final and binding upon the disputing parties and, in the case where the subdued party does not perform the award, the prevailing party may apply to a court of competent jurisdiction for enforcement of such award. 5. MISCELLANEOUS 5.1 This Agreement may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of this Agreement. 5.2 This Agreement shall take effect from the date of formal execution by the Parties. [Remainder of this page intentionally left blank] [Signature Page] IN WITNESS of which the Parties hereto have executed this Agreement on the date first mentioned above. /s/ Ji Wang ----------------------- By Mr. WANG Ji (IoU(Y)) /s/ Tao Feng ----------------------- By Mr. FENG Tao (o eII) For and on behalf of Shanghai Newmargin Venture Capital Co., Ltd. SIGNED by /s/ Tao Feng ------------------ Name: Mr. FENG Tao(o eII) Position: Chief Executive Officer For and on behalf of Shanghai T2 Entertainment Co., Ltd. SIGNED by /s/ Tao Feng ------------------ Name: Position: For and on behalf of T2CN Holding Limited SIGNED by /s/ Tao Feng ------------------ Name: Position: Chief Executive Officer EX-10 14 f1ex1010aug05.txt 10.10 EXHIBIT 10.10 Private and Confidential Execution Copy Shanghai Newmargin Venture Capital Co., Ltd. and Feng Tao and T2CN Information Technology (Shanghai) Co., Ltd. EQUITY PLEDGE AGREEMENT Regarding Shanghai T2 Entertainment Co., Ltd. ------------------------------------------------------- November 4, 2004 FANGDA PARTNERS Room 2202-2207, Kerry Center 1515 Nan Jing West Road Shanghai 200040 Equity Pledge Agreement This Equity Pledge Agreement (hereinafter this "Agreement") is entered into in Shanghai of the People's Republic of China (hereinafter "PRC") as of November 4, 2004 by and between the following Parties: (1) Shanghai Newmargin Venture Capital Co., Ltd. (hereinafter "Shanghai Newmargin"), Registered Address: No. 99 Yinqiao Road, Pudong New District, Shanghai Legal Representative: Dong Yeshun (2) Feng Tao Address: Building No. 3, Xingguo Hotel, No. 78 Xingguo Road, Shanghai Identity Card Number: 310106670509323 (The above Parties hereinafter individually and collectively the "Pledgor(s)") (3) T2CN Information Technology (Shanghai) Co., Ltd. (hereinafter the "Pledgee") Registered Address: No. 498 Guo Shoujing Road, Pudong New District, Shanghai Legal Representative: Teng Jun-Tse (Any single Party hereinafter a "Party" and all Parties collectively the "Parties") Whereas: (1) Pledgors are the enrolled shareholders of Shanghai T2 Entertainment Co., Ltd. (with its registered address is at 5th Floor, No. 88, Qinjiang Road, Xuhui District, Shanghai, with Feng Tao as its legal representative, hereinafter the "Company"), legally holding all the equity of the Company (hereinafter the "Company Equity"), and their contributions to and their equity shares in the registered capital of the Company as of the date of this Agreement are as set out in Appendix I hereto. (2) Pursuant to the Shareholders' Voting Rights Proxy Agreement dated November 4, 2004 between the Pledgee, the Company and the Pledgors (hereinafter the "Proxy Agreement"), Pledgors have already irrevocably entrusted Pledgee with full power to exercise on their behalf all of their shareholders' voting rights in the Company. 1 (3) Pursuant to the Exclusive Technical Service and Consultancy Agreement dated November 4, 2004 between the Pledgee and the Company (hereinafter the "Service Agreement"), the Company has already engaged Pledgee exclusively to provide it with relevant technical support services, and shall pay Pledgee the corresponding service fees for such services. (4) Pursuant to the Operation Agreement dated November 4, 2004 between the Pledgee, the Company and the Pledgors (hereinafter the "Operation Agreement"), the Company shall appoint or dismiss management staff and conduct daily business activities as well as financial and personnel management based on the Pledgee's instructions. (5) As the guarantee by the Pledgors and the Company for their performance of the Contract Obligations (as defined below) and repayment of the Guaranteed Liabilities (as defined below), the Pledgors agree to pledge all of their Company Equity to the Pledgee, and grant herewith to the Pledgee the right of first priority. Therefore, the Parties hereby have reached the following agreement upon mutual consultations: Article 1 - Definition 1.1 Except as otherwise construed in the context, the following terms in this Agreement shall be interpreted to have the following meanings: "Contract Obligations" shall mean all contractual obligations of the Pledgors under the Proxy Agreement, the Operation Agreement and this Agreement; and all contractual obligations of the Company under the Proxy Agreement, Service Agreement and the Operation Agreement. "Guaranteed Liabilities" shall mean all direct, indirect and derivative losses and loss of foreseeable profits suffered by Pledgee due to any Breaching Event (as defined below) of Pledgors and/or the Company, the amount of which shall be determined by Pledgee in its absolute sole discretion, to which Pledgors shall be subject; and all fees incurred by Pledgee for its enforcement of the Contractual Obligations of Pledgors and/or the Company. "Transaction Agreements" shall mean the Proxy Agreement, Service Agreement and Operation Agreement. 2 "Breaching Event" shall mean any breach by Pledgors of their Contract Obligations under the Proxy Agreement, Operation Agreement or this Agreement and any breach by the Company of its Contract Obligations under the Proxy Agreement, Service Agreement or Operation Agreement. "Pledged Property" shall mean all of Pledgors' the Company Equity legally owned by Pledgors as of the effectiveness hereof, which Pledgors shall pledge to Pledgee according to provisions hereof as the guarantee by them and the Company for the performance of their Contractual Obligations, with the particular pledged equity shares of each of Pledgors to be seen in Appendix I hereto; and the increased contribution amounts and interests as according to Article 2.6 and Article 2.7 hereof. "PRC Law" shall mean the then valid laws, administrative regulations, administrative rules, local regulations, judicial interpretations and other binding regulatory documents of the People's Republic of China. "Equity Pledge" shall have the meaning stipulated in Article 2.2 hereof. "Party's Rights" shall have the meaning stipulated in Article 12.7 hereof. "Power of Attorney" shall have the meaning stipulated in Article 12.12 hereof. 1.2 The references to any PRC Law herein shall be deemed: (1) to include the references to the amendments, changes, supplements and reenactments of such law, irrespective of whether they take effect before or after the formation of this Agreement; and (2) to include the references to other decisions, notices or regulations enacted in accordance therewith or effective as a result thereof. 1.3 Except as otherwise stated in the context herein, all references to an Article, clause, item or paragraph shall refer to the relevant part of this Agreement. 3 Article 2 - Equity Pledge 2.1 Pledgors hereby agree to pledge the Pledged Property, which they legally own and have the right to dispose of, to Pledgee according to the provisions hereof as the guarantee for the performance of the Contract Obligations and the repayment of the Guaranteed Liabilities. 2.2 Pledgors hereby undertake that they will be responsible for, on the date hereof, recording the arrangement of the equity pledge hereunder (hereinafter the "Equity Pledge") on the shareholder register of the Company, and doing their best endeavor to make registration with Registration Authoritires of Industry and Commerce of the Company. 2.3 During the valid term of this Agreement, except for the willful material negligence of Pledgee or such negligence is directly related as cause/result to the consequence, Pledgee shall not be liable in any way to, nor shall Pledgors have any right to claim in any way or propose any demands on Pledgee, in respect of the reduction in value of the Pledged Property. 2.4 Subject to compliance with the provision of 2.3 above, in case of any possibility of obvious reduction in value of the Pledged Property which is sufficient to jeopardize Pledgee's rights, Pledgee may at any time auction or sell off the Pledged Property on behalf of Pledgors, and discuss with Pledgors to use the proceeds from such auction or sale-off as pre-repayment of the Guaranteed Liabilities, or may submit such proceeds to the local notary institution where Pledgee is domiciled (any fees incurred in relation thereto shall be borne by Pledgors). 2.5 In case of any Breaching Event, Pledgee shall have the right to dispose of the Pledged Property in the way set out in Article 4 hereof. 2.6 Only upon prior consent by Pledgee shall Pledgors be able to increase their capital contribution to the Company. Pledgors' increased capital amount in the Company due to their increased capital contribution to the Company shall also be part of the Pledged Property. 2.7 Only upon prior consent by Pledgee shall Pledgors be able to receive dividends or share profits from the Pledged Property. The dividends or the profits received by Pledgors from the Pledged Property shall be deposited 4 into Pledgee's bank account designated by Pledgee, to be under the supervision of Pledgee and used as the Pledged Property to repay in priority the Guaranteed Liabilities. 2.8 Pledgee shall have the right, upon occurrence of the Breaching Event, dispose of any Pledged Property of any of Pledgors in accordance with the provisions hereof. Article 3 - Release of Pledge 3.1 Upon full and complete performance by Pledgors and the Company of all Contractual Obligations, Pledgee shall, at the request of Pledgors, release the pledge under this Agreement, and shall cooperate with Pledgors to handle the formalities to cancel the record of the Equity Pledge in the shareholder register of the Company, with the reasonable fees to be incurred in connection with the release of the pledge to be borne by Pledgee. Article 4 - Disposal of the Pledged Property 4.1 Pledgors and Pledgee agree hereby that, in case of any Breaching Event, Pledgee shall have the right to exercise, upon giving written notice to Pledgors, all of its remedies and powers at breaching enjoyable by it under the PRC Law, Transaction Agreements and the terms hereof, including but not limited to repayment in priority with proceeds from auctions or sale-offs of the Pledged Property. Pledgee shall not be liable for any loss as the result of its reasonable exercise of such rights and powers. 4.2 Pledgee shall have the right to designate in writing its legal consultant or other agents to exercise on its behalf any and all rights and powers set out above, and Pledgors shall not oppose thereto. 4.3 The reasonable costs incurred by Pledgee in connection with its exercise of any and all rights and powers set out above shall be borne by Pledgors, and Pledgee shall have the right to deduct such costs in fact from the proceeds it acquires from the exercise of the rights and powers. 4.4 The proceeds Pledgee acquires from the exercise of its rights and powers shall be used in the priority order as follows: 5 - First, to pay any cost incurred in connection with the disposal of the Pledged Property and the exercise by Pledgee of its rights and powers (including remuneration paid to its legal consultant and agents); - Second, to pay any taxes payable for the disposal of the Pledged Property; and - Third, to repay Pledgee for the Guaranteed Liabilities. In case of any balance after payment of the above amounts, Pledgee shall return the same to Pledgors or other persons entitled thereto according to the relevant laws and rules or submit the same to the local notary institution where Pledgee is domiciled (any fees incurred in relation thereto shall be borne by Pledgors). 4.5 Pledgee shall have the option to exercise, simultaneously or in certain sequence, any of the remedies at breaching it is entitled to; Pledgee is not obliged to exercise other remedies at breaching before its exercise of the right to the auctions or sale-offs of the Pledged Property hereunder. Article 5 - Fees and Costs 5.1 All actual costs in connection with the establishment of the Equity Pledge hereunder, including but not limited to stamp duties, any other taxes, all legal fees, etc shall be borne by Pledgee. Article 6 - Continuity and No Waive 6.1 The Equity Pledge hereunder is a continuous guarantee, with its validity to continue until the full performance of the Contractual Obligations or the full repayment of the Guaranteed Liabilities. Neither exemption or grace period granted by Pledgee to Pledgors in respect of their breach, nor delay by Pledgee in exercising any of its rights under the Transaction Agreements and this Agreement shall affect the rights of Pledgee under this Agreement, relevant PRC Law and the Transaction Agreements, the rights of Pledgee to demand at any time thereafter the strict performance of the Transaction Agreements and this Agreement by Pledgors or the rights Pledgee may be entitled to due to subsequent breach by Pledgors of the obligations under the Transaction Agreements and/or this Agreement. 6 Article 7 - Representations and Warranties Each of Pledgors hereby individually and jointly and severally represents and warrants to Pledgee as follows: 7.1 Feng Tao is a PRC citizen with full capacity of disposition; he has full and independent legal status and capacity and has obtained due authorization to execute, deliver and perform this Agreement and can independently be one litigant party. 7.2 Shanghai Newmargin is a limited liability corporation duly incorporated and validly existing under the PRC laws, it has independent status as a legal person; it has full and independent legal status and capacity to execute, deliver and perform this Agreement and can independently be one litigant party. 7.3 They have full right and authorization to execute and deliver this Agreement and other documents relating to the transaction as stipulated in this Agreement and to be executed by them. They also have full right and authorization to complete the transaction stipulated in this Agreement. 7.4 All reports, documents and information concerning Pledgors and all matters as required by this Agreement which are provided by Pledgors to Pledgee before this Agreement comes into effect are true and correct in all material aspects as of the execution hereof. 7.5 All reports, documents and information concerning Pledgors and all matters as required by this Agreement which are provided by Pledgors to Pledgee after this Agreement comes into effect are true and correct in all material aspects upon provision. 7.6 At the time of the effectiveness of this Agreement, Pledgors are the sole legal owner of the Pledged Property, with no existing dispute whatever concerning the ownership of the Pledged Property. Pledgors have the right to dispose of the Pledged Property or any part thereof. 7.7 Except for the encumbrance set on the Pledged Property hereunder and the rights set under the Transaction Agreements, there is no other encumbrance or third party interest set on the Pledged Property. 7.8 The Pledged Property is capable of being pledged or transferred according to the laws, and Pledgors have the full right and power to pledge the 7 Pledged Property to Pledgee according to this Agreement. 7.9 This Agreement constitutes the legal, valid and binding obligations on Pledgors when it is duly executed by Pledgors. 7.10 Any consent, permission, waive or authorization by any third person, or any approval, permission or exemption by any government authority, or any registration or filing formalities (if required by laws) with any government authority to be handled or obtained in respect of the execution and performance hereof and the Equity Pledge hereunder have already been handled or obtained, and will be fully effective during the valid term of this Agreement. 7.11 The execution and performance by Pledgors of this Agreement are not in violation of or conflict with any laws applicable to them, or any agreement to which they are a party or which has binding effect on their assets, any court judgment, any arbitration award, or any administration authority decision. 7.12 The pledge hereunder constitutes the encumbrance of first order in priority on the Pledged Property. 7.13 All taxes and fees payable in connection with acquisition of the Pledged Property have already been paid in full amount by Pledgors. 7.14 There is no pending or, to the knowledge of Pledgors, threatened litigation, legal process or demand by any court or any arbitral tribunal against Pledgors, or their property, or the Pledged Property, nor is there any pending or, to the knowledge of Pledgors, threatened litigation, legal process or demand by any government authority or any administration authority against Pledgors, or their property, or the Pledged Property, which is of material or detrimental effect on the economic status of Pledgors or their capability to perform the obligations hereunder and the Guaranteed Liabilities. 7.15 Pledgors hereby warrant to Pledgee that the above representations and warranties will remain true and correct at any time and under any circumstance before the Contractual Obligations are fully performed or the Guaranteed Liabilities are fully repaid, and will be fully complied with. 8 Article 8 - Undertakings by Pledgors Each of Pledgors hereby individually undertakes to Pledgee as follows: 8.1 Without the prior written consent by Pledgee, Pledgors shall not establish or permit to establish any new pledge or any other encumbrance on the Pledged Property; pledge or any other encumbrance on the whole or part of the Pledged Property established without the prior written consent by Pledgee shall be null and void. 8.2 Without first giving written notice to Pledgee and having Pledgee's prior written consent, Pledgors shall not transfer the Pledged Property, and any attempt by Pledgors to transfer the Pledged Property shall be null and void. The proceeds from transfer of the Pledged Property by Pledgors shall be used to repay to Pledgee in advance the Guaranteed Liabilities or submit the same to the third party agreed with Pledgee. 8.3 In case of any litigation, arbitration or other demand which may affect detrimentally the interest of Pledgors or Pledgee under the Transaction Agreements and hereunder or the Pledged Property, Pledgors undertake to notify Pledgee thereof in writing as soon as possible and promptly and shall take, at the reasonable request of Pledgee, all necessary measures to ensure the pledge interest of Pledgee in the Pledged Property. 8.4 Pledgors shall not carry on or permit any act or action which may affect detrimentally the interest of Pledgee under the Transaction Agreements and hereunder or the Pledged Property. 8.5 Pledgors guarantee that they shall, at the reasonable request of Pledgee, take all necessary measures and execute all necessary documents (including but not limited to supplementary agreement hereof) as to ensure the pledge interest of Pledgee in the Pledged Property and the exercise and realization of the rights thereof. 8.6 In case of assignment of any Pledged Property as the result of the exercise of the right to the pledge hereunder, Pledgors guarantee that they will take all necessary measures to realize such assignment. Article 9 - Change of Circumstances 9.1 As supplement and subject to compliance with other terms of the Transaction 9 Agreements and this Agreement, in case that at any time the promulgation or change of any PRC Law, regulations or rules, or change in interpretation or application of such laws, regulations and rules, or the change of the relevant registration procedures enables Pledgee to believe that it will be illegal or in conflict with such laws, regulations or rules to further maintain the effectiveness of this Agreement and/or dispose of the Pledged Property in the way provided herein, Pledgors shall, at the written direction of Pledgee and in accordance with the reasonable request of Pledgee, promptly take actions and/or execute any agreement or other document, in order to: (1) keep this Agreement remain in effect; (2) facilitate the disposal of the Pledged Property in the way provided herein; and/or (3) maintain or realize the intention or the guarantee established hereunder. Article 10 - Effectiveness and Term of This Agreement 10.1 This Agreement shall become effective upon the satisfaction of all of the following conditions: (1) this Agreement is duly executed by each of the Parties; and (2) the Equity Pledge hereunder has been legally recorded in the shareholders' register of the Company. Pledgors shall provide the registration certification of the Equity Pledge being recorded in the shareholders' register as mentioned above to Pledgee in a way satisfactory to Pledgee. 10.2 This Agreement shall have its valid term until the full performance of the Contractual Obligations or the full repayment of the Guaranteed Liabilities. Article 11 - Notice 11.1 Any notice, request, demand and other correspondences made as required by or in accordance with this Agreement shall be made in writing and delivered to the relevant Party. 11.2 The abovementioned notice or other correspondences shall be deemed to have been delivered when it is transmitted if transmitted by facsimile or telex; it shall be deemed to have been delivered when it is delivered if delivered in person; it shall be deemed to have been delivered five (5) days after posting the same if posted by mail. 10 Article 12 - Miscellaneous 12.1 Pledgee may, upon notice to Pledgors but not necessarily with Pledgors' consent, assign Pledgee's rights and/or obligations hereunder to any third party; provided that Pledgors may not, without Pledgee's prior written consent, assign Pledgors' rights, obligations and/or liabilities hereunder to any third party. Successors or permitted assignees (if any) of Pledgors shall continue to perform the obligations of Pledgors under this Agreement. 12.2 The amount of the Guaranteed Liabilities decided by Pledgee at its sole discretion in its exercise of the right of pledge to the Pledged Property according to this Agreement shall be the conclusive evidence of the Guaranteed Liabilities hereunder. 12.3 This Agreement shall be prepared in the Chinese language in three (3) original copies, with each involved Party holding one (1) copy hereof. Number of original copies may be increased accordingly for the purpose of registration or filing (if necessary). 12.4 The formation, validity, execution, amendment, interpretation and termination of this Agreement shall be subject to the PRC Laws. 12.5 Any disputes arising hereunder and in connection herewith shall be settled through consultations among the Parties, and if the Parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such disputes shall be submitted to China International Economic and Trade Arbitration Commission Shanghai Branch for arbitration in Shanghai in accordance with the arbitration rules of such Commission, and the arbitration award shall be final and binding on all Parties. 12.6 Any rights, powers and remedies empowered to any Party by any provisions herein shall not preclude any other rights, powers and remedies enjoyed by such Party in accordance with laws and other provisions under this Agreement, and the exercise of its rights, powers and remedies by a Party shall not preclude its exercise of its other rights, powers and remedies by such Party. 12.7 Any failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws (hereinafter the "Party's 11 Rights") shall not lead to a waiver of such rights, and the waiver of any single or partial exercise of the Party's Rights shall not preclude such Party from exercising such rights in any other way and exercising the remaining part of the Party's Rights. 12.8 The titles of the Articles contained herein shall be for reference only, and in no circumstances shall such titles be used in or affect the interpretation of the provisions hereof. 12.9 Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one or more articles herein become invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions herein shall not be affected as a result thereof. 12.10 Any amendments or supplements to this Agreement shall be made in writing. Except for assignment by Pledgee of its rights hereunder according to Article 12.1 of this Agreement, the amendments or supplements to this Agreement shall take effect only when properly signed by the Parties to this Agreement. 12.11 This Agreement shall be binding on the legal successors of the Parties. 12.12 At the time of execution hereof, each of Pledgors shall sign respectively a power of attorney (as set out in Appendix II hereto, hereinafter the "Power of Attorney") to authorize any person designated by Pledgee to sign on their behalf according to this Agreement any and all legal documents necessary for the exercise by Pledgee of its rights hereunder. Such Power of Attorney shall be delivered to Pledgee to keep in custody and, when necessary, Pledgee may at any time submit the Power of Attorney to the relevant government authority. 12 (Execution Page) IN WITNESS HEREOF, the following Parties have caused this Equity Pledge Agreement to be executed as of the date and in the place first here above mentioned. Shanghai NewMargin Venture Capital Co., Ltd. (Company chop) Signature by : _____________ Name: Position: Authorized Representative Feng Tao Signature by: ______________ T2CN Information Technology (Shanghai) Co., Ltd. (Company chop) Signature by : _____________ Name: Position: Authorized Representative 13 Appendix I: Basic Information of the Company Company Name: Shanghai T2 Entertainment Co., Ltd. Registered Address: 5th Floor, No. 88, Qinjiang Road, Xuhui District, Shanghai Registered Capital: RMB1,000,000 Legal Representative: Feng Tao Equity Structure: Shareholder's Name Contribution (RMB) Equity Share Shanghai NewMargin Venture RMB800,000 80% Capital Co., Ltd. Feng Tao RMB200,000 20% Total RMB1,000,000 100% Executive Director: Feng Tao Manager: Wang Ji Fiscal Year: January 1 to December 31 (Calendar Year) 14 Appendix II: Format of the Power of Attorney I/The company, ____________, hereby irrevocably entrusts ____________, with his/her identity card number ____________, to be my/the company's authorized trustee to sign on my/the company's behalf all legal documents necessary or desirous for T2CN Information Technology (Shanghai) Co., Ltd. to exercise its rights under the Equity Pledge Agreement Regarding Shanghai T2 Entertainment Co., Ltd. between it and myself/our company. .. Signature: /s/ Jun-Tse Teng -------------------- Date: ___________________ 15 EX-10 15 f1ex1011aug05.txt 10.11 EXHIBIT 10.11 NOVATION AGREEMENT THIS NOVATION AGREEMENT (this "Agreement") is made on June 6, 2005 BETWEEN: (1) Mr. JI WANG, a citizen of the People's Republic of China (the "PRC") with his I.D. card number of 330102197106260617 (the "Transferee"); (2) Mr. TAO FENG, a citizen of the PRC with his ID card number of 310106670509323 (the "Transferor"); (3) Shanghai Newmargin Venture Capital Co., Ltd., a limited liability company incorporated under the laws of the PRC with its registered address at 99 Yinqiao Road, Pudong New District, Shanghai, PRC ("Shanghai Newmargin"); and (4) T2CN Information Technology (Shanghai) Co., Ltd., a company incorporated under the laws of the PRC with its communication address at 5th Floor 88 Qinjiang Road, Xuhui District, Shanghai, PRC (200233) ("T2CN Information Technology"). Shanghai Newmargin and T2CN Information Technology may hereinafter collectively be referred to as the "Contractors" and respectively referred to as a "Contractor". The Transferee, the Transferor and the Contractors may hereinafter collectively be referred to as the "Parties" and respectively referred to as a "Party". INTRODUCTION: (A) The Transferor and the Contractors are parties to an Equity Pledge Agreement, dated November 4, 2004, whereby TAO FENG and Shanghai Newmargin should pledge all the equity interests held by them in Shanghai T2 Entertainment Co., Ltd., a limited liability company incorporated under the laws of the PRC with its registered address at 5th Floor 88 Qinjiang Road, Xuhui District, Shanghai, PRC (200233), "T2 Entertainment"), to secure the performance of certain obligations of the Transferor and Shanghai Newmargin and T2 Entertainment. (B) As agreed by T2CN Information Technology and Shanghai Newmargin, the Transferee has acquired from the Transferor 20% equity interest in T2 Entertainment and Transferor is no longer a shareholder of Shanghai. (C) The Parties have agreed to novate the aforesaid Operation Agreement to the Transferee. THE PARTIES AGREE as follows: 1. INTERPRETATION 1.1 In this Agreement "Original Agreement" means the Equity Pledge Agreement made by and among the Contractors and the Transferor, whereby TAO FENG and Shanghai Newmargin should pledge all the equity interests held by them in T2 Entertainment, to secure the performance of certain obligations of the Transferor and Shanghai Newmargin and T2 Entertainment. 1.2 The headings in this Agreement do not affect its interpretation. 2. NOVATION With effect from June 6, 2005: 2.1 the Transferee shall perform the Transferor's obligations under the Original Agreement and is bound by the terms of the Original Agreement in every way as if the Transferee had at all times been a party to the Original Agreement in place of the Transferor; 2.2 each of the Contractors releases and discharges the Transferor from further performance of the Original Agreement and all liabilities, claims and demands howsoever arising under the Original Agreement, whether in contract, tort or otherwise, and accepts the liability of the Transferee under the Original Agreement in place of the liability of the Transferor; and 2.3 each of the Contractors shall perform its obligations under the Original Agreement and be bound by the terms of the Original Agreement in every way as if the Transferee had at all times been a party to the Original Agreement in place of the Transferor. 3. GOVERNING LAW This Agreement is governed by the PRC law. 1 4. ARBITRATION 4.1 If any dispute, controversy or claim arising out of or relating to this Agreement, or the interpretation, breach, termination or validity hereof cannot be resolved through consultation, the dispute shall be submitted to arbitration. 4.2 The arbitration shall be conducted in Shanghai under the auspices of the China International Economic and Trade Arbitration Commission, Shanghai Sub-commission ("CIETAC") according to its then arbitration rules. The Parties shall jointly appoint a sole arbitrator to hear the case and if the Parties do not agree on the choice of the aforesaid sole arbitrator within twenty (20) days from the date on which the respondent receives the notice of arbitration, the Chairman of the CIETAC will make the appointment. 4.3 The award of the arbitration tribunal shall be final and binding upon the disputing parties and, in the case where the subdued party does not perform the award, the prevailing party may apply to a court of competent jurisdiction for enforcement of such award. 5. MISCELLANEOUS 5.1 This Agreement may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of this Agreement. 5.2 This Agreement shall take effect from the date of formal execution by the Parties. [Remainder of this page intentionally left blank] 2 [Signature Page] IN WITNESS of which the Parties hereto have executed this Agreement on the date first mentioned above. /s/ Ji Wang ----------------------- By Mr. JI WANG (IoU(Y)) /s/ Tao Feng ----------------------- By Mr. TAO FENG (o eII) For and on behalf of Shanghai Newmargin Venture Capital Co., Ltd. SIGNED by /s/ Tao Feng ------------------- Name: Mr. TAO FENG(o eII) Position: Chief Executive Officer For and on behalf of T2CN Information Technology (Shanghai) Co., Ltd. SIGNED by /s/ ------------------- Name: Position: Chief Executive Officer EX-10 16 f1ex1012aug05.txt 10.12 EXHIBIT 10.12 Private and Confidential Execution Copy Exclusive Technical Service and Consultancy Agreement between Shanghai T2 Entertainment Co., Ltd. and T2CN Information Technology (Shanghai) Co., Ltd. FANGDA PARTNERS 22/F, Kerry Center 1515 Nan Jing West Road Shanghai 200040, PRC Exclusive Technical Service and Consultancy Agreement This Exclusive Technical Service and Consultancy Agreement (hereinafter this "Agreement") is entered into in Shanghai, the People's Republic of China (hereinafter "PRC") as of November 4, 2004 by and between the following two Parties: (1) Shanghai T2 Entertainment Co., Ltd., a limited liability corporation duly incorporated and validly existing under the PRC laws, with its legal address at 5th Floor 88 Qingjiang Road, Xuhui District, Shanghai, PRC (hereinafter "Party A"); and (2) T2CN Information Technology (Shanghai) Co., Ltd., a wholly foreign owned enterprise duly incorporated and validly existing under the PRC laws, with its legal address at Suite 22301-526, Pudong Software Garden, 498 Guo Shoujing Road, Pudong New District, Shanghai, PRC (hereinafter "Party B"). (In this Agreement, Party A and Party B are collectively referred to as the "Parties" and individually as a "Party") Preface Whereas Party A is a limited liability corporation duly incorporated and validly existing in Shanghai, PRC, with Eight Technical services in the field of computer hardware development as its main business; Whereas Party B is a wholly foreign invested enterprise duly incorporated and validly existing in Shanghai, PRC, with computer hardware development and technical service as its main business; Whereas Party A need Party B to provide, and Party agrees to provide, technical service and consultancy related to Party A's business (as defined below). The Parties hereby have reached the following agreement upon mutual friendly consultations: Article 1 - Definition 1.1 Except as otherwise construed in the terms or context hereof, the following terms in this Agreement shall be interpreted to have the following meanings: 1 "Party A's Business" shall mean any and all Eight Technical services in the field of computer hardware development engaged in and developed by Party A currently and at any time during the valid term hereof. "Services" shall mean the exclusive technical platform services and relevant technical support and website operation and maintenance services in connection with hardware as well as software which are to be provided by Party B to Party A, including but not limited to: (1) Providing computers and network hardware equipment that are necessary for Party A's Business to Party A for its use necessary; (2) daily management, maintenance and upgrading of the hardware equipment and databases; (3) development, maintenance and upgrading of the related applied software; (4) training professional technical staff for Party A; (5) assisting Party A in conducting relevant technical information collecting and research; (6) Providing other related technical service and consultancy services from time to time as required by Party A. "Annual Business Plan" shall mean the development plan and budget report on Party A's Business for the next calendar year which is prepared before November 30 of each year by Party A with the assistance of Party B pursuant to this Agreement. "Service Fees" shall mean all fees to be paid by Party A to Party B pursuant to Article 3 of this Agreement in respect of the Services provided by Party B. "Equipment" shall mean any and all equipment owned by Party B or purchased by Party B from time to time, which are to be used for the purpose of provision of the Services. "Business Related Technology" shall mean any and all technology related to Party A's Business and developed by Party A on the basis of Service provided by Party B under this Agreement. "Service Equipment" shall be the meaning stipulated in Article 2.1 hereof. "Customer Information" shall be the meaning stipulated in Article 6.1 hereof. 2 "Confidential Information" shall be the meaning stipulated in Article 6.2 hereof. "Defaulting Party" shall be the meaning stipulated in Article 11.1 hereof. "Default" shall be the meaning stipulated in Article 11.1 hereof. "Party's Rights" shall be the meaning stipulated in Article 13.5 hereof. 1.2 The references to any laws and regulations (hereinafter the "Law") herein shall be deemed (1) to include the references to the amendments, changes, supplements and reenactments of such Law, irrespective of whether they take effect before or after the formation of this Agreement; and (2) to include the references to other decisions, notices or regulations enacted in accordance therewith or effective as a result thereof. 1.3 Except as otherwise stated in the context herein, all references to an Article, clause, item or paragraph shall refer to the relevant part of this Agreement. Article 2 - Services 2.1 Party B shall procure various equipment reasonably necessary for the provision of the Services and shall purchase and procure new equipment (hereinafter the "Service Equipment") in accordance with Party A's Annual Business Plan and Party A's reasonable requests, as to meet with the demand for its provision of quality Services under this Agreement. 2.2 Party B shall provide Party A with services in a timely manner and communicate with Party A with respect to all information related to Party A's Business and/or Party A's customers. 3 Article 3 - Service Fees 3.1 In respect of the Services to be provided by Party B pursuant to Article 2 hereof, Party A agrees to pay to Party B pursuant to Article 3 hereof the Service Fees, including the following: (1) an annual fixed service fee of RMB two million (RMB2,000,000); (2) a performance-based service fee equivalent to 80% of the total income before tax of Party A in the current year; and (3) a verified equipment depreciation fee of RMB one hundred thousand (RMB100,000). 3.2 Party A shall pay the Service Feea to Party B on a quarterly basis. Prior to January 31, April 30, July 31 and October 31 each year, Party A shall pay to Party B the performance fee set out in Paragraph (2) of Article 3.1 according to the percentage set out in the preceding Article and the amount of Party A's total business income in the preceding three (3) months, and pay the quarterly apportioned part of the Service Fees (one-fourth (1/4) of the total fees for the year) set out in Paragraphs (1) and (3) of Article 3.1. Upon expiration or termination of this Agreement, Party A shall, within thirty (30) days of the date of the expiration or termination of this Agreement, make all the outstanding payments of the Service Fees to Party B. After the end of each of Party A's accounting years, Party A and Party B shall, on the basis of Party A's total annual income in the preceding accounting year which is verified by an auditing report issued by a Chinese Certified Public Accountant firm and mutually accepted by the Parties, carry out the overall examination and verification on the Service Fees actually payable by Party A, and shall make corresponding payment adjustment (to return in case of overpayment, or make up in case of underpayment) within fifteen (15) days of the issuance of the auditing report. Party A undertakes to Party B that it will provide the involved Chinese Certified Public Accountant firm with all materials and assistance required and cause it to complete and issue the auditing report of the preceding year to the Parties within thirty (30) working days of the end of each accounting year. 3.3 Party A shall, according to the provisions of this Article, pay all Service Fees in a timely manner into the bank account designated by Party B. In case that Party B is to change its bank account, it shall notify Party A in writing of such change seven (7) working days in advance. 4 3.4 Notwithstanding the above, in case of incurrence of losses by Party A during the term of this Agreement, Party A may request for the reduction of the payable amount of the Service Fees or delay in the payment of the Service Fees to ensure its business operation by written notice to Party B, and Party B may, at its sole discretion, agree to reduce the payable amount of the Services Fees by such amount as it deems appropriate or to delay in the collection of the Service Fees for such time period as it deems appropriate. Article 4 - Party A's Obligation 4.1 The Services provided by Party B hereunder shall be of an exclusive nature. During the valid term hereof, without Party B's prior written consent, Party A shall not enter into any agreement with any other third party as to engage such third party to provide to Party A services identical or similar to the Services provided by Party B. 4.2 Prior to November 30 of each year Party A shall provide Party B with the final version of Annual Business Plan of Party A for the next year, as for Party B to make appropriate arrangement for its services plan and purchase necessary equipment and strengthen technical service force. In case that Party A needs Party B to purchase new equipment contingently, Party A shall discuss the same with Party B fifteen (15) days in advance so as to reach agreement. 4.3 For the convenience of Party B providing Service, Party A shall provide Party B with relevant materials accurately and in a timely manner at the request of Party B. 4.4 Party A shall, according to the provisions of Article 3 hereof, pay the full amount of the Service Fees to Party A in a timely manner 4.5 Party A shall maintain a good reputation of itself and make all its efforts to develop business, as to maximize the profits. 4.6 In order to promote Party A's Business, the Parties agree that, within Party A's capacity and without violating the mandatory regulations under PRC laws, Party B may appoint Party A to conduct specific research and develop related to the technologies needed by the Service to be provided by Party B under this Agreement pursuant to Party B's requirement. With respect to such appointment, Party A must accept, and the provision in Articles 5.1 and 5.2 in this Agreement shall apply to the rights and interests of the technical 5 achievements so made. Article 5 -Intellectual Property 5.1 Intellectual property of the work products generated in the process of Party B's provision of the Services shall belong to Party B. 5.2 For the reason that Party A's Business relies on the Party B's provision of the Service under this Agreement, Party A agrees to the following arrangements subject to the Business Related Technology developed by Party A on the basis of such Services: (1) In case that the Business Related Technology is generated through Party A's further development based on its performance pursuant to Party B's appointment, or generated through Party A and Party B's joint development, the title and relevant patent application right shall belong to Party B; (2) In case that the Business Related Technology is generated through Party A's independent development, provided (A) that Party A has informed Party B with details of such related technology in a timely manner and provided Party B with relevant materials required by Party B; (B) that if Party A intends to license or transfer such technology, Party shall have priority in being transferred, or granted the exclusive license of such technology, to the extent where no mandatory regulation under the PRC laws is violated, and Party B may use such technology within the scope specified by Party A's transfer or license (provided that Party B shall have the right to decide whether to accept such transfer or license for use); Party A may not transfer title of such technology or license such technology to a third party unless and until Party B waives its preferential rights to purchase or be exclusively licensed to use such technology, provided that the conditions offered by Party A to such third party shall be not favorable than those offered to Party B, and provided further that Party A shall ensure the full compliance with and full performance by such third party of the duties and obligations on the part of Party A hereunder; (C) Save as under the circumstance set forth in (B) above, Party B shall have the right to request to purchase such technology within the term stipulated in Article 8.1, which technology shall be consented by Party B, provided that such purchase shall not violate the mandatory regulation under the PRC laws. Purchase price shall be the lowest price permitted by the laws at that time. 6 5.3 In case that Party B is licensed to exclusively use the Business Related Technology in accordance with Item 2 of Article 5.2 under this Agreement, such license shall be settled according to the following provision hereof: (1) Term of the license for use shall be no less than ten (10) years (calculated from the date upon effectiveness of relevant license agreement); (2) Scope of right to the license for use shall be as wide as possible. (3) Within the license term and licensed territory, any other party (including Party A) other than Party B shall not use or license others to use such technology by any means. (4) Without breaching the conditions under Item 3 of Article 5.3, Party A shall be entitled to solely decide to license other third party to use such related technology. (5) After expiry of the term of license for use, Party B shall be entitled to request renewing the license agreement, and Party A shall approve such request. Terms of the license agreement then shall keep the same, expect for those amended as acknowledged by Party B. 5.4 Notwithstanding the provision under Paragraph 2 of Article 5.2 above, any application for patent regarding any Business Related Technology described in such paragraph shall be conducted pursuant to the following provisions: (1) In case that Party A intends to apply for patent regarding any Business Related Technology described in such paragraph, prior written consent from Party B shall be obtained. (2) Party A may not apply for patent in its own name or transfer such application right to a third party unless and until Party B waives its rights to acquire the patent application right of the Business Related Technology. Under the circumstance that Party A transfers the aforesaid patent application right to a third party, Party A shall ensure the full compliance with and full performance of the responsibilities and obligations on the part of Party A hereunder, and provided that the conditions (including but not limited to transfer 7 price terms) offered by Party A to such third party regarding the patent application right shall be no favorable than those to Party B according to provision in Paragraph 3 below. (3) Within the term of this Agreement, Party B may require Party A at any time to apply for patent regarding such Business Related Technology, and solely determine whether to acquire the application right of such patent application. Upon request of Party B, Party A shall transfer such patent application right to Party B at the transfer price being the lowest price permitted by the then Law to the extent where no mandatory regulation is violated under the PRC laws. After Party B has obtained the patent application right regarding such Business Related Technology, submitted the patent application and obtained the patent, Party B shall be the legal owner of such patent. 5.5 Party A and Party B both warrant to each other to compensate the other party for any and all economic losses incurred due to infringement of others' intellectual property (including copyright, trademark right, patent right and know-how) on the part of Party A or Party B. Article 6 - Confidentiality Obligation 6.1 During the term of this Agreement, all customer information and other relevant materials related to Party A's business and Services provided by Party B (hereinafter "Customer Information") shall jointly belong to the Parties. 6.2 Notwithstanding the termination of this Agreement, Party A and Party B shall both be obliged to keep strictly in confidence the commercial secret, proprietary information and customer information jointly owned by the Parties, other relevant materials and other non-public information owned by another Party received by the Parties as the result of performance of this Agreement (hereinafter collectively the "Confidential Information"). The Party who receives the Confidential Information shall not disclose the Confidential Information or any part of it to any other third party, except for prior written consent by the other Party or the situation that it must be disclosed to a third party required by relevant laws, rules and regulations or for the purpose of public listing; Except for the purpose of performance of this Agreement, receiving Party shall not use or indirectly use the Confidential Information or any part of it. 8 6.3 The following information shall not belong to Confidential Information: (a) any information that can be proved by written evidence to be previously obtained by the Party who receives the information; (b) information that enters into the public not for the reason of receiving Party's fault or information that is known by the public for other reasons; or (c) information legally obtained by the receiving Party by other means thereafter. 6.4 The Party who receives the information can disclose the Confidential Information to its relevant employee, agent or professional employed by it. However the receiving Party shall ensure that the aforesaid staff shall be restricted by this Agreement in order to keep the Confidential Information under confidentiality and to be used merely for the purpose of performance of this Agreement. Article 7 -Undertakings and Warranties 7.1 Party A represents and warrants hereby as follows: 7.1.1 it is a company of limited liabilities duly registered and validly existing under the laws of its incorporation with independent legal person qualification, with full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and may act independently as a subject of actions. 7.1.2 its has full corporate power and authorization to execute and deliver this Agreement and all the other documents to be entered into by it in relation to the transaction referred to herein, and it has the full power and authorization to complete the transaction referred to herein. This Agreement shall be executed and delivered by it legally and properly. This Agreement constitutes the legal and binding obligations on it and is enforceable on it in accordance with its terms and conditions. 7.1.3 it has obtained complete business permits as necessary for its operations upon this Agreement taking effect, and it has sufficient rights and qualifications to operate Party A's Business it is currently engaged in within the PRC. 9 7.2 Party B represents and warrants hereby as follows: 7.2.1 it is a company of limited liabilities duly registered and validly existing under the laws of its incorporation with independent legal person qualification, with full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and may act independently as a subject of actions. 7.2.2 its has full corporate power and authorization to execute and deliver this Agreement and all the other documents to be entered into by it in relation to the transaction referred to herein, and it has the full power and authorization to complete the transaction referred to herein. This Agreement shall be executed and delivered by it legally and properly. This Agreement constitutes the legal and binding obligations on it and is enforceable on it in accordance with its terms and conditions. Article 8 - Term of Agreement 8.1 The Parties hereby confirm, this Agreement shall take effect as of the date of formal execution by the Parties, and shall remain in force with no express expiration unless as early terminated in writing by the Parties. 8.2 After expiry of this Agreement, Party A and Party B shall still comply with their obligation stipulated in Article 3.2 and Article 6 under this Agreement. Article 9 - Indemnification Party A shall indemnify and keep Party B harmless from any and all losses Party B suffers or may suffer as the result of providing Services, including but not limited to any loss arising from any litigation, repayment pursuit, arbitration, claims lodged by any third party or administration investigations and/or penalties by government authorities against it; provided that losses due to Party B's willful or gross fault shall be excluded from such indemnification. Article 10 - Notice 10.1 Any notice, request, demand and other correspondences made as required by or in accordance with this Agreement shall be made in writing and delivered to the relevant Party. 10 10.2 The abovementioned notice or other correspondences shall be deemed to have been delivered when it is transmitted if transmitted by facsimile or telex; it shall be deemed to have been delivered when it is delivered if delivered in person; it shall be deemed to have been delivered five (5) days after posting the same if posted by mail. Article 11 - Default Liability 11.1 The Parties agree and confirm that, if any Party (hereinafter the "Defaulting Party") breaches substantially any of the agreements made under this Agreement, or fails substantially to perform any of the obligations under this Agreement, such a breach shall constitute a default under this Agreement (hereinafter a "Default"), then the non-defaulting Party shall have the right to require the Defaulting Party to rectify such Default or take remedial measures within a reasonable period. If the Defaulting Party fails to rectify such Default or take remedial measures within such reasonable period or within ten (10) days following the other Party notifying the Defaulting Party in writing and requiring it to rectify the Default, then the non-defaulting Party shall have the right to choose any one of the following Default remedy methods by itself: In case of Party A being the Defaulting Party, Party B shall have the right to (1) terminate this Agreement and require the Defaulting Party to indemnify it for all the damage; or (2) require specific performance of the obligations of the Defaulting Party hereunder and require the Defaulting Party to indemnify it for all the damage. In case of Party B being the Defaulting Party, Party A shall have the right to require specific performance of the obligations of the Defaulting Party hereunder and require the Defaulting Party to indemnify it for all the damage. 11.2 The Parties agree and confirm that Party A shall in no circumstance be entitled to terminate this Agreement for any reason. 11.3 The rights and remedies set out herein shall be cumulative, and shall not preclude any other rights or remedies provided by law. 11.4 Notwithstanding any other provisions herein, the validity of this Article shall stand disregarding the suspension or termination of this Agreement. 13 Article 12- Force Majeure In the event of earthquake, typhoon, flood, fire, war, computer virus, loophole in the design of tooling software, internet encountering a hacker, change of policies or laws, and other unforeseeable or unpreventable or unavoidable event of force majeure, which directly prevents a Party from performing this Agreement or performing the same on the agreed condition, the Party encountering such a force majeure event shall forthwith issue a notice by a facsimile and, within thirty (30) days, the Party claiming such a force majeure event shall forthwith issue a notice by a facsimile and, within thirty (30) days, present the documents proving the details of such force majeure event and the reasons for which this Agreement is unable to be performed or is required to be postponed in its performance, and such proving documents shall be issued by the notarial office of the area where such force majeure event takes place. The Parties shall consult each other and decide whether this Agreement shall be waived in part or postponed in its performance with regard to the extent of impact of such force majeure event on the performance of this Agreement. No Party shall be liable to compensate for the economic losses brought to the other Party by the force majeure event. Article 13 - Miscellaneous 13.1 This Agreement shall be prepared in the Chinese language in two (2) original counterparts, and each Party shall hold one (1) counterpart. 13.2 The formation, validity, execution, amendment, interpretation and termination of this Agreement shall be subject to the PRC Laws. 13.3 Any disputes arising hereunder and in connection herewith shall be settled through consultations between the Parties, and if the Parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such disputes shall be submitted to China International Economic and Trade Arbitration Commission Shanghai Branch for arbitration in Shanghai in accordance with the arbitration rules of such Commission, and the arbitration award shall be final and binding on the Parties. 13.4 Any rights, powers and remedies empowered to any Party by any provisions herein shall not preclude any other rights, powers and remedies enjoyed by such Party in accordance with laws and other provisions under this Agreement, and the exercise of its rights, powers and remedies by a Party shall not preclude its exercise of its other rights, powers and remedies by such Party. 12 13.5 Any failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws (hereinafter the "Party's Rights") shall not lead to a waiver of such rights, and the waiver of any single or partial exercise of the Party's Rights shall not preclude such Party from exercising such rights by any other means and exercising the remaining part of the Party's Rights. 13.6 The titles of the Articles contained herein shall be for reference only, and in no circumstances shall such titles be used in or affect the interpretation of the provisions hereof. 13.7 Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one or more articles herein become invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions herein shall not be affected as a result thereof. 13.8 Any amendments or supplements to this Agreement shall be made in writing and shall take effect only when properly signed by the Parties to this Agreement. 13.9 No Party shall assign any of its rights and/or obligations hereunder to any third parties without the prior written consent from the other Party. 13.10 This Agreement shall be binding on the legal successors of the Parties. [The remainder of this page has been intentionally left blank] (Execution Page) IN WITNESS HEREOF, the Parties have caused this Exclusive Technical Service and Consultancy Agreement to be executed as of the date and in the place first here above mentioned. Shanghai T2 Entertainment Co., Ltd. Signed by /s/ Tao Feng -------------------------- Name: Position: Authorized Representative T2CN Information Technology (Shanghai) Co., Ltd. Signed by /s/ Jun-Tse Teng -------------------------- Name: Position: Authorized Representative EX-10 17 f1ex1013aug05.txt 10.13 EXHIBIT 10.13 Nominee Agreement This nominee agreement ("Agreement") is made on this day of May 13, 2005 by and between a) Mr. WANG Ji, a citizen of the People's Republic of China (the "PRC") with his ID card number of 330102197106260617; and b) T2CN Holding Limited, a private company limited by shares organized and existing under the laws of the British Virgin Islands with its principal business address at Floor 5 No. 88, Qinjiang Road, Shanghai, PRC (200233) ("T2CN Holding"); WHEREAS, as of the date of this Agreement, Mr. WANG Ji holds 20% of the registered capital of Shanghai T2 Entertainment Co., Ltd. ("T2 Entertainment"), in the capacity of T2CN Holding's nominee. NOW THEREFORE, in order to specify the rights and obligations of the parties under the contemplated nominee arrangement between the parties, after friendly consultations between them, the parties agree as follows: Article 1 Nominee 1.1 For due and equitable consideration, T2CN Holding hereby designates Mr. WANG Ji to, and Mr. WANG Ji hereby agrees to act as T2CN Holding's nominee to dispose of the capital in the amount of RMB200,000 (the "Original Capital") released by T2CN Holding for the sole purpose of holding 20% of T2 Entertainment's total equity interest by Mr. WANG Ji, in accordance with the prior written instruction provided by T2CN Holding from time to time. 1.2 The parties hereto acknowledge the terms of this Agreement and agree that the Original Capital described in above Article 1.1 shall be disposed of for the sole purpose of the equity investment in T2 Entertainment directly by Mr. WANG Ji, whereby Mr. WANG Ji directly holds 20% of the total registered capital of T2 Entertainment, in the capacity as T2CN Holding's nominee. 1.3 T2CN Holding may, at its sole discretion and from time to time, provide further capital (the "Additional Capital") to Mr. WANG Ji for the purpose of increasing the capital contribution in the name of Mr. WANG Ji to T2 Entertainment (the "Additional Capital Increase"). In the case of request of the Additional Capital Increase by T2CN Holding, Mr. WANG Ji shall take each and all action and execute each and all instrument as necessary or appropriate to consummate the capital increase. However, the immediately preceding sentences shall not constitute any obligation on the part of T2CN Holding to release any further capital to Mr. WANG Ji for the purpose of 1 the Additional Capital Increase. 1.4 Mr. WANG Ji hereby covenants that he shall not increase his capital contribution to the registered capital of T2 Entertainment except as instructed by T2CN Holding. 1.5 Mr. WANG Ji hereby warrants that he shall dispose of the Property (as defined below) in fiduciary care to ensure the benefits of T2CN Holding under this Agreement. Article 2 Property The property subject to the terms of this Agreement (the "Nominated Property") shall include: (i) the Original Capital released to Mr. WANG Ji, (ii) any Additional Capital released to Mr. WANG Ji for the purpose of the Additional Capital Increase, (iii) any dividend or other distributions arising from the equity interest registered in the name by Mr. WANG Ji as contemplated hereunder ("T2 Entertainment Equity"), (iv) any amounts arising from a transfer or disposal of T2 Entertainment Equity, (v) liquidation distribution obtained by Mr. WANG Ji as the holder of T2 Entertainment Equity from bankruptcy, dissolution, liquidation or winding-up proceedings of T2 Entertainment, and (vi) such other rights, interests, benefits and privileges conferring to T2 Entertainment Equity. Article 3 Benefit 3.1 Mr. WANG Ji hereby covenants to deliver the Nominated Property to T2CN Holding at its instruction from time to time. Article 4 Term and Termination of the Agreement 4.1 This Agreement shall take effect upon due execution by both parties. 4.2 This Agreement may be terminated under the following circumstances: (i) upon the transfer by Mr. WANG Ji of the capital gains from transfer of T2 Entertainment Equity to T2CN Holding of all of the Nominated Property in accordance with Article 3.1; (ii) upon one (1) month prior notice in writing by T2CN Holding to Mr. WANG Ji; and (iii) upon occurrence of any event that prohibits or restricts Mr. WANG Ji to hold the Nominated Property in accordance with the applicable laws. 4.3 Upon termination of this Agreement in accordance with Article 4.2(ii) or (iii), Mr. WANG Ji shall act at the instruction of T2CN Holding to: 2 (i) pay, within five (5) working days of the termination of this Agreement, the Nominated Property comprising cash to the bank account designated by T2CN Holding provided that all payment shall be made in accordance with the applicable law; and (ii) take all necessary actions immediately, from the date on which this Agreement is terminated, to transfer T2 Entertainment Equity to T2CN Holding or any entity or individual designated by T2CN Holding to the extent permitted by the applicable laws. Article 5 Default Liability 5.1 The parties agree and confirm that, if either party (the "Defaulting Party") breaches substantially any of the agreements made under this Agreement, or fails substantially to perform any of the obligations under this Agreement, such a breach shall constitute a default under this Agreement (a "Default"), then the non-defaulting party (the "Non-defaulting Party") shall have the right to require the Defaulting Party to rectify such Default or take remedial measures within a reasonable period. If the Defaulting Party fails to rectify such Default or take remedial measures within such reasonable period or within ten (10) days of relevant Non-defaulting Party notifying the Defaulting Party in writing and requiring it to rectify the Default, then the Non-defaulting Party shall have the right, at its or his own discretion, to (1) terminate this Agreement and require the Defaulting Party to indemnify it fully for the damage; or (2) demand the enforcement of the Defaulting Party's obligations hereunder and require the Defaulting Party to indemnify it fully for the damage. Article 6 Miscellaneous 6.1 Notwithstanding any other provisions herein, the validity of Article 5 and the requirements of Mr. WANG Ji in accordance with Article 4.3 to return the Nominated Property shall not be affected by the prior suspension or termination of this Agreement. 6.2 The formation, validity, execution, amendment, interpretation and termination of this Agreement shall be subject to the laws of the British Virgin Islands. 6.3 Any dispute under this Agreement which at the discretion of either party may not be solved by amicable consultation shall be submitted to arbitration to the exclusion of litigation. The arbitration shall be conducted by Hong Kong International Arbitration Center according to its rules, and the arbitration award of which shall be final and binding to both parties. 6.4 Any rights, powers and remedies empowered to either party by any provisions herein shall not preclude any other rights, powers and remedies enjoyed by such party in accordance with laws and other provisions under this Agreement, and the exercise of its or his rights, powers and remedies by either party shall not preclude its or his exercise of its or his other 3 rights, powers and remedies by such party. 6.5 Any failure or delay by either party in exercising any of its or his rights, powers and remedies hereunder or in accordance with laws (the "Party's Rights") shall not lead to a waiver of such rights, and the waiver of any single or partial exercise of the Party's Rights shall not preclude such party from exercising such rights in any other way and exercising the remaining part of the Party's Rights. 6.6 The titles of the articles contained herein shall be for reference only, and in no circumstances shall such titles be used in or affect the interpretation of the provisions hereof. 6.7 Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one or more articles herein become invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions herein shall not be affected as a result thereof. 6.8 Any amendments or supplements to this Agreement shall be made in writing and shall take effect only when properly signed by the parties to this Agreement. [the remainder of this page is intentionally left blank.] 4 IN WITNESS of which the parties hereto have executed this Agreement on the date first mentioned above. EXECUTED as a deed by WANG Ji /s/ Ji Wang - ------------------- WITNESS /s/ - ------------------- EXECUTED as a deed of T2CN HOLDING LIMITED SIGNED by /s/ Jun-Tse Teng -------------------- Name: [ ] Position: [ ] WITNESS /s/ EX-21 18 f1ex21aug05.txt EXHIBIT 21 SUBSIDIARIES The Registrant has one subsidiary, that being T2CN Information Technology (Shanghai) Co. Ltd., which was incorporated in China on November 22, 2004. EX-23 19 f1ex231aug05.txt 23.1 EXHIBIT 23.1 CONSENT OF ATTORNEYS Reference is made to the Registration Statement of T2CN Holding Limited on Form SB-2 whereby certain shareholders of the Company propose to sell up to 8,091,503 shares of the Company's common stock. Reference is also made to Exhibit 5 included in the Registration Statement relating to the validity of the securities proposed to be sold. We hereby consent to the use of our opinion concerning the validity of the securities to be sold. Very truly yours, HART & TRINEN, L.L.P. /s/ William T. Hart William T. Hart Denver, Colorado August 15, 2005 EX-23 20 f1ex232aug05.txt 23.2 EXHIBIT 23.2 Consent of Independent Registered Public Accounting Firm T2CN Holing Limited 5th Floor, No. 88, Qingjiang road Shanghai, 200233 We hereby consent to the use in the prospectus constituting a part of this Registration Statement of our report dated April 8, 2005, relating to the consolidated financial statements of T2CN Holding Limited, which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO Shanghai Zhonghua BDO Shanghai Zhonghua Certified Public Accountants Shanghai, PRC August 26th, 2005 -----END PRIVACY-ENHANCED MESSAGE-----