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
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(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
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(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
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(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.
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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.
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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.
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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.
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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
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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.
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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;
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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
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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
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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:
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(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
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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.
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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
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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