As filed with the Securities and Exchange Commission on October 17, 2005
Registration No. 333-
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CHINA EVERGREEN ENVIRONMENTAL CORPORATION
(Name of small business issuer in its charter)
NEVADA 88-0409151
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7371
(Primary Standard Industrial
Classification Code Number)
FLOOR 5, GUOWEI BUILDING
73 XIANLIE MIDDLE ROAD
GUANGZHOU, GUANGDONG, CHINA 510095
(Address and telephone number of principal executive offices
and principal place of business)
--------------------------------------
CHONG LIANG PU
FLOOR 5, GUOWEI BUILDING
73 XIANLIE MIDDLE ROAD
GUANGZHOU, GUANGDONG, CHINA 510095
(86-20) 87327909
(Name, address and telephone number of agent for service)
---------------------------
COPIES TO:
DANIEL K. DONAHUE, ESQ.
PRESTON GATES ELLIS, LLP
1900 MAIN STREET, SUITE 600
IRVINE, CA 92614
(949) 253-0900
---------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE
PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION
STATEMENT BECOMES EFFECTIVE.
----------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 earlier effective registration
statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
----------------------------------------------------
CALCULATION OF REGISTRATION FEE
================================ ======================= ====================== ===================== =================
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM OFFERING PROPOSED
SECURITIES AMOUNT TO BE PRICE PER SHARE MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED (1) OFFERING PRICE REGISTRATION FEE
- -------------------------------- ----------------------- ---------------------- --------------------- -----------------
Common Stock, $.03 par value 91,904,501 Shares $0.27 $24,814,215 $2,920.63
================================ ======================= ====================== ===================== =================
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of
1933, based upon the last sale of the Registrant's common stock on
October 14, 2005, as reported in the over-the-counter market.
-----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
SUBJECT TO COMPLETION, DATED OCTOBER 17, 2005
PROSPECTUS
91,904,501 Shares
CHINA EVERGREEN ENVIRONMENTAL CORPORATION
Common Stock
This prospectus relates to the offer and sale of our common stock by
the selling stockholders identified in this prospectus. The selling stockholders
will determine when they will sell their shares, and in all cases will sell
their shares at the current market price or at negotiated prices at the time of
the sale. Although we have agreed to pay the expenses related to the
registration of the shares being offered, we will not receive any proceeds from
the sale of the shares by the selling stockholders.
Our common stock is currently traded on the OTC Bulletin Board under
the symbol "CEEC." On October 14, 2005, the last reported sale price of the
common stock on the OTC Bulletin Board was $0.27 per share. However, we consider
our common stock to be "thinly traded" and any last reported sale prices may not
be a true market-based valuation of the common stock.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 3 TO READ ABOUT CERTAIN
FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is ____________, 2005
TABLE OF CONTENTS
Summary.......................................................................1
Risk Factors..................................................................3
Cautionary Statement Concerning
Forward-Looking Information.................................................6
Selling Stockholders..........................................................7
Plan of Distribution..........................................................9
Market for Common Equity and
Related Stockholder Matters................................................10
Management's Discussion and Analysis or Plan of
Operations.................................................................11
Business.....................................................................14
Management...................................................................23
Principal Stockholders.......................................................27
Description of Securities....................................................28
Experts......................................................................30
Available Information........................................................30
Index to Financial Statements................................................31
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER DESCRIBED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY US. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
UNDER THIS PROSPECTUS SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN OUR AFFAIRS SINCE THE DATE HEREOF OR SINCE THE DATE
OF ANY DOCUMENTS INCORPORATED HEREIN BY REFERENCE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES, OR AN OFFER OR SOLICITATION IN
ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN EACH STATE.
SUMMARY
UNLESS OTHERWISE INDICATED, ALL REFERENCES TO OUR COMPANY INCLUDE OUR
WHOLLY AND MAJORITY OWNED SUBSIDIARIES. YOU SHOULD READ THIS SUMMARY IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS.
OUR COMPANY
We are a waste water engineering company in the People's Republic of
China (the "PRC"). Through our majority owned subsidiaries, we are engaged in
the design, construction, implementation of and investment in industrial and
municipal waste water treatment facilities throughout the PRC.
We provide turnkey waste water treatment engineering design and
contracting. We hold 90% and 35%, respectively, of the equity interest in the
following two water treatment facilities operated through build, operate and
transfer (BOT) arrangements with the PRC government: (i) Tian Jin Shi Sheng
Water Treatment Company Limited ("TJSH"), which commissioned water treatment in
November 2003 and has a daily treatment capacity of approximately 10,000 tons;
and (ii) Xin Le Sheng Mei Water Purifying Company Limited ("XL"), which also
commissioned water treatment in November 2003 and has a daily treatment capacity
of 40,000 tons. We have been retained as the manager to manage both TJSH and XL.
The fees from XL and TJSH did not represent a material portion of our revenue
during 2004.
We also developed a BOT water treatment facility project in Hai Yang
City with capacity of 20,000 tons per day. We began constructing this project in
April 2004 and completed the project and commenced water treatment in June 2005.
We are also developing another BOT water treatment facility project in Beijing
with planned capacity of 20,000 tons per day. We began construction of this
project in July 2004 and expect the completion of the project and commencement
of water treatment in the fourth quarter of 2005. The fees from these projects
are expected to strengthen our net sales in the future.
Our executive offices are located at Floor 5, Guowei Building, 73
Xianlie Middle Road, Guangzhou, Guangdong, China; telephone number (86-20)
87327909.
THE OFFERING
This offering relates to the offer and sale of our common stock by the
selling stockholders identified in this prospectus. The selling stockholders
will determine when they will sell their shares, and in all cases will sell
their shares at the current market price or at negotiated prices at the time of
the sale. Although we have agreed to pay the expenses related to the
registration of the shares being offered, we will not receive any proceeds from
the sale of the shares by the selling stockholders.
-1-
SUMMARY FINANCIAL INFORMATION
The following summary financial data as of and for the years ended
December 31, 2004 and 2003 are derived from our audited financial statements.
The summary financial data as of and for the six months ended June 30, 2005 and
2004 are derived from our unaudited interim financial statements. Such unaudited
interim financial statements have been prepared by us on a basis consistent with
our annual audited financial statements and, in the opinion of our management,
contain all normal recurring adjustments necessary for a fair presentation of
the financial position and results of operations for the applicable periods.
This information is only a summary and does not provide all of the information
contained in our financial statements and related notes. You should read the
"Management's Discussion and Analysis or Plan of Operations" beginning on page
13 of this prospectus and our financial statements and related notes included
elsewhere in this prospectus.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------- --------------------------
STATEMENT OF OPERATIONS DATA: 2004 2003 2005 2004
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Net revenue ................... $9,366,513 $2,889,094 $4,000,954 $ 191,014
Net income (loss).............. 3,696,949 168,347 836,148 (7,288)
JUNE 30, 2005
-------------
BALANCE SHEET DATA: (UNAUDITED)
Working capital................ $ 911,576
Total assets................... 18,549,554
Total liabilities.............. 9,942,474
Stockholders' equity .......... 8,291,866
-2-
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE
INVESTING IN OUR COMMON STOCK. OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE
SERIOUSLY HARMED BY ANY OF THE FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE PART OR ALL OF
YOUR INVESTMENT.
WE ARE DEPENDENT ON THE STATE OF THE PRC'S ECONOMY AS ALL OF OUR
BUSINESS IS CONDUCTED IN THE PRC. All our business operations are conducted in
the PRC and all of our customers are also located in the PRC. Accordingly, any
significant slowdown in the PRC economy may cause the waste water treatment
industry to reduce expenditure or delay the building of new facilities or
projects for waste water treatment. This may in turn lead to a decline in the
demand for our products and services. That would have a material adverse effect
on our business, financial condition and results of operations.
WE MAY NOT BE ABLE TO SECURE NEW CUSTOMERS. Our business is
project-based, and many of our major customers are non-recurring customers. With
the exception of True Global Limited, our other customers accounted for only 3%
of our revenue in 2004 and we do not expect them to continue to be our major
customers because of the nature of the industry. If we fail to secure projects
from new customers, our revenues will decline and our business, prospects,
financial condition and results of operations could be materially and adversely
affected.
OUR BUSINESS COULD BE AFFECTED BY COST OVERRUNS, PROJECT DELAYS AND/OR
INCORRECT ESTIMATION OF PROJECT COSTS. As our business is project-based, it is
important that we manage our projects efficiently in terms of time, procurement
of materials and allocation of resources. If our initial cost estimates are
incorrect or delays occur in a project resulting in cost overruns, the
profitability of that project will be adversely affected. Currently, we offer
some of our customers a warranty period of up to 12 months after the
commissioning of the water treatment projects, during which we are obliged to
provide free rectification work against any manufacturing defects. Cost overruns
due to additional rectification work and delays in completion of projects would
adversely affect our profitability. We may also face potential liability from
legal suits brought against us by our customers for causing loss due to any
delay in completing a project. Mismanagement of or mistakes made during our
projects will adversely affect our profitability as well as our reputation among
our customers. We may also face potential liability from legal suits brought
against us by our customers who have suffered loss due to such mismanagement or
mistakes. This would also adversely affect our profitability and financial
position.
OUR BUSINESS WOULD BE AFFECTED IF WE ARE UNABLE TO ATTRACT AND RETAIN
SUFFICIENT NUMBERS OF SKILLED EMPLOYEES AND PROFESSIONALS. We may face
difficulties in recruiting skilled personnel in our industry due to its
specialized nature. Our continued success depends largely on our ability to
attract and retain highly skilled executive, managerial and technical employees.
If we are unable to attract and retain a sufficient number of suitably skilled
and qualified personnel, our business would be materially and adversely
affected. We may also have to pay substantial wages to attract sufficient
numbers of skilled employees and professionals, which would also adversely
affect our operating margins.
FAILURE TO RETAIN SERVICES OF KEY PERSONNEL WILL AFFECT OUR OPERATIONS
AND RESULTS. Our success to date has been largely due to the contributions of
our executive officers. The continued success of our business is very much
dependent on the goodwill that they have developed in the industry over the past
several years.
Our continued success is dependent, to a large extent, on our ability
to retain the services of our executive officers. The loss of any of our
executive officers' services due to resignation, retirement, illness or
otherwise without suitable replacement or the inability to attract and retain
qualified personnel would adversely affect our operations and hence, our revenue
and profits.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGES. We are a
chemical free, biological and mineral based wastewater treatment company, and in
order to maintain our customer-base and market share, we must ensure that we are
able to continually provide relevant solutions to our customers that meet their
needs. However, there are rapid technological changes and improvements in
wastewater treatment technologies and equipment. In the event that we are unable
develop or to source for new and improved chemical free, biological and mineral
based wastewater treatment systems to keep up with such technological changes
and to meet the developing needs of our customers, we may not be able to
maintain our competitive edge or our market share, and our profits will be
adversely affected.
-3-
WE MAY NOT BE ABLE TO PROTECT OUR PROCESSES, TECHNOLOGIES AND SYSTEMS
AGAINST CLAIMS BY OTHER PARTIES. Although we have two registered patents in
respect of the processes, technologies and systems we use frequently in our
systems, we have not purchased or applied for any patents other than these as we
are of the view that it may not be cost-effective to do so. For such other
processes, technologies and systems for which we have not applied for or
purchased or been licensed to use patents, we may have no legal recourse to
protecting our rights in the event that they are replicated by other parties. If
our competitors are able to replicate our processes, technologies and systems at
lower costs, we may lose our competitive edge and our profitability will be
adversely affected.
WE MAY FACE CLAIMS FOR INFRINGEMENT OF THIRD-PARTY INTELLECTUAL
PROPERTY RIGHTS. We may face claims from third parties in respect of the
infringement of any intellectual property rights owned by such third parties.
There is no assurance that third parties will not assert claims to our
processes, technologies and systems. In such an event, we may need to acquire
licenses to, or to contest the validity of, issued or pending patents or claims
of third parties. There can be no assurance that any license acquired under such
patents would be made available to us on acceptable terms, if at all, or that we
would prevail in any such contest. In addition, we would incur substantial costs
and spend substantial amounts of time in defending ourselves in or contesting
suits brought against us for alleged infringement of another party's patent
rights. As such, our operations and business may be adversely affected by such
civil actions.
We rely on trade secrets, technology and know-how, which we seek to
protect, in part, by confidentiality provisions in contracts with our customers
and our employees. There can be no assurance that these agreements will not be
breached, or that we will have adequate remedies for any breach, or that other
parties may not obtain knowledge of our trade secrets and processes, technology
and systems. Should these events occur, our business and hence, our
profitability, will be adversely affected.
WE MAY REQUIRE ADDITIONAL FUNDING FOR OUR FUTURE GROWTH. Our future
growth will depend to a large extent on our ability to secure and invest in BOT
projects which require a higher amount of capital investment. In order to obtain
additional capital to develop these growth opportunities, we may issue
additional shares of our equity securities. If new shares placed to new and/or
existing shareholders are issued, they may be priced at a discount to the then
prevailing market price of our shares, in which case, existing shareholders'
equity interests may be diluted. If we fail to utilize the new equity to
generate a commensurate increase in earnings, our earnings per share will be
diluted, and this could lead to a decline in our share price. Any additional
debt financing may, apart from increasing interest expense, contains restrictive
covenants with respect to dividends, future fund raising exercises and other
financial and operational matters.
OUR CUSTOMERS MAY MAKE CLAIMS AGAINST US AND/OR TERMINATE OUR SERVICES
IN WHOLE OR IN PART PREMATURELY SHOULD WE FAIL TO IMPLEMENT PROJECTS WHICH FULLY
SATISFY THEIR REQUIREMENTS AND EXPECTATIONS. Failure to implement projects which
fully satisfy the requirements and expectations of our customers or defective
system structure or products as a result of design or workmanship or due to acts
of nature may lead to claims against us and/or termination of our services in
whole or in part prematurely. This may arise from a variety of factors including
unsatisfactory design or implementation, staff turnover, human errors or
misinterpretation of and failure to adhere to regulations and procedures. This
may adversely affect our profits and reputation.
WE ARE EXPOSED TO CREDIT RISKS OF OUR CUSTOMERS. DEFAULTS IN PAYMENT BY
OUR CUSTOMERS WILL AFFECT OUR FINANCIAL POSITION AND OUR PROFITABILITY. As of
December 31, 2004 and June 30, 2005, accounts receivables of $9.46 million and
$2.63 million, respectively, accounted for approximately 60% and 24% of our
current assets, respectively. Therefore, our financial position and
profitability are dependent on the credit worthiness of our customers.
Generally, our credit terms vary from 90 days to 180 days. Defaults in payment
by our customers would adversely affect our profitability and cash flow. There
was no allowance for doubtful amounts for the year ended December 31, 2004 or
six months ended June 30, 2005. We are unable to provide assurance that risks of
default by our customers would not increase in the future, or that we will not
experience cash flow problems as a result of such defaults. Should these develop
into actual events, our operations and profitability will be adversely affected.
WE ARE RELIANT ON A FEW MAJOR SUPPLIERS. We are dependent on our major
suppliers for the timely delivery of materials and equipment that we require for
the equipment and systems we install.. Should our major suppliers fail to
deliver the materials and equipment on time, and if we are unable to source
these materials and equipment from alternative suppliers on a timely basis, our
project timeline will be delayed, thereby affecting delivery to our customers.
This in turn would adversely affect our reputation if our customers lose
confidence in our services and as a result, our revenue and profitability would
be adversely affected.
-4-
WE ARE SUBJECT TO RISKS RELATING TO BOT PROJECTS IN WHICH WE HAVE
STARTED TO INVEST. We have begun to invest capital in BOT projects which require
high up front capital expenditure. Our returns from BOT projects are derived
from fees paid by the PRC government and such BOT projects are able to generate
a steady and recurring source of income for us over a sustained period of time
between 20 and 25 years. However, our BOT projects are exposed to risks such as
the occurrence of natural disasters or the imposition of more stringent
government regulations, which may result in the disruption to our BOT projects.
Our investment returns from these BOT projects may thus be materially affected
should any of such risks materialize.
WE RELY ON SUBCONTRACTORS FOR OUR PROJECTS. As we may from time to time
subcontract some parts of our projects to subcontractors, such as engineering,
assembly and integration works, we face the risk of unreliability of work
performed by our subcontractors. Should our subcontractors default on their
contractual obligations and work specifications, our ability to deliver the end
product or service to our customers in accordance with quality and/or timing
specifications may, in turn, be compromised. Furthermore, if we are unable to
secure competitive rates from our subcontractors, our financial performance may
be adversely affected.
THE REGISTERED CAPITAL OF OUR PRC SUBSIDIARIES MAY, IN SOME CASES,
LIMIT THE SIZE OF THE PROJECTS WE BID FOR. We tender for projects in the normal
course of business. There are instances where companies require tendering
companies to have a minimum registered share capital equivalent to the worth of
the project. Therefore, the size of the projects that we are able to
successfully tender for may sometimes be dependent on the registered capital of
our subsidiaries. Although some customers may take into account other factors
like our trading status and our track record, we are unable to assure you that
we would be able to secure projects which are valued at more than our registered
capital. Consequently, our revenue, business and financial results may be
adversely and materially affected.
WE ARE SUBJECT TO FOREIGN EXCHANGE RISKS. Our dominant transactional
currency is the Chinese RMB, including the cost of materials which are imported
by our suppliers. With costs mainly denominated in RMB, our transactional
foreign exchange exposure for the past few years has been insignificant.
However, as our suppliers take into account the fluctuations in foreign exchange
rates when they price the imported materials which we procure from them, such
fluctuations in foreign exchange rates may result in changes in the purchase
price of imported materials. Any future significant fluctuations in foreign
exchange rates may have a material impact on our financial performance in the
event that we are unable to transfer the increased costs to our customers.
WE MAY BE ADVERSELY AFFECTED BY SLOW DOWNS IN THE PRC ECONOMY OWING TO
UNFORESEEN CIRCUMSTANCES, SUCH AS AN OUTBREAK OF INFECTIOUS DISEASE. Our
business is dependent on the number of contracts we are able to secure from our
customers. Unforeseen circumstances such as an outbreak of infectious disease
may lead to a decline in global and regional business, which may in turn lead to
a decline in demand for our services.
Furthermore, should such unforeseen circumstances cause disruptions to
our customers' operations, they may undertake cost-cutting measures such as
cutting capital expenditure and deferring projects such as installation of water
treatment systems. This would adversely affect the demand for our business.
SINCE OUR SUBSIDIARIES, OPERATIONS AND SIGNIFICANT ASSETS ARE LOCATED
IN THE PRC, SHAREHOLDERS MAY FIND IT DIFFICULT TO ENFORCE A U.S. JUDGMENT
AGAINST THE ASSETS OF OUR COMPANY, OUR DIRECTORS AND EXECUTIVE OFFICERS. Our
subsidiaries' operations and significant assets are located in the PRC. In
addition, all of our executive officers and our directors are non-residents of
the U.S., and substantially all the assets of these persons are located outside
the U.S. As a result, it could be difficult for investors to effect service of
process in the U.S., or to enforce a judgment obtained in the U.S. against us or
any of these persons.
OUR OPERATIONS COULD BE ADVERSELY AFFECTED BY CHANGES IN THE POLITICAL
AND ECONOMIC CONDITIONS IN THE PRC. The PRC is our main market and accounted for
all of our revenue in 2004. Therefore, we face risks related to conducting
business in the PRC. Changes in the social, economic and political conditions of
the PRC may adversely affect our business. Unfavorable changes in government
policies, political unrest and economic developments may also have a negative
impact on our operations.
Since the adoption of the "open door policy" in 1978 and the "socialist
market economy" in 1993, the PRC government has been reforming and is expected
to continue to reform its economic and political systems. Any changes in the
political and economic policy of the PRC government may lead to changes in the
laws and regulations or the interpretation of the same, as well as changes in
the foreign exchange regulations, taxation and import and export restrictions,
which may in turn adversely affect our financial performance. While the current
policy of the PRC government seems to be one of imposing economic reform
policies to encourage foreign investments and greater economic decentralization,
there is no assurance that such a policy will continue to prevail in the future.
-5-
INTRODUCTION OF NEW LAWS OR CHANGES TO EXISTING LAWS BY THE PRC
GOVERNMENT MAY ADVERSELY AFFECT OUR BUSINESS. The PRC legal system is a codified
legal system made up of written laws, regulations, circulars, administrative
directives and internal guidelines. Unlike common law jurisdictions like the
U.S., decided cases (which may be taken as reference) do not form part of the
legal structure of the PRC and thus have no binding effect. Furthermore, in line
with its transformation from a centrally planned economy to a more free
market-oriented economy, the PRC government is still in the process of
developing a comprehensive set of laws and regulations. As the legal system in
the PRC is still evolving, laws and regulations or the interpretation of the
same may be subject to further changes. For example, the PRC government may
impose restrictions on the amount of tariff that may be payable by municipal
governments to waste water treatment service providers like us. Also, more
stringent environmental regulations may also affect our ability to comply with,
or our costs to comply with, such regulations. Such changes, if implemented, may
adversely affect our business or financial results.
WE MAY BE SUBJECT TO FOREIGN EXCHANGE CONTROLS IN THE PRC. Our PRC
subsidiaries are subject to PRC rules and regulations on currency conversion. In
the PRC, the State Administration for Foreign Exchange ("SAFE") regulates the
conversion of the RMB into foreign currencies. Currently, foreign investment
enterprises ("FIEs") are required to apply to SAFE for "Foreign Exchange
Registration Certificate for FlEs". All of our subsidiaries are FIEs. With such
registration certifications (which need to be renewed annually), FlEs are
allowed to open foreign currency accounts including the "recurrent account" and
the "capital account". Currently, conversion within the scope of the "recurrent
account" can be effected without requiring the approval of SAFE. However,
conversion of currency in the "capital account" (e.g. for capital items such as
direct investments, loans, securities, etc.) still requires the approval of
SAFE.
THE MARKET FOR OUR STOCK IS LIMITED. Our common stock is traded on the
OTC Bulletin Board under the symbol "CEEC." On October 14, 2005, the last
reported sale price of our common stock on the OTC Bulletin Board was $0.27 per
share. However, we consider our common stock to be "thinly traded" and any last
reported sale prices may not be a true market-based valuation of the common
stock. There can be no assurance that an active market for our common stock will
develop. In addition, the stock market in general, and internet and technology
companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of such companies.
-6-
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This prospectus and the documents to which we refer you and incorporate
into this prospectus by reference contain forward-looking statements. In
addition, from time to time, we or our representatives may make forward-looking
statements orally or in writing. We base these forward-looking statements on our
expectations and projections about future events, which we derive from the
information currently available to us. Such forward-looking statements relate to
future events or our future performance. You can identify forward-looking
statements by those that are not historical in nature, particularly those that
use terminology such as "may," "will," "should," "expects," "anticipates,"
"contemplates," "estimates," "believes," "plans," "projected," "predicts,"
"potential" or "continue" or the negative of these or similar terms. In
evaluating these forward-looking statements, you should consider various
factors, including those described in this prospectus under the heading "Risk
Factors" beginning on page 3. These and other factors may cause our actual
results to differ materially from any forward-looking statement. Forward-looking
statements are only predictions. The forward-looking events discussed in this
prospectus, the documents to which we refer you and other statements made from
time to time by us or our representatives, may not occur, and actual events and
results may differ materially and are subject to risks, uncertainties and
assumptions about us. For these statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
-7-
SELLING STOCKHOLDERS
This prospectus relates to the offer and sale of our common stock by
the selling stockholders identified below. In some cases, the common shares
included in the table below consist of common shares issuable upon presently
exercisable warrants. The common shares, including those common shares
underlying our warrants, were issued in two private placements conducted in
2005, as follows:
o In April 2005, we conducted a private placement of 20
investment units, at $25,000 per unit, for gross proceeds of
$500,000. Each unit consisted of (a) one 12% convertible
debenture in the original principal amount of $25,000,
convertible into shares of our common stock at the rate of the
lesser of (i) $0.20 per share or (ii) a 10% discount to the
price per share of common stock (or conversion price per share
of common stock) of the next private placement conducted by us
prior to any conversion of the debenture, and (b) 125,000
detachable warrants to purchase one share each of our common
stock at an exercise price of $0.20 per share, expiring ten
years from their date of issuance. The debentures were due and
payable August 1, 2005. All of the debentures have been
converted into common shares.
o In September 2005, we conducted a private placement of 161
units, at $30,000 per unit, for gross proceeds of $4.83
million. Each unit consisted of 200,000 shares of our common
stock and warrants to purchase 200,000 shares of our common
stock over a five year period at an exercise price of $0.20
per share. A green shoe option to purchase additional shares
was granted to one investor in the September 2005 private
placement.
Westminster Securities Corporation acted as placement agent for both
private placements. Certain officers and employees of Westminster were investors
in the two private placements. We also issued to Westminster, as partial
compensation for their placement agent services, a placement agent warrant to
purchase our common shares, a portion of which has been assigned by Westminster
to certain of its officers and employees. In connection with both private
placements, we agreed to register the common shares for resale. The selling
stockholders will determine when they will sell their shares, and in all cases
will sell their shares at the current market price or at negotiated prices at
the time of the sale. Although we have agreed to pay the expenses related to the
registration of the shares being offered, we will not receive any proceeds from
the sale of the shares by the selling stockholders.
None of the selling stockholders hold any affiliation with us apart
from their ownership of our securities. However, the selling stockholders
include certain officers and employees of Westminster Securities Corporation and
the common shares beneficially owned by them and offered for sale pursuant to
this prospectus include both common shares purchased by them in our 2005 private
placements and a portion of the placement agent warrants assigned to them by
Westminster. Each officer and employee of Westminster included as a selling
shareholder herein has represented that the common shares beneficially owned by
them were acquired by them in the ordinary course of business and there are no
agreements or understandings, directly or indirectly, with any person to
distribute the securities.
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of the date of this prospectus by
each selling shareholder. Certain warrants contain anti-dilution provisions that
entitle their holders to acquire a greater number of common shares under certain
circumstances. Accordingly, the number of common shares beneficially held by
certain selling stockholders is subject to increase. In reviewing the table,
please keep in mind that the percentage amounts beneficially owned are based on
135,903,701 common shares issued and outstanding as of October 14, 2005 and the
amounts in the column relating to shares beneficially owned after the offering
assume that all offered shares are sold.
SHARES BENEFICIALLY OWNED SHARES SHARES BENEFICIALLY OWNED
BEFORE THE OFFERING BEING AFTER THE OFFERING
NAME NUMBER PERCENTAGE OFFERED (1) NUMBER PERCENTAGE
- ------------------------------------------ ----------- ---------- ---------- ------ ----------
Vision Opportunity Master Fund Ltd. (2) 27,000,000 17.30% 27,000,000 -0- -0-
Stephanie D. Tibi 1,200,000 * 1,200,000 -0- -0-
Michael P. Ross 2,000,000 1.46% 2,000,000 -0- -0-
IRA FBO Richard M. Ross, Pershing LLC as 1,200,000 * 1,200,000 -0- -0-
Custodian
Guerilla Partners LP (3) 2,400,000 1.76% 2,400,000 -0- -0-
-8-
SRG Capital LLC (4) 3,200,000 2.33% 3,200,000 -0- -0-
Alpha Capital AG (5) 1,520,000 1.11% 1,520,000 -0- -0-
IRA FBO Chi Pai, Pershing LLC as Custodian 800,000 * 800,000 -0- -0-
Steven Farber 400,000 * 400,000 -0- -0-
Barron Partners LP (6) 6,600,000 4.74% 6,600,000 -0- -0-
Frank L. Kramer 400,000 * 400,000 -0- -0-
Maurice LaFlamme and Mary-Ann LaFlamme, 400,000 * 400,000 -0- -0-
JTWROS
Ronald J. Frank 200,000 * 200,000 -0- -0-
John B. Marsala (7) 755,093 * 755,093 -0- -0-
Charles Carlson (8) 200,000 * 200,000 -0- -0-
DAS Consulting LLC PSP - Pershing LLC as 1,220,370 * 600,000 -0- -0-
Custodian FBO Deborah Salerno - Ttee (9)
IRA FBO John P. O'Shea, Pershing LLC as 1,292,170 * 1,220,370 71,800 *
Custodian (8) (10)
Anthony DiBenedetto 800,000 * 800,000 -0- -0-
Terrance J. Szymanski 200,000 * 200,000 -0- -0-
Peter Fox-Penner 400,000 * 400,000 -0- -0-
Andrew Krauss and Sharon Krauss, JTTEN (11) 524,074 * 524,074 -0- -0-
Earnco MPPP (12) 200,000 * 200,000 -0- -0-
AI International Corporate Holdings Ltd. 1,000,000 * 1,000,000 -0- -0-
(13)
Barry Honig 400,000 * 400,000 -0- -0-
Renee Honig 400,000 * 400,000 -0- -0-
Jacob Honig Irrevocable Trust (14) 400,000 * 400,000 -0- -0-
Michael Brauser and Betsy Brauser 400,000 * 400,000 -0- -0-
Professional Traders Fund, LLC (15) 400,000 * 400,000 -0- -0-
PABC Investment Fund LLC (16) 200,000 * 200,000 -0- -0-
James Davidson 200,000 * 200,000 -0- -0-
IRA FBO Jeffrey J. McLaughlin, Pershing 400,000 * 400,000 -0- -0-
LLC as Custodian (8)
Ajay Ahuja 400,000 * 400,000 -0- -0-
Giovanni Gabriele and Antonia Gabriele, 400,000 * 400,000 -0- -0-
JTWROS
Goliath Holdings LLC (17) 200,000 * 200,000 -0- -0-
Neurnberger Kapitalverwaltung (18) 400,000 * 400,000 -0- -0-
Jan Engstrom 200,000 * 200,000 -0- -0-
Crypto Corp. (19) 400,000 * 400,000 -0- -0-
Marc Deutsch (8) 200,000 * 200,000 -0- -0-
Richard L. Cohen 400,000 * 400,000 -0- -0-
Natalie Merdinger 400,000 * 400,000 -0- -0-
Bell Capital Partners LLC (20) 400,000 * 400,000 -0- -0-
Monmouth Consulting Inc. (21) 400,000 * 400,000 -0- -0-
Dennis Ringer 410,000 * 400,000 10,000 *
Quarum Capital LLC (22) 200,000 * 200,000 -0- -0-
Gabriel Zeitouni 200,000 * 200,000 -0- -0-
Alan R. Cohen 400,000 * 400,000 -0- -0-
Kellogg Capital Group LLC (23) 800,000 * 800,000 -0- -0-
John D. McKey, Jr. 400,000 * 400,000 -0- -0-
Daniel E. Larson (24) 493,056 * 493,056 -0- -0-
Bruno J. Casatelli 220,000 * 200,000 20,000 *
Maree Casatelli 80,000 * 80,000 -0- -0-
Doug C. Millar 200,000 * 200,000 -0- -0-
Kevin R. Wilson (8) 80,000 * 80,000 -0- -0-
Joseph and Joan Kump, JTWROS 400,000 * 400,000 -0- -0-
Thomas J. Banholzer 200,000 * 200,000 -0- -0-
Michael Lusk 80,000 * 80,000 -0- -0-
-9-
Patrick Discepola 200,000 * 200,000 -0- -0-
Alastair S. McEwan 80,000 * 80,000 -0- -0-
Richard W. Wilson 80,000 * 80,000 -0- -0-
Ron D. Lucas 80,000 * 80,000 -0- -0-
John S. Keenan 200,000 * 200,000 -0- -0-
Michael A. Mohr 120,000 * 120,000 -0- -0-
Richard A. Jacoby 1,200,000 * 1,200,000 -0- -0-
Ichi Shih (8) (25) 198,000 * 180,000 18,000 *
F Luskind and S Krauss Ttees for Frances 400,000 * 400,000 -0- -0-
Luskind Dtd 1/10/51 (26)
IRA FBO Michael B. Jawitz, Pershing LLC as 400,000 * 400,000 -0- -0-
Custodian
Meadowbrook Opportunity Fund LLC (27) 800,000 * 800,000 -0- -0-
Herbert Arnold Duke and Leslie Duke, JTWROS 1,000,000 * 1,000,000 -0- -0-
Mark Krakowski 400,000 * 400,000 -0- -0-
Michael Harvey and Lyn Harvey, JTWROS 400,000 * 400,000 -0- -0-
James Wayne Hill and Ruth C. Hill, JTWROS 400,000 * 400,000 -0- -0-
Judith Phillips 200,000 * 200,000 -0- -0-
Brad Gibson 400,000 8 400,000 -0- -0-
Samir Barakat and Claudia.Marseille (28) 1,420,370 1.04% 1,420,370 -0- -0-
Richard Louise (8) (29) 611,000 * 611,000 -0- -0-
Glenn Murer (30) 1,640,740 1.20% 1,640,740 -0- -0-
Operation Dogbone LLC (31) 710,185 * 710,185 -0- -0-
W. Cobb Hazelrig 400,000 * 400,000 -0- -0-
Frederick G. Wedell 400,000 * 400,000 -0- -0-
F&J Partnership (32) 400,000 * 400,000 -0- -0-
Wayne H. Lazarus 400,000 * 400,000 -0- -0-
David R. Holbrooke 400,000 * 400,000 -0- -0-
Blue Sky Securities Ltd. (33) 1,400,000 1.04% 1,400,000 -0- -0-
Robert T. Kolb 400,000 * 400,000 -0- -0-
Joe Wolfe (8) (34) 341,000 * 341,000 -0- -0-
James I. Dangar 200,000 * 200,000 -0- -0-
Jonathan B. Dangar (8) (35) 262,360 * 262,360 -0- -0-
Scott Bowman (8) (36) 245,640 * 245,640 -0- -0-
Christopher Hett (8) (37) 206,000 * 206,000 -0- -0-
John T. Cella and Peggy M. Cella JTWROS 206,000 * 206,000 -0- -0-
(38)
Charles Cagnon 400,000 * 400,000 -0- -0-
Nite Capital LP (39) 1,200,000 * 1,200,000 -0- -0-
Jeffrey J. McLaughlin (8) (40) 248,148 * 248,148 -0- -0-
SOS Resource Services Inc. (41) 310,185 * 310,185 -0- -0-
Generation Capital Associates (42) 620,370 * 620,370 -0- -0-
IRA FBO Angus Morrison, Pershing LLC as 310,185 * 310,185 -0- -0-
Custodian (43)
James R. Echols Sr. (43) 310,185 * 310,185 -0- -0-
Charles Lipman (43) 310,185 * 310,185 -0- -0-
Matthew Richard McGovern Living Trust 310,185 * 310,185 -0- -0-
Dated 7/28/2000 (8) (44)
Westminster Securities Corp. (45) 2,642,615 1.91% 2,642,615 -0- -0-
John P. O'Shea (8) (46) 594,000 * 594,000 -0- -0-
Matthew R. McGovern (8) (46) 2,727,385 1.97% 2,727,385 -0- -0-
Cody J. Corrubia (8) (46) 744,000 * 744,000 -0- -0-
Marika Xirouhakis (8) (47) 142,500 * 140,000 2,500 *
Angelique Xirouhakis (8) (48) 62,500 * 60,000 2,500 *
Kenneth Hart (8) (46) 48,000 * 48,000 -0- -0-
-10-
* Less than one percent
- --------------------------------------------------------------------------------
(1) Of the shares being offered, unless otherwise noted, 50% represent
common shares held by the selling shareholders and 50% represent common
shares issuable to the selling shareholders upon exercise of
outstanding warrants. Unless otherwise noted, the common shares
underlying warrants relate to warrants made part of units acquired in
one of our two private placements conducted in 2005.
(2) Includes (i) 6,800,000 common shares, (ii) 6,800,000 common shares
issuable upon exercise of warrants, (iii) 6,700,000 common shares
issuable upon exercise of a green shoe option, and (iv) 6,700,000
common shares issuable upon exercise of warrants made part of the green
shoe option. The shares underlying the green shoe option may only be
exercised upon 61 days' prior written notice in the event such exercise
would cause the selling shareholder to exceed 9.99% beneficial
ownership of our common shares. Adam Benowitz exercises dispositive and
voting power with respect to these shares.
(3) Peter Siris exercises dispositive and voting power with respect to
these shares.
(4) Edwin Mecabe and Tai May Lee exercise dispositive and voting power with
respect to these shares.
(5) Konrad Ackerman and Rainer Posche exercise dispositive and voting power
with respect to these shares.
(6) Andrew Worden exercises dispositive and voting power with respect to
these shares.
(7) Includes 392,593 common shares and 455,093 common shares issuable upon
exercise of warrants.
(8) The selling shareholder is an employee of Westminster Securities
Corporation and has represented that the shares were bought in the
ordinary course of business and there are no agreements or
understandings, directly or indirectly, with any person to distribute
the securities.
(9) Includes 670,370 common shares and 550,000 common shares issuable upon
exercise of warrants. Deborah Salerno exercises dispositive and voting
power with respect to these shares.
(10) Includes 670,370 common shares and 550,000 common shares issuable upon
exercise of warrants.
(11) Includes 274,074 common shares and 250,000 common shares issuable upon
exercise of warrants.
(12) Earnest Mathis exercises dispositive and voting power with respect to
these shares.
(13) Rima Salam exercises dispositive and voting power with respect to these
shares.
(14) Alan Honig exercises dispositive and voting power with respect to these
shares.
(15) Mark K. Swickie exercises dispositive and voting power with respect to
these shares.
(16) Karol Kolouszek exercises dispositive and voting power with respect to
these shares.
(17) Michael G. Mezzapelle exercises dispositive and voting power with
respect to these shares.
(18) Ralf Schwarz exercises dispositive and voting power with respect to
these shares.
(19) Evelyn Cann exercises dispositive and voting power with respect to
these shares.
(20) J. Daniel Bell and William M. Bell exercise dispositive and voting
power with respect to these shares.
(21) Stanley Merdinger exercises dispositive and voting power with respect
to these shares.
(22) Dennis Ringer exercises dispositive and voting power with respect to
these shares.
(23) Charles K. Kellogg, Nicholas Cappelleri and Mark Schalles exercise
dispositive and voting power with respect to these shares.
-11-
(24) Includes 255,556 common shares and 237,500 common shares issuable upon
exercise of warrants.
(25) Includes 40,000 common shares and 140,000 common shares issuable upon
exercise of warrants, including 100,000 common shares issuable upon
exercise of placement agent warrants.
(26) The selling shareholder is the spouse of Daniel Luskind, an employee of
the Westminster Securities Corporation, and has represented that the
shares were bought in the ordinary course of business and there are no
agreements or understandings, directly or indirectly, with any person
to distribute the securities.
(27) Michael Ragins exercises dispositive and voting power with respect to
these shares.
(28) Includes 770,370 common shares and 650,000 common shares issuable upon
exercise of warrants.
(29) Includes 100,000 common shares and 511,000 common shares issuable upon
exercise of warrants, including 411,000 common shares issuable upon
exercise of placement agent warrants.
(30) Includes 940,740 common shares and 700,000 common shares issuable upon
exercise of warrants.
(31) Includes 385,185 common shares and 325,000 common shares issuable upon
exercise of warrants. Glenn Murer exercises dispositive and voting
power with respect to these shares.
(32) Alex W. Jones, Jr. exercises dispositive and voting power with respect
to these shares.
(33) Michel Clemence exercises dispositive and voting power with respect to
these shares.
(34) Includes and 100,000 common shares and 241,000 common shares issuable
upon exercise of warrants, including 141,000 common shares issuable
upon exercise of placement agent warrants.
(35) Includes 100,000 common shares and 162,360 common shares issuable upon
exercise of warrants, including 62,360 common shares issuable upon
exercise of placement agent warrants.
(36) Includes 100,000 common shares and 145,640 common shares issuable upon
exercise of warrants, including 45,640 common shares issuable upon
exercise of placement agent warrants.
(37) Includes 100,000 common shares and 106,000 common shares issuable upon
exercise of warrants, including 6,000 common shares issuable upon
exercise of placement agent warrants.
(38) Includes 100,000 common shares and 106,000 common shares issuable upon
exercise of warrants, including 6,000 common shares issuable upon
exercise of placement agent warrants. John T. Cella is an employee of
Westminster Securities Corporation.
(39) Keith Goodman exercises dispositive and voting power with respect to
these shares.
(40) Includes 148,148 common shares and 100,000 common shares issuable upon
exercise of warrants.
(41) Includes 185,185 common shares and 125,000 common shares issuable upon
exercise of warrants. Salvatore Russo exercises dispositive and voting
power with respect to these shares.
(42) Includes 370,370 common shares and 250,000 common shares issuable upon
exercise of warrants. Frank E. Hart, Fred A. Brasch and David A.
Rapaport exercise dispositive and voting power with respect to the
shares.
(43) Includes 185,185 common shares and 125,000 common shares issuable upon
exercise of warrants.
(44) Includes 185,185 common shares and 125,000 common shares issuable upon
exercise of warrants. Matthew R. McGovern is an employee of Westminster
Securities Corporation.
(45) Represents 2,642,615 common shares issuable upon exercise of placement
agent warrants. Westminster Securities Corporation is a registered
broker-dealer and as such may be deemed an underwriter.
-12-
(46) Represents common shares issuable upon exercise of placement agent
warrants.
(47) Includes 140,000 common shares issuable upon exercise of placement
agent warrants.
(48) Includes 60,000 common shares issuable upon exercise of placement agent
warrants.
-13-
PLAN OF DISTRIBUTION
We are registering the common shares covered by this prospectus for the
selling stockholders. As used in this prospectus, "selling stockholders"
includes the pledgees, donees, transferees or others who may later hold the
selling stockholders' interests. We will pay the costs and fees of registering
the common shares, but the selling stockholders will pay any brokerage
commissions, discounts or other expenses relating to the sale of the common
shares.
The selling stockholders may sell the common shares in the
over-the-counter market or otherwise, at market prices prevailing at the time of
sale, at prices related to the prevailing market prices, or at negotiated
prices. In addition, the selling stockholders may sell some or all of their
common shares through:
o a block trade in which a broker-dealer or other person may
resell a portion of the block, as principal or agent, in order
to facilitate the transaction;
o purchases by a broker-dealer or other person, as principal,
and resale by the broker-dealer for its account; or
o ordinary brokerage transactions and transactions in which a
broker solicits purchasers.
When selling the common shares, the selling stockholders may enter into
hedging transactions. For example, the selling stockholders may:
o enter into transactions involving short sales of the common
shares by broker-dealers;
o sell common shares short themselves and deliver the shares
registered hereby to settle such short sales or to close out
stock loans incurred in connection with their short positions;
o enter into option or other types of transactions that require
the selling shareholder to deliver common shares to a
broker-dealer or other person, who will then resell or
transfer the common shares under this prospectus; or
o loan or pledge the common shares to a broker-dealer or other
person, who may sell the loaned shares or, in the event of
default, sell the pledged shares.
The selling stockholders may negotiate and pay broker-dealers or other
persons commissions, discounts or concessions for their services. Broker-dealers
or other persons engaged by the selling stockholders may allow other
broker-dealers or other persons to participate in resales. However, the selling
stockholders and any broker-dealers or such other persons involved in the sale
or resale of the common shares may qualify as "underwriters" within the meaning
of the Section 2(a)(11) of the Securities Act of 1933 (the "1933 Act"). In
addition, the broker-dealers' or their affiliates' commissions, discounts or
concession may qualify as underwriters' compensation under the 1933 Act. If the
selling stockholders qualify as "underwriters," they will be subject to the
prospectus delivery requirements of Section 5(b)(2) of the 1933 Act.
In addition to selling their common shares under this prospectus, the selling
stockholders may:
o agree to indemnify any broker-dealer or agent against certain
liabilities related to the selling of the common shares,
including liabilities arising under the 1933 Act;
o transfer their common shares in other ways not involving
market makers or established trading markets, including
directly by gift, distribution, or other transfer; or
o sell their common shares under Rule 144 of the 1933 Act rather
than under this prospectus, if the transaction meets the
requirements of Rule 144.
We have agreed to indemnify the selling stockholders against
liabilities arising in connection with this offering, including liabilities
under the 1933 Act, or to contribute to payments that the selling stockholders
may be required to make in that respect.
-14-
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the OTC Bulletin Board ("OTCBB") under
the symbol "CEEC". The following table sets forth, for the periods indicated,
the high and low sale prices of our common stock as reported on the OTCBB. We
consider our common stock to be thinly traded and that any reported bid or sale
prices may not be a true market-based valuation of the common stock.
QUARTER ENDED HIGH LOW
------------- ---- ---
March 31, 2004 $0.54 $0.10
June 30, 2004 $0.58 $0.365
September 30, 2004 $0.65 $0.38
December 31, 2004 $0.55 $0.35
March 31, 2005 $0.48 $0.30
June 30, 2005 $0.37 $0.15
September 30, 2005 $0.43 $0.14
Fourth quarter through October 12th $0.30 $0.26
We consider our common stock to be thinly traded and, accordingly,
reported sale prices may not be a true market-based valuation of our common
stock. As of October 14, 2005, there were approximately 136 record holders of
our common stock.
We have not paid any cash dividends since our inception and do not
contemplate paying dividends in the foreseeable future. It is anticipated that
earnings, if any, will be retained for the operation of our business.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
We design, construct, and invest in waste water treatment projects in
the PRC. We sell materials and products related to environmental protection. We
also operate waste water treatment facilities and tap water facilities under our
BOT model.
In 2004, we derived all of our net sales from BOT projects. Our
customers include municipal governments in the PRC, food processing and beverage
companies and industrial companies. In 2004, net sales to our largest customer,
True Global Limited, accounted for 97% of our total net sales.
We were incorporated under the laws of the State of Nevada on September
10, 1996. Prior to the transaction mentioned below, our corporate name was
Discovery Investments, Inc. For the prior two years we had not generated
significant revenues and were considered a development stage company as defined
in Statement of Financial Accounting Standards No. 7. We were seeking business
opportunities or potential business acquisitions. Pursuant to a securities
purchase agreement and plan of reorganization dated September 9, 2004, as
amended, between our company, Evergreen Asset Group Limited, an International
Business Company organized under the laws of the British Virgin Islands
("Evergreen"), and the stockholders of Evergreen, we acquired 100% of the issued
and outstanding shares of Evergreen's capital stock. We issued 83,500,000 shares
of our common stock in exchange for all of the issued and outstanding shares of
Evergreen capital stock. Since the stockholders of Evergreen acquired
approximately 83.5% of our outstanding shares and the Evergreen management team
and board of directors became the management team and board of directors of our
company, according to FASB Statement No. 141 - "BUSINESS COMBINATIONS," this
acquisition has been treated as a recapitalization for accounting purposes, in a
manner similar to reverse acquisition accounting. In accounting for this
transaction:
o Evergreen is deemed to be the purchaser and surviving company
for accounting purposes. Accordingly, its net assets are
included in the balance sheet at their historical book values
and the results of operations of Evergreen have been presented
for the comparative prior period;
o Control of the net assets and business of our company was
acquired effective October 15, 2004. This transaction has been
accounted for as a purchase of the assets and liabilities of
our company by Evergreen. The historical cost of the net
liabilities assumed was $0.00.
As a result of the transaction described above we changed our name from
Discovery Investments, Inc. to China Evergreen Environmental Corporation.
CRITICAL ACCOUNTING POLICIES
The following is a discussion of those accounting policies that we deem
to be "critical" -- that is, they are important to the portrayal of our
financial condition and results, and they reflect management's reliance on
estimates regarding matters that are inherently uncertain.
REVENUE RECOGNITION. Revenue from fixed price long-term contracts is
recognized on the percentage of completion method for individual contracts.
Revenues are recognized based on the ratio that costs incurred bear to total
estimated contract costs. The use of the percentage of completion method of
revenue recognition requires estimates of percentage of project completion.
Changes in job performance and estimated losses on uncompleted contracts are
made in the period in which such losses are determinable. In instances when the
work performed on fixed price agreements is of relatively short duration, we use
the completed contract method of accounting whereby revenue is recognized when
the work is completed.
Revenue arising from waste water treatment is recognized based on waste
water treated as recorded by meters read during the year.
IMPAIRMENT OF ASSETS. Our policy is to periodically review and evaluate
whether there has been a permanent impairment in the value of long-lived assets.
Factors considered in the evaluation include current operating results, trends
and whether the anticipated undiscounted estimated future cash flows are less
than the carrying value.
-16-
ALLOWANCES FOR ACCOUNTS RECEIVABLES. Our provisioning policy for bad
and doubtful debt is based on the evaluation of collectability and aging
analysis of accounts receivables and on management's judgment. We do not require
collateral or other security to support client's receivables. We conduct
periodic review of our clients' financial condition and customer payment
practice to minimize collection risk on accounts receivables. This review is
based on a considerable amount of judgment which is required in assessing the
ultimate realization of these receivables, including the current
creditworthiness and the past collection history of each customer. During the
2004 financial period, we had not made any allowance for doubtful debts.
CREDIT POLICY. In 2004 and 2003, our accounts receivables were $9.46
million and $0.08 million, respectively. The sharp increase in accounts
receivables in 2004 was due to receivables from True Global Limited, which
amounted to $ 9.41 million, as a result of the sale of the Xianyang East Suburbs
Wastewater Treatment Plant BOT Project. There is no allowance for doubtful
amounts for both 2004 and 2003.
For turnkey projects, we bill our customers based on the percentage of
completion as set forth in the contract signed with our customers whereas for
BOT projects, we will start billing our customers monthly once the wastewater
treatment facilities start operation for the operating period as stipulated in
the BOT agreements.
RESULTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO DECEMBER 31,
2003
The following table sets forth the items in our consolidated statements
of operations for the periods indicated.
FISCAL YEAR ENDED DECEMBER 31,
------------------------------
2004 2003
----------- -----------
Net sales $ 9,366,513 $ 2,889,094
Cost of goods sold 6,025,435 1,828,801
Gross profit 3,341,078 1,060,293
Selling, general and administrative 1,395,169 355,413
Income from operations 1,945,909 704,880
Other income 19,295 9,240
Interest expense (2,420) (28,590)
Share of results in XL 91,740 --
Gain on disposal of interest in XY 2,029,720 --
Impairment loss on other investment -- (370,097)
Income before income tax 4,084,244 315,433
Income tax expense (467,911) (104,093)
Minority interests 80,616 (42,993)
Net income 3,696,949 168,347
NET SALES. Net sales increased 224.2% from $2.89 million in 2003 to
$9.37 million in 2004. The 2004 increase in net sales was primarily from our
sale of our investment in the waste water treatment project of Xian Yang City,
Shanxi Province, PRC. The percentage of net sales attributable to operating the
waste water treatment plants and fresh water plants was not significant in 2004,
but we expect such fees to increase in 2005. We derived our net sales in 2003
mainly from turn-key engineering projects.
GROSS PROFIT. Gross profit increased 215.1% from $1.06 million in 2003
to $3.34 million in 2004 and, as a percentage of net sales, decreased slightly
from 36.69% in 2003 to 35.67% in 2004. The increase in gross profit for 2004 was
primarily the result of an increase in our revenue.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs increased 292.5% from $0.36 million in 2003 to $1.4 million
in 2004, and as a percentage of net sales, increased from 12.30% to 14.89%. The
increase in costs in 2004 was primarily the result of higher expenditures to
support our increased sales.
OPERATING INCOME. Operating income increased 176.06% from $0.7 million
in 2003 to $1.95 million in 2004, and as a percentage of net sales, operating
income decreased slightly from 24.4% in 2003 to 20.77% in 2004. The increase in
operating income for 2004 was primarily the result of an increased net sales.
-17-
GAIN ON DISPOSAL OF INTEREST IN SUBSIDIARY XY. We recorded a $2.02
million gain in 2004 on the disposal of our entire 90% attributable interest in
Xian Yang Bai Sheng Water Purifying Company Limited ("XY") at a consideration of
$4,130,435. The gain represents the difference between the disposal proceeds and
our attributable share of net assets of XY at the date of disposal.
FOR THE SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2004
The following table sets forth the items in our consolidated statements of
operations for the periods indicated.
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2005 2004
----------- -----------
Revenue 4,000,954 191,014
Cost of revenue (2,657,008) (58,978)
Gross profit 1,343,946 132,036
General and administrative expenses (444,493) (175,518)
Income / (loss) from operations 899,453 (43,482)
Other income 2,861 35,094
Share of results in an associate 87,483 --
Interest expense (23,827) (4,818)
Income / (loss) before income tax 965,970 (13,206)
Income tax (expense) / credit (70,867) 8,416
Minority interests (58,955) (2,498)
Net income / (loss) 836,148 (7,288)
REVENUE. During the six month periods ended June 30, 2005 and 2004, the
revenue increased to $4,000,954 from 191,014. This increase in revenue was
mainly due to the completion of one turnkey engineering waste water project in
Le Chang City in the first quarter of 2005 and the completion of the remaining
15% construction of the waste water treatment plant of Xian Yang City and one
turnkey engineering waste water project in Yong Ji Economic Development Zone
coupled with the revenue from Tian Jin BOT waste water treatment plant.
COST OF REVENUE. During the six month periods ended June 30, 2005 and
2004, the cost of revenue increased to $2,657,008 from $58,978. The increase in
cost of revenue for the six month periods ended June 30, 2005 is mainly due to
the cost of revenue for the turnkey engineering waste water projects.
GROSS PROFIT. Gross profit as a percentage of revenue for the six month
periods ended June 30, 2005 and 2004 increased to $1,343,946 from $132,036. The
percentage of gross margin iincreased because the revenue for the six month
period ended June 30, 2004 included revenue from technical transfer which has no
cost of revenue.
GENERAL AND ADMINISTRATIVE EXPENSES. Our total general and
administrative expenses for the six month periods ended June 30, 2005 and 2004
increased to $444,493 from $175,518. The principal components of general and
administrative expenses are administrative salaries and benefits, depreciation,
finance cost, traveling expenses, rental and other general administration costs.
NET INCOME / (LOSS). During the six month period ended June 30, 2005,
net income, after income tax and minority interests, increased to $836,148 from
a net loss of $7,288 for the six month period ended June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2005, we had $0.91 million in cash and cash equivalents.
Our principal sources of liquidity are our cash and cash flow we generate from
operations and financing activities. Net cash provided by operating activities
during the six month period ended June 30, 2005 was $1,510,341 while net cash
used in operating activities during the six month period ended June 30, 2004 was
$356,075. Net cash provided by operating activities in the six month period
ended June 30, 2005 consisted of net income of $836,148, adjustment for non-cash
items of $106,269 and $567,924 provided by operating activities. Cash flow from
operating activities consisted primarily of a decrease in accounts receivable of
$6.7 million due to receipts from customers amounts fall due and decrease in
accounts payable of $4.3 million due to payments made to our suppliers.
-18-
In April 2005, we conducted a private placement of 20 investment units,
at $25,000 per unit, for gross proceeds of $500,000. Each unit consisted of (a)
one 12% convertible debenture in the original principal amount of $25,000,
convertible into shares of our common stock at the rate of the lesser of (i)
$0.20 per share or (ii) a 10% discount to the price per share of common stock
(or conversion price per share of common stock) of the next private placement
conducted by us prior to any conversion of the debenture, and (b) 125,000
detachable warrants to purchase one share each of our common stock at an
exercise price of $0.20 per share, expiring ten years from their date of
issuance. The debentures were due and payable August 1, 2005. All of the
debentures have been converted into shares of our common stock.
On September 14, 2005, we closed the private placement sale to
accredited investors of units consisting of shares of our common stock and
warrants to purchase shares of our common stock for aggregate gross proceeds of
$4.83 million. Pursuant to the subscription agreements entered into with the
investors, we issued to the investors 161 units at a price of $30,000 per unit.
Each unit consisted of 200,000 shares of our common stock, priced at $0.15 per
share, and warrants to purchase 200,000 shares of our common stock over a five
year period at an exercise price of $0.20 per share. Pursuant to the terms of
the subscription agreements, we granted the investors limited registration
rights for all common shares comprising the units, including the common shares
issuable on exercise of the warrants.
Our business forecasts project that our cash position, cash flow and
our working capital line of credit will be sufficient to meet our corporate,
operating and capital requirements throughout 2005. However, we may need
additional access to long-term capital for acquisitions or other expansion
projects.
OTHER MATTERS
The impact of inflation and the effect of foreign exchange rate changes
during 2004 have not had a material impact on our business and financial
results.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet financing arrangements.
-19-
BUSINESS
We are a leading waste water engineering company in the People's
Republic of China (the "PRC"). Through our majority owned subsidiaries, we are
engaged in the design, construction, implementation of and investment in
industrial and municipal waste water treatment facilities throughout the PRC.
We provide turnkey waste water treatment engineering design and
contracting. We hold 90% and 35%, respectively, of the equity interest in the
following two water treatment facilities operated through build, operate and
transfer (BOT) arrangements with the PRC government: (i) Tian Jin Shi Sheng
Water Treatment Company Limited ("TJSH"), which commissioned water treatment in
November 2003 and has a daily treatment capacity of approximately 10,000 tons;
and (ii) Xin Le Sheng Mei Water Purifying Company Limited ("XL"), which also
commissioned water treatment in November 2003 and has a daily treatment capacity
of 40,000 tons. We have been retained as the manager to manage both TJSH and XL.
The fees from XL and TJSH did not represent a material portion of our revenue
during 2004.
We also developed a BOT water treatment facility project in Hai Yang
City with capacity of 20,000 tons per day. We began constructing this project in
April 2004 and completed the project and commenced water treatment in June 2005.
We are also developing another BOT water treatment facility project in Beijing
with planned capacity of 20,000 tons per day. We began construction of this
project in July 2004 and expect the completion of the project and commencement
of water treatment in the fourth quarter of 2005. The fees from these projects
are expected to strengthen our net sales in the future.
CORPORATE HISTORY
Our company was organized as a Nevada corporation on September 10, 1996
under the name Discovery Investments, Inc., and was previously engaged in the
business of seeking, investigating and, if such investigation warranted,
acquiring an interest in a business opportunity. During the two years prior to
the transaction described below, we had no operations or employees and owned no
real estate.
On October 15, 2004, we were the subject of a reverse acquisition by
Evergreen Asset Group Limited, an International Business Company organized under
the laws of the British Virgin Islands ("Evergreen"), pursuant to which we
acquired 100% of the outstanding shares of Evergreen capital stock in exchange
for a controlling interest in our common stock. Pursuant to a securities
purchase agreement dated September 9, 2004, as amended, we issued 83,500,000
shares of our common stock (representing 83.5% of our outstanding capital stock)
in exchange for all of the issued and outstanding shares of Evergreen capital
stock transferred to us by the Evergreen shareholders at the closing. At the
close of the reverse acquisition, all of our pre-closing officers and directors
resigned and our current officers and directors were appointed to serve in their
present capacities. Following the close of the reverse acquisition, we changed
our corporate name from Discovery Investments, Inc. to China Evergreen
Environmental Corporation.
In April 2005, we conducted a private placement of 20 investment units,
at $25,000 per unit, for gross proceeds of $500,000. Each unit consisted of (a)
a 12% convertible debenture in the original principal amount of $25,000,
convertible into shares of our common stock at the rate of the lesser of (i)
$0.20 per share or (ii) a 10% discount to the price per share of common stock
(or conversion price per share of common stock) of the next private placement
conducted by us prior to any conversion of the debenture, and (b) 125,000
detachable warrants to purchase one share each of our common stock at an
exercise price of $0.20 per share, expiring ten years from their date of
issuance. The debentures are due and payable August 1, 2005. We granted the
investors limited registration rights for the common shares underlying their
debentures and warrants. Westminster Securities Corporation acted as placement
agent for this offering on our behalf.
On September 14, 2005, we closed the private placement sale to
accredited investors of units consisting of shares of our common stock and
warrants to purchase shares of our common stock for aggregate gross proceeds of
$4.83 million. Pursuant to the subscription agreements entered into with the
investors, we issued to the investors 161 units at a price of $30,000 per unit.
Each unit consisted of 200,000 shares of our common stock, priced at $0.15 per
share, and warrants to purchase 200,000 shares of our common stock over a five
year period at an exercise price of $0.20 per share. Pursuant to the terms of
the subscription agreements, we granted the investors limited registration
rights for all common shares comprising the units, including the common shares
issuable on exercise of the warrants.
-20-
Our executive offices are located at Floor 5, Guowei Building, 73
Xianlie Middle Road, Guangzhou, Guangdong, China; telephone number (86-20)
87327909.
OUR BUSINESS
GENERAL
We are a leading waste water engineering company in the People's
Republic of China (the "PRC"). Through our majority owned subsidiaries, we are
engaged in the design, construction, implementation of and investment in
industrial and municipal waste water treatment facilities throughout the PRC.
Our business was originally established in 1999 by our Chairman, Mr.
Chong Liang Pu, with a focus on developing innovative biochemical technologies
and processes for waste water treatment. We have the exclusive rights to MHA
biological treatment processes technologies ("MHA") and GM Bio-carriers. Both
are the subject of patents owned by our Chairman, Mr. Pu, and we have acquired
the exclusive rights pursuant to a license agreement with Mr. Pu. Both
technologies were developed to improve the efficiency and effectiveness of waste
water treatment processes and reduce the initial investment and on-going
operating cost of waste water treatment facilities.
We have applied biotechnological processes to waste water treatment and
have developed relationships with the Chinese environmental authorities at both
national and provincial levels throughout China. Since 2000, we have
successfully completed the design and construction of over 14 waste water
facilities across China with total daily capacity of over 120,000 tons
(inclusive of three BOT waste water treatment facilities with daily capacity of
70,000 tons). Our customers include municipal governments, food processing and
beverage companies and industrial companies.
Because of these achievements, we have been recognized as a "Key
Enterprise in Environmental Industry in PRC" by the General Bureau of
Environmental Protection of China and are viewed as a "High-Tech Enterprise" by
the Bureau of Science and Technology of Guangzhou, PRC.
INDUSTRY BACKGROUND
WASTE WATER TREATMENT MARKETS IN THE PRC. The waste water treatment
business is in a developmental stage in China. Following decades of rapid
industrialization and urbanization resulting from China's breakneck economic
expansion, demands for urban and industrial waste water treatment are immense.
In 2002, total volume of municipal and industrial waste water produced reached
23 billion and 26 billion tons, respectively, of which only approximately 25%
was treated in some form. The government, which views environmental issues as a
policy priority, has targeted a 90% treatment ratio by 2030. This targeted
growth, combined with a policy of privatizing all existing government
facilities, is resulting in extraordinary high levels of expansion in an
industry that did not effectively exist until the 1980s.
In order to promote investment in the waste water treatment industry,
the central government has created incentives such as tax relief and higher
throughput fees which can improve the profitability of certain municipal
projects.
FRESH WATER MARKETS. Before 2003, the facilities for fresh water supply
in the PRC were owned and operated by the agencies of local governments. As
industrial, economic and population growth and chronic pollution has placed
intense demands on the water supply in China, the fresh water supply has had a
serious shortage. Similar to the waste water treatment industry, the PRC
government has opened up the fresh water supply business to private sector and
international operators.
OUR BUSINESS ACTIVITIES
There are different types and quantities of pollutants in water due to
the environment, conditions and purpose for which the water is used. Municipal
water has organic matters including nitrogen and phosphorus. The composition of
such municipal wastewater is relatively stable. In contrast, pollutants in water
discharged from industries include organic pollutants, inorganic matters, metal
ions and salt ion. We adopt varying treatment processes for different industrial
wastewater.
-21-
We provide turn-key engineering, equipment and chemical sales for
industrial and municipal waste water treatment facilities in China. We also
invest in, manage and operate our own water treatment facilities through BOT
arrangements in the PRC.
TURN-KEY WASTE WATER ENGINEERING. We provide turn-key waste water
treatment engineering services to both public and private sectors. Our public
sector clients include municipal governments at the city, district and town
levels. Our private sector clients include heavy industries, such as steel, car
manufacturing, electronic; light industries, such as chemical, food and
beverage, paper, printing and breweries; and others, including hospitals and the
pharmaceutical industry. The industrial wastewater qualities differ due to the
different industrial products and manufacturing processes.
These contracts are awarded either by public tender or by direct
contract. A typical turn-key waste water treatment project can be classified
into three phases; (1) survey and design, (2) construction and equipment
installation, and (3) operation and management services.
From 2000 to 2004, we completed the following turnkey projects: Yongji
Development Zone Wastewater Treatment Plant (Phase 1), Guangdong Nanhai City
Jinsha Town Wastewater Treatment Plant, Guangdong Sanshui Baini Wastewater
Treatment Plant and Guangzhou Yantang Wastewater Treatment Plant. The following
table sets forth the Company's turnkey projects which are still in process:
NAME OF
NEW TURN-KEY PROJECT CAPACITY/PER DAY DATE OF COMMENCEMENT
- -------------------- ---------------- --------------------
Tianjin City Meichang Town Wastewater 2,000 tons Commenced in July 2005
Treatment Plant
Dayawan Wastewater Treatment Plant 30,000 tons Commenced in August 2005
Yongji Development Zone Wastewater 11,000 tons Commenced in August 2005
Treatment Plant
China Environment Industrial Park 5,000 tons Commenced in July 2005
Wastewater Treatment Plant
Huangzhuang Industrial Park Wastewater 1,000 tons Commenced in July 2005
Treatment Plant
INVESTMENT IN BOT WASTE WATER TREATMENT FACILITIES. We also invest in
waste water treatment facilities through BOT arrangements. BOT projects provide
us with a stable and guaranteed income source under a long-term (usually 20-30
year) contract granted by municipal governments to build and operate a waste
water plant. BOT project land is typically contributed by the municipal
government with the operator providing investment and daily management. After
the contract period, the project is transferred to the local government. After
we secure a contract for a BOT project from a municipal government and the
financing for such project is in place, we will proceed to construct the
facility. We will own and operate the facility after the project is completed.
The typical capital return period of a BOT project is approximately 5-6 years if
it is not divested earlier.
The following table sets forth the BOT projects which we have completed
or are in process:
OPERATION DATE OF
NAME OF BOT PROJECT OUR INVESTMENT CAPACITY/PER DAY PERIOD COMMENCEMENT
- ------------------- -------------- ---------------- ----------- ------------
Tianjin Wuqing Wastewater RMB 9 million 10,000 tons 20 years November 2003
Treatment Plant (Phase 1)
Xinle Wastewater Treatment Plant RMB 34 million 40,000 tons 22 years October 2003
Haiyang Wastewater Treatment RMB 30 million 20,000 tons 22 years June 2005
Plant
Beijing Tianzhu Wastewater RMB 20 million 20,000 tons 25 years Operation expected to
Treatment Plant (Phase 1) commence in fourth
quarter of 2005
Handan Fengfeng Mining Area RMB 29.25 million 33,000 tons 22 years Operation expected to
Wastewater Treatment Plant commence in first
(Phase 1) quarter of 2006
-22-
OUR PRODUCTION PROCESS
Though the chemicals used for treating municipal and industrial
wastewater qualities are different due to the different sources of wastewater
for municipal wastewater treatment and different industrial product and
manufacturing process for industrial wastewater treatment, the treatment process
is largely similar.
During the wastewater treatment process, the wastewater is first
collected by a pipeline network system and then transported to a sand
sedimentation pool. The wastewater will then go through the MHA waste water
treatment process, which is a natural, chemical free, biological and mineral
based process that facilitates the rapid growth of bacteria in order to improve
the efficiency of degrading the micro-organism materials in the wastewater and
for more efficient operation and reduced energy consumption. After the MHA waste
water treatment process, the wastewater is then transported to the sedimentation
pool to remove the fine particles in the wastewater. The wastewater will then be
sterilized in the sterilization pool and be transported to the water outlet.
OUR PROJECT MANAGEMENT PROCESS
The following is the flow chart of our project management process for both
turn-key wastewater engineering projects and BOT projects:
[FLOW CHART APPEARS HERE]
MARKET INTELLIGENCE. The starting point for all our projects is market
intelligence so that our management is able to decide which projects they wish
to secure for the benefit of the Company. Our marketing personnel are in charge
of market information on potential projects on a regular and ad-hoc basis. Our
management is able to identify and decide on projects which we may potentially
bid for.
PROJECT TRACKING. Based on the information gathered through market
intelligence and the subsequent comprehensive analysis conducted on such
information, our management will decide on which projects to pursue. We carry
out internal evaluations which consist of three steps: initial evaluation,
revaluation and valuation by professional. We also engage external advisors to
carry out external evaluation. We will then embark on determining what the
tender rules and conditions are and the capital requirements and technologies
used for the project. Project tracking allows us to plan ahead and make the
necessary cost planning.
TENDER PROCESS. Once we decide to proceed to tender for a particular
project, we will form a tender committee comprising marketing personnel and
technical personnel, who will be responsible for compiling the tender documents
to be submitted for tender within the stipulated deadline. The tender committee
will compile internal costing and budgetary estimates of labor and material
costs based on quotations from the relevant suppliers and factor in a suitable
profit margin in determining our tender pricing.
DESIGN AND DEVELOPMENT. After signing of the contract, we will appoint
a project team to be responsible for the execution of the project, including an
ad-hoc research and development team to handle the design and development of
that particular project. The research and development team will follow our
overall guidelines to analyze, assess and determine the design and
specifications of a system which will ensure that all of our customers'
requirements are met. The design and development process includes collection of
information, site survey, key design concept, design specification, individual
design, evaluation, revaluation and issue for construction. In addition to our
own design and development capabilities, we have also entered into collaboration
arrangements with other parties to test our equipment to ensure its suitability
and effectiveness.
-23-
PROCUREMENT. After the necessary design and analysis, the
specifications of the system are confirmed, and our procurement department will
proceed to purchase all the materials and equipment required or appoint
appropriate sub-contractors to carry out certain parts of the project.
CONSTRUCTION. The construction process includes subcontracting and site
supervision. During construction, we will send site representative to control
and supervise the construction.
ASSEMBLY AND INSTALLATION. We will carry out assembly and installation
of equipment and/or system and coordinate the assembly and installation fully
with the construction process to ensure all equipment and/or system are properly
assembled and installed. We will send technical staff to assist and guide the
assembly and installation.
TESTING. After the equipment and/or system has been assembled and
installed, we will test the system in accordance with industrial and national
rules and regulations formulated by the relevant PRC authorities.
COMMISSIONING AND FINE-TUNING. For turnkey projects, should the system
pass all tests, we will proceed to hand over the system to our customers. 5%-10%
of the total contract value will be will be treated as retention monies during
the warranty period of up to 12 months requirement. Our technical personnel will
carry out fine-tuning and on-site services. After successful commissioning of
the entire system, the retention monies will be paid by our customers to us
after the warranty period of up to 12 months. For BOT projects, the plant will
start operation after passing all tests. The technical team will carry out
fine-tuning and on-site services. The operation team will follow the operational
guidelines and monitor the quality of treated water.
COMPETITION
We believe our main competitor is Beijing Capital Co., Ltd., a
subsidiary of Capital Group, which has identified investment, development,
operation and management in Chinese water industry as its core business. Beijing
Capital provides comprehensive environment management service. Beijing Capital's
key advantages over us are capital resources and strong human resources as they
are a long-standing, leading environmental enterprise. We also compete with
several other environmental and water treatment companies. We believe that we
compete primarily on the basis of contract pricing. Though many of our
competitors offer similar but less cost effective services, they may have
greater financial resources and hence be able to secure contracts with reduced
operating margins but more competitive pricing. However, we believe having
access to the capital market in the United States through our public listing
will help to differentiate us from our competition. Another area of competition
comes from local protectionism where local governments wish to protect local
environmental businesses. In order for us to overcome this kind of competition,
we rely on our financial and technical resources.
OUR COMPETITIVE STRENGTHS
Based on the performance of our projects, we believe that we are a
leading provider of waste water engineering company in PRC. Key elements of our
competitive strengths include:
SUFFICIENT CAPITAL RESOURCES. The threshold of capital requirements for
entering the waste water treatment segment and the initial capital investment of
waste water treatment facilities and projects, especially BOT projects, is
relatively high. Based on our good track record and relationships with local
governments in China, we believe we are capable of obtaining sufficient capital
resources to fund our operation of projects and expansion plan.
EXPERIENCED MANAGEMENT TEAM AND STRONG RESEARCH AND DEVELOPMENT
CAPABILITY. We have a qualified and experienced management team and staff who
possess strong technical capabilities and who specialize in project management,
project design and research and development in relation to the water
purification and wastewater treatment industry. Among our senior management,
most possess degrees or senior technical qualifications. Members of our senior
management team also have prior experience in managing large corporations and
are familiar with all levels of management. Most of our management and staff
have strong technical expertise and are professionally trained.
We place great emphasis on technical research and development, and
typically set up research and development teams for specific projects to handle
the design, development and improvement of such projects.
-24-
We also keep track of the latest developments in water treatment
technology through our advisors and consultants who are experts in the water
purification and waste water treatment industry. We have established a long-term
cooperation with the Chinese Academy of Science at Guangdong and a number of
universities to maintain its superiority in developing innovative wastewater
treatment technology.
We believe that our management experience and our strong technical
capabilities provide us with a competitive edge over our competitors.
GOOD TRACK RECORD AND PROFESSIONAL QUALITY. We believe that our good
track record and goodwill that we have built up in the provision of water
treatment systems for the municipal government and industrial waste water
treatment give us an edge over our competitors. Due to our strong track record,
we have been awarded various certifications by different environmental
institutions, including certifications of Quality Facility for Environmental
Protection, Gold Price of 2nd Chinese Patent Technology Fair, World Chinese
Scientific and Technology Invention Prize, certificates of "Quality Branded
Environmental Protection" and "Asia International Scientific and Technology
Improvement Prize". These certificates typically strengthen our ability to
tender for BOT projects with the municipal government and also turnkey projects
for industrial waste water treatment.
EFFECTIVE MARKET NETWORK. We emphasize the importance of marketing and
have people specialized in promotion of our company and securing projects. We
have an extensive marketing network in Shangdong, Tianjin, Neijing, Handan
Hebei, Xianyang Shangxi and Guangdong, where we have BOT projects. Such offices
provide feedback on market intelligence and deal with existing and potential
customers. Project selection is partially based on intelligence feedback from
these networks. We retain a team of former senior government officials with
considerable influence on local and central governments in China. This team
identifies and helps to secure major environmental projects for the group. The
team also provides timely feedback of market conditions and deal with our
existing and potential customers regularly.
LONG-TERM RELATIONSHIPS WITH ACADEMIC INSTITUTIONS. We have good and
long-term relationships with Guangdong Province Environmental Protection Design
Institute and North-Eastern Environmental Protection Design Institute, who
provide important technical support in design and project execution.
CUSTOMERS, SALES AND MARKETING
Many of our principal customers are local governments, food and
beverage processing companies and industrial companies that use our technologies
to treat their waste water.
Our largest customers have historically accounted for a significant
percentage of our net sales. Net sales to our largest customer, True Global
Limited, accounted for approximately 97% of our net sales in 2004. We sold our
investment in a BOT project, Xian Yang Bai Cheng Environmental Protection Co.
Ltd., in the fourth quarter of 2004 to True Global Limited.
We market and sell our products through our direct sales force and
independent sales representatives throughout the PRC. Our sales and marketing
team is responsible for evaluating the marketplace, generating leads and
creating sales programs. We use a "Project-Company" strategy for each BOT
project, establishing a company in the location of the project, responsible for
construction and operation of the project. Through establishing a good
relationship with the local government, the Project-Company markets its business
in the location. Our on-site direct service organization provides ongoing
services to customers using our products.
In order to compete effectively, we focus on projects of a scale
between 10,000 tons and 50,000 tons of waste water per day, where we can achieve
a balance between economies of scale arising from our technology and our
available capital base.
RESEARCH AND DEVELOPMENT
Our research and development efforts are directed toward enhancing our
existing technology and products and developing our next generation of
technology.
We have the exclusive rights to MHA biological treatment processes
technologies ("MHA") and GM Bio-carriers. Both are the subject of patents owned
by our Chairman, Mr. Pu, and we have acquired the exclusive rights pursuant to a
license agreement with Mr. Pu. We have applied both technologies to improve the
efficiency and effectiveness of waste water treatment processes as well as to
reduce the initial investment and on-going operating cost of waste water
treatment facilities. The advantages of MHA are:
-25-
o Proprietary design of water flow control mixer to ensure even
distribution of waste treatment bacteria in the treatment
facility.
o Proprietary design of no-oxygen, low-oxygen and oxygen tanks
to reduce energy consumption and ensure low sludge build up in
the treatment process.
o Proprietary blend of waste water treatment bacteria (i.e.,
photosynthetic, lactobacillus, yeast, streptonyces, etc.) of
over 50 types of different degradation and effectiveness to
achieve toxic, aromatic and micro-organism free water of
release.
The following chart shows the comparison of percentages of saving between using
MHA and traditional waste water treatment technology.
PERCENTAGE OF SAVINGS THROUGH MHA TECHNOLOGY
[GRAPH GO'S HERE]
GM biological-carrier is a natural, chemical-free, biological and
mineral based process that facilitates the rapid growth of bacteria in order to
improve the efficiency of degrading the micro-organism materials in the waste
water. Installation of such carriers into the waste treatment process
facilitates bacterial growth for more efficient operation and reduced energy
consumption.
Currently we are developing technology with universities and research
institutions in Guangdong Province and have on staff a chief scientist, who is a
researcher in the field of environmental protection, and two research fellows.
We are planning to invite additional experts in the waste water treatment field
to join our company.
QUALITY CONTROL
Our quality control department is headed by Ying Mo Zhang, who has more
than 30 years of relevant experience. Mr. Zhang has been an engineer and a
general manager at several companies, and Vice Chairman of our company, and he
is familiar with resource allocation, quality control and environmental facility
management control.
To ensure the quality of our products and services, we carry out
stringent quality control checks at every stage of project execution.
QUALITY CONTROL DURING DESIGN, RESEARCH AND DEVELOPMENT. The design of
every project is carried out by our experienced staff following strict
guidelines. We have also established a three-tier examination and verification
system. A strict examination and approval system is also adopted in respect of
any design changes.
-26-
QUALITY CONTROL DURING PROCUREMENT. To ensure the quality of equipment
and materials procured, we maintain a list of suppliers and sub-contractors
whose goods and services meet our quality control standards. We purchase our
materials and equipment only from these suppliers, and such materials and
equipment are subject to further inspections and checks by our quality control
staff upon arrival at our production facilities. Goods which do not meet our
quality control standards are rejected.
QUALITY CONTROL DURING ASSEMBLY AND INTEGRATION. As a general policy,
our sub-contractors selected and appointed by us to carry out engineering,
assembly and integration works should be long established and have good track
records.
QUALITY CONTROL DURING DELIVERY AND INSTALLATION. To ensure that our
qualified sub-contractors comply with our quality control standards during
delivery and installation, we also task our engineers with formulating a quality
control and progress plan, and to identify the key quality control points of the
delivery and installation procedure. Such engineers will supervise our
sub-contractors during delivery and installation.
QUALITY CONTROL DURING OPERATION FOR BOT PROJECTS. Our operation team
starts their training prior to the commencement of operation. After test run and
commissioning, the operation team will take over the operation. We have very
strict guidelines for the operating team to ensure quality of clean water. A
production report is to be faxed to the head office everyday and we will perform
regular tests to ensure the treated water meet high quality standard. We also
conduct regular training to ensure that our operation teams are equipped with
the latest know-how.
COOPERATIVE PARTNERS AND SUPPLIERS
We outsource the design and construction of our subsystems to a number
of cooperative partners and key suppliers and maintain close relationships with
them. Our cooperative partners include East-North Design Institution of China
Civil Engineering, Guangzhou Design Institution of Environmental Protection
Engineering, and the 20th Group of China Railway Company. There are three main
types of equipment for our waste water treatment and potable water projects: (i)
electrical equipment which includes various types of sewage pumps, slush pumps
and other water pumps, separators, sludge scrapers, mixers, air compressors,
filters, dehydrators, blow fans, etc; (ii) automated control systems and
electrical parts; and (iii) various test, analysis, detection and monitoring
instruments. All purchases from foreign companies are made through their
authorized dealers/agents in the PRC. We adhere closely to the principles of
total quality management. Our customers, suppliers and employees are encouraged
to provide feedback and suggestions for improvements in products and services.
The following table sets forth our major suppliers of equipment and
materials:
COMPONENT, RAW MATERIALS AND OUR MAJOR SUPPLIERS
EQUIPMENTS
Waste water treatment analytical Hach Company
instruments
Blow fan systems HV-Turbo A/S
Sewage pumps, slush pumps, other German Pump Industry Company
water pumps and mixers
PLC automated control systems Mitsubishi Electric
Electrical parts Schneider Electric Low Voltage
(Tianjin) Co.
Automated systems Xian Huiyou Automated
Engineering Company
INTELLECTUAL PROPERTY
We seek to protect our intellectual property by way of our license
rights to patents on proprietary features of our advanced bio-chemical treatment
technology and processing systems for waste water treatment and by challenging
third parties that we believe infringe on our licensed patents. We have obtained
the exclusive right to use two patents owned by our Chairman, Mr. Pu, for our
MHA and GM Bio-carriers technologies. We also protect our intellectual property
rights with nondisclosure and confidentiality agreements with employees,
consultants and key customers.
-27-
EMPLOYEES
As of October 12, 2005, we had 54 employees, of whom 8 were engaged in
sales, marketing and service, 12 in research, development and engineering, 25 in
finance and administration and 9 in operations. None of our employees are
represented by a collective bargaining agreement, and we believe that we have
satisfactory relations with our employees.
ENVIRONMENTAL
One of our core values is protecting the environment in which we
operate and the environment in which our equipment operates. Compliance with
laws and regulations regarding the discharge of materials into the environment,
or otherwise relating to the protection of the environment, has not had any
material effects on our capital expenditures, earnings or competitive position.
We do not anticipate any material capital expenditures for environmental control
facilities in 2005.
REGULATION
China's numerous ongoing water reforms are moving toward a user-pay
market-driven sector. Legislation serves as the basis to regulate and enforce
these reforms. The Water Resource Law, amended and put into effect on October 1,
2002, significantly changes water resource management systems, water resource
protection, water conservation, and legal responsibilities.
ENVIRONMENTAL LAWS AND REGULATIONS
In China, environmental laws and regulations are stipulated and
implemented through legislation and through administrative authorities at
various levels of government. Current environmental laws and regulations can be
classified into two categories: environmental management and environmental
pollution prevention and control. All environmental laws and regulations are
stipulated on the basis of the Environmental Protection Law (EPL). EPL,
effective in December 1989, sets the framework for environmental management and
pollution control legislation in China.
ENVIRONMENTAL MANAGEMENT LAW AND REGULATION. China's environmental
management measures include environmental impact assessment (EIA), the Three
Synchronies Policy, permitting requirements, and reporting requirements. Each of
these is described below:
1. ENVIRONMENTAL IMPACT ASSESSMENT. The 1989 Environmental Impact
Assessment Law was revised in October 2002. These revisions
became effective in September 2003 and apply to all
construction projects that may negatively impact the
environment. An EIA must be prepared during the project
feasibility stage to assess the project's environmental
impact. EIA approval is necessary to secure a construction and
operating permit.
2. THREE SYNCHRONIES POLICY. Article 26 of the EPL, defines the
Three Synchronies Policy as the installation of pollution
prevention and control facilities in a construction project to
be undertaken concurrently with the main construction phase.
The pollution prevention and control facilities are to be
installed and commissioned only after they are inspected and
approved by the Environmental Protection Bureau (EPB).
3. PERMITTING REQUIREMENTS. Pollution discharges in China are
subject to registration and permitting requirements. The EPL
defines requirements for pollution discharge registration and
permits. Pollution discharges must be registered with the
relevant environmental authority. A pollution discharge permit
is issued after registration. The Management Regulation on the
Registration of Discharged Pollutants, issued by the State
Environmental Protection Administration (SEPA), effective Oct.
1, 1992, details requirements for pollution discharge
registration. At the state level, the Department of Pollution
Control under SEPA implements pollution discharge registration
and permitting policies. Pollution control departments under
local EPBs are in charge of the registration procedures and
issue a pollution discharge permit.
-28-
4. REPORTING REQUIREMENTS. According to Article 31 of the EPL,
any organization that causes or has a potential to cause an
accident resulting in environmental pollution must promptly
take measures to prevent and control the pollution hazard and
notify the relevant authority. In addition, enterprises and
institutions that have a greater likelihood to cause severe
pollution accidents must adopt effective pollution prevention
measures.
ENVIRONMENTAL POLLUTION LAW AND REGULATION. Environmental pollution
prevention and control measures in China apply to various environmental media,
including water, water supply, wastewater discharge, air emissions, hazardous
waste management, noise, and soil and groundwater. In November 2004, the
management rules regarding environmental pollution prevention facilities
operation permit was enacted and it set forth the requirements for getting a
permit and how the facilities must be operated.
The following is a summary of environmental pollution laws and
regulations regarding water, water supply and waste water discharge in China:
WATER. Three laws apply to the water sector:
1. The Water Resources Law emphasizes the uniform management of
river basins and the macro-management of water distribution
and consumption. In addition, the law identifies a water
quality management system.
2. The 1984 Water Pollution Prevention and Control Law (WPL)
applies to discharges to rivers, lakes, canals, reservoirs,
and groundwater. The WPL contains sections pertaining to water
quality and discharge standards, pollution prevention, surface
water, and groundwater. Amendments in 1996 introduced further
controls on river basins, including requirements for cities
and towns to establish central sewage treatment plants and to
set treatment fees, mass-loading controls, provisions for
strengthening the supervision and management of water
pollution, and non-point-source pollution controls.
3. The Implementation Regulation of Water Pollution Prevention
and Control Law was enacted on March 20, 2000. This law
regulates the supervision and management of surface and ground
water pollution, prevention, and control measures.
WATER SUPPLY. In urban areas, water is usually supplied by the
municipal water utility companies, which are responsible for ensuring that water
quality complies with the National Drinking Water Standard (GB5749-85). A
groundwater abstraction permit is required if any company intends to use
groundwater directly. In Northern China, however, the use of groundwater is
strictly controlled because of significant water shortages and ground settlement
issues. Users must apply to provincial or higher level administrative committees
for a groundwater abstraction permit.
WASTEWATER DISCHARGE. Two types of wastewater discharge systems are
defined in China: (1) polluted wastewater discharges (typically industrial and
domestic wastewater) and (2) non-polluted wastewater discharges (for example,
storm water). Separate drainage systems for polluted and non-polluted discharges
are required for a facility in which a municipal sewer system is available.
ENVIRONMENTAL ENFORCEMENT
In China, methods of enforcing environmental legislation include
discharge fees, surcharge fees, fines, and administrative sanctions. Pollutant
discharge activity is subject to a discharge permit, which must be registered
and obtained before the pollutants are generated.
In major pollution control areas, such as Shanghai and Beijing,
mass-loading targets are established and allocated to major emission facilities
by the local EPB. In some pilot locations, emission quotas can be traded among
facilities.
In areas with significant pollution problems, such as those impacted by
sulfur dioxide emissions, acid rain, and water quality deterioration, specific
discharge limitations are adopted to prevent further degradation.
-29-
There are specific items within the Constitution of the People's
Republic of China and the PRC Criminal Law to strengthen the enforcement of
environmental legislation by disciplinary sanction, civil liability, and even
criminal liability. Disciplinary sanctions may come in the form of a warning, a
fine, a requirement to install environmental protection equipment, or a
requirement to cease operations. Criminal liability can also be passed on to the
legal representative of an enterprise if the polluting activity caused severe
damage to property, health, or interests of the state or its citizens. In these
cases, the individual deemed responsible may be prosecuted. Civil liability also
exists and is aimed at activities that may result in civil disputes. Generally,
the dispute may be settled through financial compensation by the facility that
caused the damage.
FACILITIES
We lease many of our facilities, consisting principally of
administration, operations, research and development, finance and sales offices.
Our principal executive offices consist of 400 square meters of office
space that we lease and which are located at the Floor 5, Guowei Building, 73
Xianlie Middle Road, Guangzhou, Guangdong, China. We lease this space pursuant
to a one year lease at a rate of rmb 240,000 per year. We believe that our
offices in China provide sufficient service capacity for the foreseeable future.
LITIGATION
There are no pending legal proceedings to which we or our properties
are subject.
-30-
MANAGEMENT
Set forth below are our executive officers and directors.
NAME AGE POSITION
- --------------- --- -----------------------------------------------
Chong Liang Pu 46 Chief Executive Officer, President and Director
Ren Cai Ding 46 Chief Financial Officer
Jia He Li 62 Chief Operating Officer
Shi Rong Jiang 30 Director
Lin Hong Ye 62 Director
Mr. Pu has served as our chief executive officer, president and a
director since October 2004. Mr. Pu founded Evergreen and has acted as its
chairman and president since April 2004. From May 1999 until April 2004, Mr. Pu
was the chief executive officer and general manager of Guang Dong Xin Xing Mei
Biology Company Limited, a majority-owned subsidiary of Evergreen.
Mr. Ding has served as our chief financial officer since October 2004.
>From December 2003 until October 2004, Mr. Ding served as the chief financial
officer and financial manager of Guang Dong Xin Xing Mei Biology Company
Limited, a majority-owned subsidiary of Evergreen. From January 2000 until
December 2003, Mr. Ding was a financial manager of Guangzhou Yitao Group Co.,
Ltd., a real estate development company in the PRC. In 1999, Mr. Ding was the
chief financial officer and head of the auditing department of Shenzhen Wei Ang
Appliance Development Co., Ltd., a household appliance manufacturer in the PRC.
Mr. Li has served as our chief operating officer since October 2004.
Immediately prior to joining our company, Mr. Li was the assistant to the
general manager of Evergreen and the deputy general manager of Guang Dong Xin
Xing Mei Biology Company Limited, a majority-owned subsidiary of Evergreen. From
March 2003 until April 2004, Mr. Li was the deputy general manager of Baijitan
Hot Spring Co., Ltd., a hotel resort and spa operator in the PRC. From 1999
until March 2003, Mr. Li was a freelance project promoter, developer and
designer for various development projects in the PRC.
Ms. Jiang has served as member of our board of directors since October
2004. Between June 2002 and October 2004, Ms. Jiang served as the assistant to
the president of Guangdong Xinsheng Environmental Investment Group Limited. From
May 1999 to June 2002, Ms. Jiang was assistant to the general manager of
Guangdong Xinxingmei Environment Protection Company, a majority-owned subsidiary
of Evergreen.
Mr. Ye has served as member of our board of directors since October
2004. Between May 2000 and October 2004, Mr. Ye served as the vice president of
the Guangdong Branch of the Chinese Academy of Sciences.
AUDIT COMMITTEE FINANCIAL EXPERT
We do not have an audit committee nor do we have a financial expert
associated with an audit committee.
CODE OF ETHICS
We have adopted a code of ethics that applies to the principal
executive officer and principal financial and accounting officer. We will
provide to any person without charge, upon request, a copy of our code of
ethics. Requests may be directed to our principal executive offices at Floor 5,
Guowei Building, 73 Xianlie Middle Road, Guangzhou, Guangdong, China.
-31-
EXECUTIVE COMPENSATION.
CASH COMPENSATION OF EXECUTIVE OFFICERS. The following table sets forth
the cash compensation paid by the company to its chief executive officer for
services rendered during the fiscal years ended December 31, 2004 and 2003.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ----------------------------
RESTRICTED COMMON SHARES
NAME AND POSITION YEAR SALARY BONUS OTHER ANNUAL STOCK UNDERLYING ALL OTHER
COMPENSATION AWARDS ($) OPTIONS GRANTED COMPENSATION
(# SHARES)
- -------------------------------------------------------------------------------------------------------------------
Chong Liang Pu, 2004 $24,000 -0- -0- -0- -0- -0-
Chief Executive Officer 2003 $24,000 -0- -0- -0- -0- -0-
COMPENSATION OF DIRECTORS. Members of our board of directors do not
receive cash compensation for their services as directors, although some
Directors are reimbursed for reasonable expenses incurred in attending board or
committee meetings. In the future, we may have to consider compensating any
outside directors that become members of our board of directors.
EQUITY COMPENSATION PLANS
The following table sets forth certain information as of December 31,
2004 concerning our equity compensation plans:
Number of Common
Shares to Be Issued Upon Weighted- Average Number of Common
Exercise of Outstanding Exercise Price of Shares Remaining
Plan Category Options Outstanding Options Available for Issuance
- -------------------------- -------------------------- ------------------------- ------------------------
None
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We paid a deposit of $543,478 to Bei Jing Zhao Cheng Chuang Zhan
Investment Company Limited, in which Mr. Pu has equity interests, for
acquisition of property, plant and equipment during the year.
We hold the exclusive rights to use MHA biological treatment processes
technologies and GM Bio-carriers. Both are the subject of patents owned by our
Chairman, Mr. Pu, and we have acquired the exclusive rights pursuant to a
license agreement with Mr. Pu.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
The Nevada General Corporation Law provides that corporations may
include a provision in their certificate of incorporation relieving directors of
monetary liability for breach of their fiduciary duty as directors, provided
that such provision shall not eliminate or limit the liability of a director (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful payment
of a dividend or unlawful stock purchase or redemption, or (iv) for any
transaction from which the director derived an improper personal benefit. Our
certificate of incorporation provides that directors are not liable to us or our
stockholders for monetary damages for breach of their fiduciary duty as
directors to the fullest extent permitted by Nevada law. In addition to the
foregoing, our bylaws provide that we may indemnify directors, officers,
employees or agents to the fullest extent permitted by law and we have agreed to
provide such indemnification to each of our directors.
The above provisions in our certificate of incorporation and bylaws and
in the written indemnity agreements may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breach of their fiduciary duty, even though such an action, if successful, might
-32-
otherwise have benefited us and our stockholders. However, we believe that the
foregoing provisions are necessary to attract and retain qualified persons as
directors.
Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the 1933 Act and is, therefore, unenforceable.
-33-
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the shares of our common stock as of October 14, 2005 by
(i) each person who is known by us to be the beneficial owner of more than five
percent (5%) of the issued and outstanding shares of our common stock, (ii) each
of our directors and executive officers and (iii) all directors and executive
officers as a group. Except as otherwise stated, the mailing address for each
person identified below is Floor 5, Guowei Building, 73 Xianlie Middle Road,
Guangzhou, Guangdong, 510095, China.
NAME NUMBER OF SHARES PERCENTAGE OWNED
------------------ ------------------
Chong Liang Pu 57,489,750 42.30%
Shi Rong Jiang 5,101,000 3.75%
Jia He Li -0- 0%
Lin Hong Ye -0- 0%
Ren Cai Ding -0- 0%
Vision Opportunity Fund Ltd. 27,000,000 17.30%
Gao Yongping 10,145,250 7.46%
This table is based upon information derived from our stock records.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws where applicable, we believe that each of the
shareholders named in this table has sole or shared voting and investment power
with respect to the shares indicated as beneficially owned. Applicable
percentages are based upon 135,903,701 shares of common stock outstanding as of
October 14, 2005.
The common shares beneficially owned by Vision Opportunity Fund Ltd.
include (i) 6,800,000 common shares, (ii) 6,800,000 common shares issuable upon
exercise of outstanding warrants, (iii) 6,700,000 common shares issuable upon
exercise of a green shoe option, and (iv) 6,700,000 common shares issuable upon
exercise of warrants made part of the green shoe option. The shares underlying
the green shoe option may only be exercised upon 61 days' prior written notice
in the event such exercise would cause the selling shareholder to exceed 9.99%
beneficial ownership of our common shares. The address for Vision Opportunity
Fund Ltd. is 954 3rd Avenue, Suite 402, New York, New York.
-34-
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue 200,000,000 shares of common stock, of
which, as of the date of this prospectus, 135,903,701 shares were issued and
outstanding and held by approximately 136 recordholders. As of the date of this
prospectus, there are no outstanding options, warrants or other securities which
upon exercise or conversion entitle their holder to acquire shares of common
stock, except as set forth below.
Holders of shares of common stock are entitled to one vote per share on
all matters to be voted upon by the stockholders generally. The approval of
proposals submitted to stockholders at a meeting other than for the election of
directors requires the favorable vote of a majority of the shares voting, except
in the case of certain fundamental matters (such as certain amendments to the
certificate of incorporation, and certain mergers and reorganizations), in which
cases Nevada law and our bylaws require the favorable vote of at least a
majority of all outstanding shares. Stockholders are entitled to receive such
dividends as may be declared from time to time by the board of directors out of
funds legally available therefor, and in the event of liquidation, dissolution
or winding up, to share ratably in all assets remaining after payment of
liabilities. The holders of shares of common stock have no preemptive,
conversion, subscription or cumulative voting rights.
WARRANTS
We have issued warrants to purchase shares of our common stock to
investors and investment bankers in several investment transactions in the past.
As of the date of this prospectus, we have issued warrants that entitle the
holders to purchase an aggregate of 56,428,000 shares of common stock.
DIVIDENDS
We do not anticipate the payment of cash dividends on our common stock
in the foreseeable future.
EXPERTS
PKF, Hong Kong, registered public accountants, have audited, as set
forth in their report appearing elsewhere in this prospectus, our financial
statements for the years ended December 31, 2004 and 2003. We have included our
financial statements in the prospectus in reliance on PKF, Hong Kong's report,
given on their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, file reports, proxy
statements and other information with the SEC. Our reports, proxy statements and
other information filed pursuant to the Securities Exchange Act of 1934 may be
inspected and copied at the public reference facilities maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such
material can also be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the SEC maintains a Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's Web site is
http://www.sec.gov.
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act of 1933 with respect to the common stock offered hereby. As
permitted by the rules and regulations of the SEC, this prospectus, which is
part of the registration statement, omits certain information, exhibits,
schedules and undertakings set forth in the registration statement. Copies of
the registration statement and the exhibits are on file with the SEC and may be
obtained from the SEC's Web site or upon payment of the fee prescribed by the
SEC, or may be examined, without charge, at the offices of the SEC set forth
above. For further information, reference is made to the registration statement
and its exhibits.
-35-
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Accounting Firm................................................................F-1
Consolidated Balance Sheets at December 31, 2004 and 2003.......................................................F-2
Consolidated Statements of Operations for the years ended December 31, 2004 and 2003............................F-3
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2004 and 2003................................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003............................F-5
Notes to Consolidated Financial Statements......................................................................F-6
Unaudited Condensed Consolidated Balance Sheet at June 30, 2005................................................F-28
Unaudited Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2005 and 2004..................................................................F-29
Unaudited Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2005 and 2004.................................................................................F-30
Notes to Unaudited Condensed Consolidated Financial Statements.................................................F-31
-36-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
China Evergreen Environmental Corp.
We have audited the accompanying consolidated balance sheets of China Evergreen
Environmental Corp. (the "Company") and its subsidiaries as of December 31, 2004
and 2003 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2004 and 2003 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.
/s/ PKF
Certified Public Accountants
Hong Kong
March 11, 2005, except for note 34 as to
which the date is April 15, 2005
F-1
CHINA EVERGREEN ENVIRONMENTAL CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------------
2004 2003
USD USD
ASSETS
Current assets
Cash and cash equivalents 336,079 54,556
Inventories, net (Note 9) - 12,559
Accounts receivable (Note 10) 9,462,999 84,359
Prepayment, deposits and other receivables (Note 11) 777,365 1,183,354
Amounts due from related companies (Note 12) 3,158,328 703,103
Amounts due from directors (Note 13) 26,794 -
Amount due from an associate (Note 14) 1,744,775 3,588,453
Other investment (Note 15) - 28,454
Deferred tax assets (Note 28) 199,981 197,395
---------------- ----------------
Total current assets 15,706,321 5,852,233
Infrastructure assets, net (Note 5) 3,305,089 983,895
Property, plant and equipment, net (Note 6) 330,865 361,332
Convertible note receivable (Notes 7 and 20) 1,366,997 -
Construction-in-progress - 6,869
Deposits paid for acquisition of property, plant and equipment (Note 32) 543,478 2,619,566
Interests in an associate (Note 8) 345,363 253,623
---------------- ----------------
Total assets 21,598,113 10,077,518
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Unsecured loan (Note 16) 229,468 1,386,715
Other borrowing (Note 17) 24,155 24,155
Accounts payable 8,755,148 1,811,010
Accrued liabilities (Note 18) 526,068 1,026,060
Amounts due to directors (Note 13) 606,645 740,460
Amounts due to related companies (Note 19) 2,864,506 910,723
Deposit received for disposal of a subsidiary (Note 20) 350,514 -
Income tax payable 626,249 118,816
---------------- ----------------
Total liabilities 13,982,753 6,017,939
---------------- ----------------
Minority interests (Note 21) 159,642 449,515
---------------- ----------------
Stockholders' equity
Common stock, USD0.001 par value, 200,000,000 shares
authorized; 99,999,997 shares issued and outstanding at
December 31, 2004; 29,059,007 shares issued and outstanding
at December 31, 2003 (Note 23) 83,800 3,792,391
Additional paid-in capital (Note 24) 3,857,296 -
Retained earnings/(accumulated deficit) 3,514,622 (182,327)
---------------- ----------------
Total stockholders' equity 7,455,718 3,610,064
---------------- ----------------
Total liabilities and stockholders' equity 21,598,113 10,077,518
================ ================
see accompanying notes to consolidated financial statements
F-2
CHINA EVERGREEN ENVIRONMENTAL CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------
2004 2003
USD USD
Revenue (Note 30) 9,366,513 2,889,094
Cost of revenue (6,025,435) (1,828,801)
---------------- ----------------
Gross profit 3,341,078 1,060,293
Depreciation and amortization (66,413) (17,941)
General and administrative expenses (1,328,756) (337,472)
---------------- ----------------
Income from operations 1,945,909 704,880
Other income (Note 25) 19,295 9,240
Interest expense (Note 26) (2,420) (28,590)
Share of results in an associate - XL 91,740 -
Gain on disposal of interest in a subsidiary - XY (Note 27) 2,029,720 -
Impairment loss on other investment - (370,097)
---------------- ----------------
Income before income tax 4,084,244 315,433
Income tax expense (Note 28) (467,911) (104,093)
Minority interests (Note 21) 80,616 (42,993)
---------------- ----------------
Net income 3,696,949 168,347
================ ================
Basic net income per share (Note 22) 0.043 0.002
================ ================
see accompanying notes to consolidated financial statements
F-3
CHINA EVERGREEN ENVIRONMENTAL CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK
-------------------------- ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
NO. OF AMOUNT CAPITAL DEFICIT EQUITY
SHARES USD USD USD USD
At January 1, 2003 - 1,292,391 - (350,674) 941,717
Initial capital injection of XY and HY - 2,500,000 - - 2,500,000
Net income - - - 168,347 168,347
------------ ------------ ------------ -------------- --------------
At December 31, 2003 - 3,792,391 - (182,327) 3,610,064
============ ============ ============ ============== ==============
At January 1, 2004 - 3,792,391 - (182,327) 3,610,064
At January 1, 2004 - CEEC share capital 29,059,007 - - - -
Initial capital injection of BJHTSY - 217,392 - - 217,392
Elimination of capital upon the
acquisition of XXM, XY, HY
and BJHTSY by EGAG - (4,009,783) - - (4,009,783)
Initial capital injection of EGAG
(Notes 2(ii) and 23) - 300 - - 300
Additional paid-in capital of EGAG
(Note 24) - - 3,857,296 - 3,857,296
Issue of shares (Note 23) 1,200,000 - - - -
Cancellation of shares before reverse
acquisition (Notes 2(ii) and 23) (13,759,010) - - - -
Acquisition of EGAG (Notes 2(ii) and 23) 83,500,000 83,500 - - 83,500
Net income - - - 3,696,949 3,696,949
------------ ------------ ------------ -------------- --------------
At December 31, 2004 99,999,997 83,800 3,857,296 3,514,622 7,455,718
============ ============ ============ ============== ==============
see accompanying notes to consolidated financial statements
F-4
CHINA EVERGREEN ENVIRONMENTAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003
USD USD
Cash flows from operating activities :
Net income 3,696,949 168,347
Adjustments to reconcile net income to net cash
provided by operating activities :
Depreciation and amortization 66,413 17,941
Impairment loss on other investment - 370,097
Provision of inventories 12,559 -
Increase in deferred tax assets (42,644) (14,723)
(Decrease)/increase in minority interests (56,462) 320,771
Gain on disposal of interest in a subsidiary - XY (Note 27) (2,029,720) -
Share of results in an associate - XL (91,740) -
Changes in operating assets and liabilities :
Decrease in inventories - 239
Increase in accounts receivable (7,422,118) (23,992)
Decrease/(increase) in prepayment, deposits and other receivables 298,576 (1,055,993)
Decrease/(increase) in amounts due from related companies 1,012,593 (838,692)
(Increase)/decrease in amounts due from directors (722,263) 1,104,381
Increase in accounts payable 6,944,138 1,807,138
(Decrease)/increase in accrued liabilities (533,723) 49,301
Increase in amounts due to directors 561,655 7,246
Increase in income tax payable 507,433 118,816
-------------- --------------
Net cash provided by operating activities 2,201,646 2,030,877
-------------- --------------
Cash flows from investing activities :
Deposit paid for acquisition of property, plant and equipment (543,478) (2,619,566)
Cash inflow arising from disposal of interest in a
subsidiary - XY (Note 33(iii)) 2,168,806 -
Acquisition of property, plant and equipment (4,691) (23,817)
Acquisition of infrastructure assets (2,405,113) (433,170)
Construction-in-progress - (6,869)
Decrease in amount due from an associate (55,682) (3,069,129)
Acquisition of XXM, XY, HY and BJHTSY (4,009,783) -
-------------- --------------
Net cash used in investing activities (4,849,941) (6,152,551)
-------------- --------------
Cash flows from financing activities :
New unsecured loans - 1,386,715
Repayment of unsecured loans (1,157,247) -
Initial capital injection of HY and XY - 2,500,000
Initial capital injection of EGAG 300 -
Paid-in capital of EGAG (Note 24) 4,086,765 -
Decrease in amount due to a related company - (185,798)
-------------- --------------
Net cash provided by financing activities 2,929,818 3,700,917
-------------- --------------
Net increase/(decrease) in cash and cash equivalents 281,523 (420,757)
Cash and cash equivalents, beginning of year 54,556 475,313
-------------- --------------
Cash and cash equivalents, end of year 336,079 54,556
============== ==============
see accompanying notes to consolidated financial statements
F-5
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CHANGE OF COMPANY NAME
The Company was incorporated in the State of Nevada on September 10,
1996.
Following a reverse takeover transaction as detailed in note 2(ii), the
Company has ended its development stage and is now engaging in the
provision of the business as set out in note 3.
On November 12, 2004, the name of the Company was changed from
Discovery Investment Inc. to China Evergreen Environmental Corp.
("CEEC"), with all the required filings submitted to the United States
Securities and Exchange Commission.
2. BASIS OF PRESENTATION
(i) The accompanying consolidated financial statements of CEEC and
its subsidiaries (the "Group") have been prepared in
accordance with generally accepted accounting principles in
the United States of America. All significant intercompany
transactions and balances have been eliminated in
consolidation.
(ii) On October 15, 2004, CEEC completed a share exchange with the
stakeholders of Evergreen Asset Group Limited ("EGAG") which
was incorporated in the British Virgin Islands on April 20,
2004 under the International Business Companies Act, British
Virgin Islands (the "Exchange") (Details of the group
reorganization of EGAG was set out in note 2(iii)). Before the
Exchange, CEEC caused its stakeholders to cancel and return to
treasury, for no consideration, 13,759,010 outstanding shares
of common stock. In the Exchange, CEEC acquired 300 shares
representing all the issued and outstanding common stock of
EGAG from the stakeholders of EGAG (the "Shareholders") in
exchange for the issuance of 83,500,000 shares of common stock
of CEEC to the Shareholders.
The Exchange resulted in a change of control of CEEC. Upon
completion of the Exchange, CEEC has a total of 99,999,997
shares issued and outstanding, of which 83,500,000 or 83.5%
are owned by the Shareholders. As the Exchange resulted in the
former stakeholders of EGAG owning greater than 50% of the
common stock of CEEC, the Exchange has been treated as a
reverse takeover with EGAG as the accounting acquirer (legal
subsidiary) and CEEC as the accounting acquiree (legal
parent).
F-6
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BASIS OF PRESENTATION (CONT'D)
Accordingly, the purchase method under reverse takeover
accounting has been applied except that no goodwill is
recorded on the consolidated balance sheet, as such :
(a) The consolidated financial statements are issued
under the name of the legal parent, CEEC, but are a
continuation of the financial statements of EGAG. The
comparative figures are those of EGAG.
(b) EGAG is deemed to be the acquirer for accounting
purposes and as such, its assets and liabilities are
included in the consolidated financial statements at
their historical carrying values.
(c) The common stock and accumulated deficit of CEEC up
to the date of the Exchange are eliminated.
(d) The capital structure of the Company is that of CEEC,
but the dollar amount of the issued share capital in
the consolidated balance sheet is that of EGAG
immediately prior to the Exchange plus the value of
shares issued by CEEC to acquire EGAG.
(e) The value of shares issued by CEEC is determined to
be their par value as CEEC had net liabilities at the
date of the Exchange.
(f) The par value of CEEC common stock and the net
liabilities of CEEC at the date of the Exchange are
written off to the consolidated statement of
operations.
(iii) Pursuant to a group reorganization (the "Reorganization")
which was completed in July 2004, EGAG became the holding
company of the commonly controlled entities by the acquisition
of 90% equity interests in each of Guang Dong Xin Xing Mei
Biology Company Limited ("XXM"), Xian Yang Bai Sheng Water
Purifying Company Limited ("XY"), Hai Yang City Sheng Shi
Environment Protection Company Limited ("HY") and Bei Jing Hao
Tai Shi Yuan Water Purifying Company Limited ("BJHTSY") for
cash consideration of RMB12,601,000, RMB18,000,000,
RMB2,700,000 and RMB1,800,000 respectively, all of which are
domestic incorporated companies established in the People's
Republic of China (the "PRC") with limited liability, the
particulars of which are set out below :-
F-7
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BASIS OF PRESENTATION (CONT'D)
DATE OF ATTRIBUTABLE EQUITY REGISTERED
NAME OF COMPANY ESTABLISHMENT INTEREST % CAPITAL
----------------------
DIRECT INDIRECT RMB
Guang Dong Xin Xing Mei Biology May 18, 1999 90 - 11,890,000
Company Limited ("XXM")
Tian Jin Shi Sheng Water Treatment November, 19 - 81 2,000,000
Company Limited ("TJ") 2002
Xian Yang Bai Sheng Water May 19, 2003 90 - 20,000,000
Purifying Company Limited ("XY")
Hai Yang City Sheng Shi Environment July 30, 2003 90 - 3,000,000
Protection Company Limited ("HY")
Bei Jing Hao Tai Shi Yuan Water May 26, 2004 90 - 2,000,000
Purifying Company Limited
("BJHTSY")
3. DESCRIPTION OF BUSINESS
The principal activities of the Group are the research and development
of waste water, garbage treatment and aqueous purifying techniques,
investment and construction of waste water treatment plant and sales of
environment protection related products.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting years. Although management believes that the
estimates and assumptions used in preparing the accompanying
consolidated financial statements and related notes are reasonable in
light of known facts and circumstances, actual results could differ
from those estimates.
F-8
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments and have maturities of
three months or less at the date of purchase.
INVENTORIES
Inventories are valued at the lower of cost or market with cost
determined on a first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization and impairment loss. Maintenance, repairs
and betterments, including replacement of minor items, are charged to
expense; major additions to physical properties are capitalized.
Depreciation and amortization are provided using the straight-line
method over the following estimated useful lives :-
Office equipment 5 years
Furniture and fixtures 5 years
Tools and equipment 5 years
Motor vehicles 10 years
Waste water treatment plant 20 years
INFRASTRUCTURE ASSETS
Infrastructure assets represents the cost of construction of the waste
water treatment plants under the Build-Operate-Transfer ("BOT")
agreements with the PRC government. The cost includes development and
construction expenditure incurred and other direct costs attributable
to the development. No depreciation and amortization is provided in
respect of infrastructure assets until such time as the relevant assets
are completed and put into operational use. On completion, depreciation
and amortization are provided using the straight-line method over the
operation periods.
IMPAIRMENT OF ASSETS
The Group's policy is to periodically review and evaluate whether there
has been a permanent impairment in the value of long-lived assets.
Factors considered in the evaluation include current operating results,
trends and anticipated undiscounted future cash flows. An impairment
loss is recognized to the extent that the sum of undiscounted estimated
future cash flows that is expected to result from the use of the asset,
or other measure of fair value, is less than the carrying value.
F-9
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
ASSOCIATE
An associate is one, not being a subsidiary or a joint venture, in
which the Company is in a position to exercise significant influence,
including participation in financial and operating policy decisions.
Details of the associate are set out in note 8 to the consolidated
financial statements.
Interests in an associate is stated in the consolidated balance sheet
at the Group's share of the net assets under the equity method of
accounting, as reduced by any identified impairment loss. The results
of the associate are included in the consolidated income statement to
the extent of post-acquisition results attributable to the Group.
OTHER INVESTMENT
Other investment includes equity investment in a private company and is
carried at fair value. Unless there has been a permanent impairment to
the value of the investment, the change in fair value is reported as a
separate component of other comprehensive income or loss. Permanent
impairment to the value of the investment is recognized in the
consolidated statements of operations.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs comprise all cost which are directly
attributable to research and development activities or which can be
allocated on a reasonable basis to such activities. As no research and
development costs satisfy the criteria for the recognition of such
costs as an asset during the year, such costs are therefore recognized
as an expense in the period in which they are incurred.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk is limited to accounts receivable and is
subject to the financial conditions of a major customer which is stated
in note 30 to the consolidated financial statements. The Group does not
require collateral or other security to support client's receivables.
The Group conducts periodic reviews of its clients' financial condition
and customer payment practices to minimize collection risk on accounts
receivable.
FINANCIAL INSTRUMENTS
The carrying amounts of all financial instruments approximate fair
value. The carrying amounts of cash, accounts receivable, related
parties receivable, unsecured loans, accounts payable and related
parties payable approximate fair value due to the short-term nature of
these items. The carrying amounts of borrowings approximate the fair
value based on the Group's expected borrowing rate for debt with
similar remaining maturities and comparable risk.
F-10
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION
Revenue from fixed price long-term contracts is recognized on the
percentage of completion method for individual contracts. Revenues are
recognized in the ratio that costs incurred bear to total estimated
contract costs. The use of the percentage of completion method of
revenue recognition requires estimates of percentage of project
completion. Changes in job performance, estimated profitability and
final contract settlements may result in revisions to costs and income
in the period in which the revisions are determined. Provisions for any
estimated losses on uncompleted contracts are made in the period in
which such losses are determinable. In instances when the work
performed on fixed price agreements is of relatively short duration, we
use the completed contract method of accounting whereby revenue is
recognized when the work is completed.
Revenue arising from waste water treatment is recognized based on waste
water treated as recorded by meters read during the year.
COST OF REVENUES
Cost of revenues comprises labor and other cost of personnel directly
engaged in providing the services, subcontracting and attributable
overhead costs. Cost of revenues does not include any allocation of
depreciation or amortization expense.
INCOME TAXES
The Group utilizes the asset and liability method of accounting for
income taxes whereby deferred taxes are determined based on the
temporary differences between the financial statements and tax bases of
assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Group uses China Renminbi ("RMB") as the functional currency, which
is not freely convertible into foreign currencies. Transactions
denominated in currencies other than RMB are translated into RMB at the
applicable rates of exchange prevailing at the dates of the
transactions, quoted by the People's Bank of China ("the PBOC").
Monetary assets and liabilities denominated in other currencies are
translated into RMB at rates of exchange quoted by the PBOC prevailing
at the balance sheet date. Exchange gains or losses arising from
changes in exchange rates subsequent to the transactions dates for
monetary assets and liabilities denominated in other currencies are
included in the determination of net income for the respective period.
F-11
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS (CONT'D)
For financial reporting purposes, RMB has been translated into USD as
the reporting currency. Assets and liabilities are translated at the
exchange rate in effect at period end. Income statement accounts are
translated at the average rate of exchange prevailing during the
period. Translation adjustments arising from the use of different
exchange rates from period to period are included as a component of
stockholders' equity as "Accumulated other comprehensive income -
foreign currency translation adjustments". Gains and losses resulting
from foreign currency transactions are included in other comprehensive
income/(loss). Foreign currency translation adjustment was not
material.
During 2004 and 2003, there have been no significant change in exchange
rates. Accordingly, there are no changes in other comprehensive
income/(loss).
INCOME PER SHARE
Basic income per share is computed by dividing the net income for the
year by the weighted average number of common shares outstanding during
the year. Diluted income per share is computed by dividing the net
income for the year by the weighted average number of common and common
equivalent shares outstanding during the year. Common equivalent
shares, composed of incremental common shares issuable upon the
exercise of stock options, unvested restricted common stock and
contingently issuable shares that are probable of being issued, are
included in diluted income per share to the extent such shares are
dilutive. In accordance with SFAS 128, "Earnings Per Share", the
Company uses income from continuing operations, net of income taxes as
the "control number" in determining whether common equivalent shares
are dilutive or anti-dilutive in periods where discontinued operations
are reported.
NEW ACCOUNTING PRONOUNCEMENTS
(i) The Statement of Financial Accounting Standards No.150,
"Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150")
was issued in May 2003. This statement affects the
classification, measurement and disclosure requirements of the
following three types of freestanding financial instruments :-
1) mandatory redeemable shares, which the issuing
company is obligated to buy back with cash or other
assets;
2) instruments that do or may require the issuer to buy
back some of its shares in exchange for cash or other
assets, which include put options and forward
purchase contracts; and
F-12
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
NEW ACCOUNTING PRONOUNCEMENTS (CONT'D)
3) obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index,
or varies inversely with the value of the issuers'
shares.
In general, SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this
statement had no impact on the Group's results of operations
or financial position.
(ii) Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities ("VIE")" ("FIN
46"), was issued in January 2003. FIN 46 requires that if an
entity is the primary beneficiary of a variable interest
entity, the assets, liabilities and results of operations of
the variable interest entity should be included in the
consolidated financial statements of the entity. The
provisions of FIN 46 are effective immediately for all
arrangements entered into after January 31, 2003.
In December 2003, the Financial Accounting Standards Board
("FASB") completed deliberations on proposed modifications to
FIN 46 and re-issued FIN 46 ("Revised Interpretation")
resulting in multiple effective dates based on the nature as
well as the creation date of the VIE. VIEs created after
January 31, 2003 but prior to January 1, 2004 may be accounted
for either based on the original interpretation or the Revised
Interpretation. The adoption of these interpretations had no
impact on the Group's results of operation or financial
position.
(iii) SFAS 132 (revised 2003), "Employer's Disclosure about Pensions
and Other Post-Retirement Benefits" was issued in December
2003. SFAS 132 (revised) revised employer's disclosure about
pension plans and other post-retirement benefit plans. SFAS
132 (revised) requires additional disclosures in annual
financial statements about the types of plan assets,
investment strategy, measurement dates, plan obligations, cash
flows, and components of net periodic benefit cost of defined
benefit pension plans and other post-retirement benefit plans.
The annual disclosure requirements are effective for fiscal
years ended after December 15, 2003. SFAS 132 (revised) also
requires interim disclosure of the elements of net periodic
benefit cost and the total amount of contributions paid or
expected to be paid during the current fiscal year if
significantly different from amounts previously disclosed. The
interim disclosure requirements of SFAS 132 (revised) are
effective for interim periods beginning after December 15,
2003. The adoption of this statement had no impact on the
Group's results of operation or financial position.
F-13
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
NEW ACCOUNTING PRONOUNCEMENTS (CONT'D)
The details of the Group's pension plans are disclosed in note
29 to the consolidated financial statements
(iv) In November 2004, the FASB issued SFAS No. 151 "Inventory
costs - an amendment of ARB No. 43, Chapter 4". SFAS 151
amends ARB No. 43, Chapter 4, to clarify that abnormal amounts
of idle facility expense, freight, handling costs and wasted
materials (spoilage) should be recognized as current-period
charges. SFAS No. 151 is effective for inventory costs
incurred during fiscal year beginning after June 15, 2005. The
adoption of this standard has no impact on the Company's
results of operations or financial position.
(v) In December 2004, the FASB issued SFAS No. 123R, "Share-Based
Payment." This Standard addresses the accounting for
transactions in which a company receives employee services in
exchange for (a) equity instruments of the company or (b)
liabilities that are based on the fair value of the company's
equity instruments or that may be settled by the issuance of
such equity instruments. This Standard eliminates the ability
to account for share-based compensation transactions using
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and requires that such
transactions be accounted for using a fair-value-based method.
The Standard is effective for periods beginning after June 15,
2005. The Group is currently assessing the impact of this
Standard on its results of operations and financial position.
5. INFRASTRUCTURE ASSETS, NET
Infrastructure assets, net represented the construction costs of three
waste water treatment plants in the PRC under the BOT agreements as
follows :-
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Construction costs :-
Infrastructure assets of TJ 983,895 983,895
Infrastructure assets of HY 1,951,566 -
Infrastructure assets of BJHTSY 418,823 -
--------------- ----------------
Total 3,354,284 983,895
Less : Accumulated amortization (49,195) -
--------------- ----------------
Infrastructure assets, net 3,305,089 983,895
=============== ================
Amortization expenses for 2004 and 2003 amounted to USD49,195 and
USDNil respectively.
F-14
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following :-
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Purchase cost :-
Office equipment - 6,356
Furniture and fixtures 6,063 11,063
Tools and equipment 25,270 20,539
Motor vehicles 121,739 133,318
Waste water treatment plant 235,053 231,946
--------------- ----------------
Total 388,125 403,222
Less : Accumulated depreciation and amortization (57,260) (41,890)
--------------- ----------------
Property, plant and equipment, net 330,865 361,332
=============== ================
Depreciation and amortization expenses for 2004 and 2003 amounted to
USD17,218 and USD17,941 respectively.
There was no impairment loss for 2004 and 2003.
7. CONVERTIBLE NOTE RECEIVABLE
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Convertible note - Note 20 1,366,997 -
=============== ================
F-15
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INTERESTS IN AN ASSOCIATE
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Share of net assets 345,363 253,623
=============== ================
(a) Details of the associate as of December 31, 2004 are as
follows :-
PERCENTAGE
OF EQUITY
NAME OF ASSOCIATE HOLDING
Xin Le Sheng Mei Water Purifying Company Limited 35%
(b) Information extracted from the audited financial statements of
the associate for the years ended December 31, 2004 and 2003
is as follows :-
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2003
USD USD
(i) Statements of operations
Turnover 1,149,275 -
=============== ================
Net profit/(loss) 452,007 (74,785)
=============== ================
F-16
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
(ii) Balance sheet
Infrastructure assets 4,412,073 4,592,842
Property plant and equipment, net - 25,586
Cash and cash equivalents 591 21,104
Inventories 37,418 30,117
Prepayment, deposits and other receivables 1,576,542 551,488
Deferred tax assets 32,211 -
Other investment - 36,232
Accounts payable (630,808) (324,119)
Amount due to XXM (3,586,400) (3,519,575)
Other current liabilities (745,238) (769,292)
--------------- ----------------
Net assets 1,096,389 644,383
=============== ================
9. INVENTORIES, NET
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Finished goods 12,559 12,559
Less : Provision for obsolescence (12,559) -
--------------- ----------------
Finished goods, net - 12,559
=============== ================
10. ACCOUNTS RECEIVABLE
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Accounts receivable 9,462,999 84,359
=============== ================
There was no allowance for doubtful amounts for the year ended December
31, 2004 and 2003.
F-17
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. PREPAYMENT, DEPOSITS AND OTHER RECEIVABLES
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Prepayment 47,186 37,403
Deposits - 670,048
Other receivables 730,179 475,903
--------------- ----------------
777,365 1,183,354
=============== ================
12. AMOUNTS DUE FROM RELATED COMPANIES
At December 31, 2004 and 2003, it mainly represents amount due from
Guang Dong Xin Sheng Environmental Protection Company Limited in which
Mr. Pu Chongliang ("Mr. Pu"), a director who is also a stockholder of
the Company, is also a director and has equity interests.
All amounts are interest-free, unsecured and repayable on demand.
13. AMOUNTS DUE FROM/TO DIRECTORS
The amounts are interest-free, unsecured and repayable on demand.
14. AMOUNT DUE FROM AN ASSOCIATE
The amount is interest-free, unsecured and repayable on demand.
F-18
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. OTHER INVESTMENT
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Unlisted equity, at cost - 398,551
=============== ================
Unlisted equity, at fair value - 28,454
=============== ================
The amount represents 55% equity interest in XL and was disposed to an
independent third party, a wholly-owned subsidiary of China Silver
Dragon Group Limited ("CSD"), a listed company in Hong Kong, in 2004.
16. UNSECURED LOAN
The amount represents a loan borrowed from a financial institution
which is interest bearing at 6.6375% per annum, unsecured and repayable
on demand.
17. OTHER BORROWING
The amount represents a loan borrowed from the government for research
and development of the application of the waste water treatment system.
The amount is interest-free, unsecured and repayable on demand.
18. ACCRUED LIABILITIES
At December 31, 2004 and 2003, accrued liabilities comprised of the
following :-
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Acquisition of property, plant and equipment - 550,725
Payroll 1,859 529
PRC tax 153,340 161,927
Staff welfare 30,124 28,195
Other payable 336,566 205,693
Other accruals 4,179 78,991
--------------- ----------------
Total 526,068 1,026,060
=============== ================
F-19
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. AMOUNTS DUE TO RELATED COMPANIES
At December 31, 2004 and 2003, it mainly represents amount due to Bei
Jing Zhao Cheng Chuang Zhan Investment Company Limited ("BJZC") in
which Mr. Pu has equity interests.
All amounts are interest-free, unsecured and repayable on demand.
20. DEPOSIT RECEIVED FOR DISPOSAL OF A SUBSIDIARY
On December 17, 2003, XXM entered into two sale and purchase agreements
with an independent third party, a wholly-owned subsidiary of CSD, a
listed company in Hong Kong, in relation to the disposal of 55% equity
interest in TJ and XL and the stockholder's loans at a consideration of
USD350,514 and USD1,927,815 respectively. The total consideration of
USD2,278,329 will be settled by cash of USD911,332 within one year and
by issuing a convertible note of USD1,366,997.
The convertible note bears interest at 6% per annum with maturity date
of three years from the date of issuance and are repayable after three
years from the date of issuance or convertible into shares of CSD at
the conversion price of approximately USD 0.103 subject to adjustments
as stipulated in the convertible note at any time after six months from
the date of issuance.
At December 31, 2004, the equity interest in XL were disposed to CSD
while the procedure for disposal of stake in TJ could not be completed
due to prohibition by the government of Tian Jin city, so the amount
represented the outstanding deposit received for disposal of TJ.
21. MINORITY INTERESTS
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
At January 1 449,515 128,744
Minority interests in the consolidated
statements of operations (80,616) 42,993
Initial capital injection of XY and HY - 277,778
Initial capital injection of BJHTSY 24,154 -
Release on disposal of XY (Note 32(iii)) (233,411) -
--------------- ----------------
At December 31 159,642 449,515
=============== ================
F-20
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. BASIC NET INCOME PER SHARE
(i) The basic net income per share is calculated using the net
income and the weighted average number of shares outstanding
during the year.
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2003
Net income (USD) 3,696,949 168,347
================= =================
Weighted average number of common
shares outstanding 86,970,079 83,500,000#
================= =================
Basic net income per share (USD) 0.043 0.002
================= =================
# The number represents the number of shares issued by
CEEC for the Exchange.
(ii) The diluted net income per share is not presented as there is
no dilutive effect for years ended December 31, 2004 and 2003.
F-21
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. COMMON STOCK
NO. OF AMOUNT
SHARES USD
Authorized :-
Common stock at USD0.001 par value
At January 1, 2004 100,000,000 100,000
Increase on November 12, 2004 - Note 23(i) 100,000,000 100,000
----------------- -----------------
At December 31, 2004 200,000,000 200,000
================= =================
Preferred stock at USD0.001 par value
Increase on November 12, 2004 and
at December 31, 2004 - Note 23(i) 50,000,000 50,000
================= =================
Issued and outstanding :-
Common stock at USD0.001 par value
At January 1, 2004
CEEC share capital 29,059,007 -
EGAG share capital - 300
Shares issued 1,200,000 -
Shares cancelled before the Exchange (13,759,010) -
Shares issued for acquisition of EGAG (Note 2(ii)) 83,500,000 83,500
----------------- -----------------
At December 31, 2004 99,999,997 83,800
================= =================
Note :
(i) Pursuant to a board resolution passed on November 12, 2004,
the authorized number of shares of common stock was increased
from 100,000,000 to 200,000,000 and also 50,000,000 shares of
preferred stock was authorized.
24. ADDITIONAL PAID-IN CAPITAL
The amount represents additional paid-in capital of USD4,086,765 paid
by the stakeholders of EGAG upon the issue of 100 shares of EGAG and
the merger difference of USD229,469 (equivalent to RMB1,900,000)
arising from the Reorganization as set out in Note 2(iii).
F-22
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. OTHER INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Bank interest income 5,215 8,578
Other income 14,080 662
--------------- ----------------
19,295 9,240
=============== ================
26. INTEREST EXPENSE
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Interest on bank and other loans wholly
repayable within one year 2,420 28,590
=============== ================
27. GAIN ON DISPOSAL OF INTEREST IN A SUBSIDIARY - XY
On October 5, 2004, EGAG entered into an agreement with True Global
Limited, an independent third party, to dispose of its entire 90%
direct interest in XY at a consideration of USD4,130,435.
The gain represents the difference between the disposal proceeds and
the Group's attributable share of net assets of XY at the date of
disposal.
F-23
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28. INCOME TAXES
The income tax expense consisted of the following :-
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Current tax :
PRC (510,555) (118,816)
Deferred tax :
PRC 42,644 14,723
--------------- ----------------
Total income tax expense (467,911) (104,093)
=============== ================
No provision for income tax has been made for the Company for the year
due to the net loss and no state income tax in Nevada, the state of the
Company's domicile and operations.
The current tax for the year represents the provision for PRC
enterprise income tax calculated at the standard income tax rate of 33%
on the assessable profits of the PRC's subsidiaries and the standard
withholding income tax rate of 10% on the assessable profits generated
by EGAG, a company incorporated in the British Virgin Islands, in the
PRC.
Income tax expense can be reconciled with the amount computed by
applying the statutory income tax rate to income before income tax as
follows :-
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Income before income tax 4,084,244 315,433
=============== ================
Expected income tax expense
at PRC statutory income tax rate of 33% (1,347,801) (104,093)
Income not taxable for tax purposes 36,305 -
Tax rate differential 1,104,152 -
Valuation allowances (260,567) -
--------------- ----------------
Income tax expense (467,911) (104,093)
=============== ================
The major components of deferred tax assets recognized in the
consolidated balance sheets as of December 31, 2004 and 2003 were as
follows :-
F-24
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28. INCOME TAXES (CONT'D)
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Expenses that are reported in financial statements prior
to becoming deductible for tax purposes 1,251,825 1,083,570
Revenue recognized for financial reporting purposes
before being recognized for tax purposes (1,051,844) (886,175)
Tax losses of CEEC and XXM 264,201 -
Valuation allowances (264,201) -
--------------- ----------------
199,981 197,395
=============== ================
At December 31, 2004, XXM had unutilized tax losses amounted to
USD789,598 which can be carried forward five years from the year of
loss with expiry in 2009. The net federal tax loss of CEEC will expire
in 2020.
29. PENSION PLANS
As stipulated by the PRC government regulations, the Group is required
to contribute to PRC insurance companies organized by the PRC
government which are responsible for the payments of pension benefits
to retired staff. The monthly contribution was equal to 12% of the
salaries of the existing staff. The Group has no obligation for the
payment of pension benefits beyond the annual contributions described
above.
Pension contributions for 2004 and 2003 amounted to USD13,981 and
USD8,767 respectively.
30. CONCENTRATION
The Group's major customer is True Global Limited, an independent third
party, which accounted for 97% of the Group's total revenue of 2004 in
relation to the construction of the waste water treatment plant of XY.
F-25
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31. COMMITMENTS
Capital commitment
At December 31, 2004, capital expenditure contracted for but not
recognized in these financial statements was as follows :-
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Capital expenditures 3,103,042 26,207,729
=============== ================
The amount represents the unpaid amount of the total contract sum for
constructing the waste water treatment plants in Bei Jing and Hai Yang
cities under the BOT agreements and is expected to be paid as follows
:-
DECEMBER 31,
-----------------------------------
2004 2003
USD USD
Within 2 years 3,103,042 15,338,164
After 2 years - 10,869,565
--------------- ----------------
3,103,042 26,207,729
=============== ================
32. RELATED PARTY TRANSACTIONS
Apart from those as disclosed in notes 12 to 14 and 19, the Group paid
deposit of USD543,478 to BJZC for acquisition of property, plant and
equipment during the year.
F-26
CHINA EVERGREEN ENVIRONMENTAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
33. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2003
USD USD
(i) Interest paid 2,420 28,590
(ii) Non-cash investing activities
Infrastructure assets (Note 5) 632,232 550,725
Convertible note receivable (Notes 7 and 20) 1,366,997 -
=============== ================
(iii) During the year, the Group disposed of a subsidiary - XY. The
fair value of the net assets disposed of was as follows :-
USD
Cash and cash equivalents 5,107
Prepayment, deposits and other receivables 702,560
Deferred tax assets 40,058
Infrastructure assets, net 666,956
Property, plant and equipment, net 17,940
Deposits paid for acquisition of property,
plant and equipment 2,310,386
Accrued liabilities (15,318)
Amount due to related company (1,393,563)
Minority interests (233,411)
---------------
2,100,715
Gain on disposal of interest in a subsidiary - XY 2,029,720
---------------
4,130,435
===============
Satisfied by :-
Cash 2,173,913
Accounts receivable 1,956,522
---------------
4,130,435
===============
An analysis of net cash inflow of cash and cash equivalents in
respect of the disposal of interest in a subsidiary :-
Cash consideration 2,173,913
Cash and cash equivalents disposed (5,107)
---------------
Net cash inflow of cash and cash equivalents 2,168,806
===============
34. SUBSEQUENT EVENTS
In April 2005, the Company conducted the private placement sale of 20
units, at USD25,000 per unit, for the gross proceeds of USD500,000.
Each unit consisted of (a) one 12% convertible debenture in the
original principal amount of USD25,000, convertible into shares of the
Company's common stock at the rate of the lesser of (i) USD0.20 per
share or (ii) a 10% discount to the price per share of common stock (or
conversion price per share of common stock) of the next private
placement conducted by the Company prior to any conversion of the
debenture, and (b) 125,000 detachable warrants to purchase one share
each of the Company's common stock at an exercise price of USD0.20 per
share, expiring ten years from their date of issuance. The debentures
are due and payable August 1, 2005.
F-27
CHINA EVERGREEN ENVIRONMENTAL CORP
Unaudited Consolidated Balance Sheet
June 30,2005
US$
Current assets
Cash and cash equivalents 295,254
Inventories, net 2,422
Accounts receivable 2,630,583
Prepayment, deposits and other receivables 2,503,491
Amounts due from related companies 3,463,559
Amount due from an associate 1,749,535
Deferred tax assets 209,206
------------
Total current assets 10,854,050
Non-current assets
Infrastructure assets, net 5,239,895
Property, plant and equipment, net 322,595
Convertible note receivable 1,156,690
Deposit paid for acquisition of property, plant and equipment 543,478
Interest in an associate 432,846
-----------
Total non-current assets 7,695,504
-----------
Total assets 18,549,554
===========
Current liabilities
Unsecured loan 181,160
Convertible debenture (Note 6) 500,000
Accounts Payable 4,443,211
Accrued liabilities 460,342
Amounts due to directors 493,212
Amounts due to related companies 2,937,291
Income tax payable 927,258
-----------
Total current liabilities 9,942,474
Minority interests 315,214
Stockholders' equity
Common stock 83,800
Additional paid in capital 3,857,296
Retained earnings / (accumulated deficit) 4,350,770
-----------
Total stockholders' equity 8,291,866
-----------
Total liabilities and stockholders' equity 18,549,554
============
F-28
CHINA EVERGREEN ENVIRONMENTAL CORP
Unaudited Consolidated Statements of Operations
Six months
ended June 30,
-------------------------
2005 2004
---------- ----------
US$ US$
Revenue (Note 4) 4,000,954 191,014
Cost of revenue 2,657,008 58,978
---------- ----------
Gross profit 1,343,946 132,036
General and administrative expenses 444,493 175,518
---------- ----------
Income / (loss) from operations 899,453 (43,482)
Other income 2,861 35,094
Share of results in an associate 87,483 --
Interest expense 23,827 4,818
---------- ----------
Income / (loss) before income tax 965,970 (13,206)
Income tax expense / (credit) 70,867 (8,416)
Minority interests 58,955 2,498
---------- ----------
Net income / (loss) 836,148 (7,288)
========== ==========
Basic net income / (loss) per
share (Note 5) 0.00836 (0.00008)
F-29
CHINA EVERGREEN ENVIRONMENTAL CORP
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
Six months ended June 30,
2005 2004
---- ----
Cash flows from operating activities:
Net income / (loss) 836,148 (7,288)
Adjustments to reconcile net income / (loss) to net cash provided by /
(used in) operating activities:
Depreciation and amortization 47,406 47,695
Provision for inventories -- 12,558
Increase in deferred tax assets (9,225) (1,765)
Increase in minority interests 155,571 2,499
Share of results in an associate (87,483) --
Changes in operating assets and liabilities:
Increase in inventories (2,422) (5,343)
Decrease / (increase) in accounts receivable 6,692,209 (4,772)
(Increase) / decrease in prepayment, deposits and
other receivables (1,726,126) 566,315
(Decrease) / increase in accounts payable (4,311,936) 534,938
(Decrease) / increase in accrued liabilities (65,725) 2,154,750
Decrease in amounts due to directors (86,640) (745,895)
Decrease / (increase) in amounts due from related companies 619,640 (2,952,692)
Increase / (decrease) in tax payable 301,009 (118,816)
(Decrease) / increase in amounts due to related companies (852,085) 161,741
----------- -----------
Net cash provided by / (used in) operating activities 1,510,341 (356,075)
Cash flows from investing activities:
Deposit paid for acquisition of property, plant and equipment -- 2,619,566
Acquisition of infrastructure assets (1,973,942) (1,263,445)
Increase in amount due from an associate (4,760) (10,477)
----------- -----------
Net cash (used in) / provided by investing activities (1,978,702) 1,345,644
Cash flows from financing activities:
Increase in share capital -- 241,546
Proceeds from convertible debenture issued 500,000 --
Repayment of borrowing (72,464) (1,145,170)
----------- -----------
Net cash provided by / (used in) financing activities 427,536 (903,624)
----------- -----------
Net (decrease) / increase in cash and cash equivalents (40,825) 85,945
Cash and cash equivalents, beginning of period 336,079 54,556
Cash and cash equivalents, end of period 295,254 140,501
F-30
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements of China Evergreen Environmental
Corp. (the "Company") and subsidiaries (the "Group") included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in consolidated financial statements
prepared in conjunction with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the annual audited financial statements and
the notes thereto included elsewhere in this prospectus, and other
reports filed with the SEC.
The accompanying unaudited quarterly consolidated financial statements reflect
all adjustments of a normal and recurring nature which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows of the Group for the periods presented. The results of
operations for these periods are not necessarily comparable to, or indicative
of, results of any other quarterly period of or for the fiscal year taken as a
whole. Factors that affect the comparability of financial data from year to year
and for comparable quarterly periods include non-recurring expenses associated
with the Group's costs incurred to reorganize the Group, raise capital, and
stock options and awards. Certain financial information that is not required for
interim financial reporting purposes has been omitted.
NOTE 2 - DESCRIPTION OF BUSINESS
Our company was organized as a Nevada corporation on September 10, 1996 under
the name Discovery Investments, Inc., and was previously engaged in the business
of seeking, investigating and, if such investigation warranted, acquiring an
interest in a business opportunity.
On October 15, 2004, we were the subject of a reverse acquisition by Evergreen
Asset Group Limited, an International Business Company organized under the laws
of the British Virgin Islands ("Evergreen"), pursuant to which we have acquired
100% of the outstanding shares of Evergreen capital stock in exchange for a
controlling interest in our common stock. Pursuant to a securities purchase
agreement dated September 9, 2004, as amended, we issued 83,500,000 shares of
our common stock (representing 83.5% of our outstanding capital stock) in
exchange for all of the issued and outstanding shares of Evergreen capital stock
transferred to us by the Evergreen shareholders at the closing. Following the
close of the reverse acquisition, we changed our corporate name from Discovery
Investments, Inc. to China Evergreen Environmental Corp. ("CEEC", "we", "us" or
the "Company").
F-31
As a result of the transactions described above, Evergreen became our wholly
owned subsidiary. Evergreen, through its three majority owned subsidiaries,
Guang Dong Xin Xing Mei Biology Company Limited ("XXM"), Bei Jing Hao Tai Shi
Yuan Water Purifying Company Limited ("BJHT) and Hai Yang City Sheng Shi
Environment Protection Company Limited ("HY"), provides waste water turn-key
engineering, equipment and chemical trading. Evergreen currently holds 90% of
XXM. XXM provides turnkey waste water treatment engineering design and
contracting. XXM also holds 90% and 35% respectively in the equity interest of
the following two water treatment facilities operated through build, operate and
transfer (BOT) arrangements with the PRC government: (i) Tian Jin Shi Sheng
Water Treatment Company Limited ("TJSH"), which commissioned water treatment in
November 2003 and has a daily treatment capacity of approximately 10,000 cubic
meter and; (ii) Xin Le Sheng Mei Water Purifying Company Limited ("XL"), which
also commissioned water treatment in November 2003 and has a daily treatment
capacity of 40,000 cubic meter. XXM is retained as the managers to manage both
TJSH and XL. The fees from XL and TJSH did not represent a material portion of
our revenue during the second quarter of 2005.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IMPAIRMENT OF ASSETS: The Group's policy is to periodically review and evaluate
whether there has been a permanent impairment in the value of long-lived assets.
Factors considered in the evaluation include current operating results, trends
and anticipated undiscounted future cash flows. An impairment loss is recognized
to the extent that the sum of undiscounted estimated future cash flows that is
expected to result from the use of the asset, or other measure of fair value, is
less than the carrying value.
OTHER INVESTMENT: Other investment includes equity investment in a private
company and is carried at fair value. Unless there has been a permanent
impairment to the value of the investment, the change in fair value is reported
as a separate component of other comprehensive income or loss. Permanent
impairment to the value of the investment is recognized in the consolidated
statements of operations.
REVENUE RECOGNITION: Revenue from fixed price long-term contracts is recognized
on the percentage of completion method for individual contracts. Revenues are
recognized in the ratio that costs incurred bear to total estimated contract
costs. The use of the percentage of completion method of revenue recognition
requires estimates of percentage of project completion. Changes in job
performance, estimated profitability and final contract settlements may result
in revisions to costs and income in the period in which the revisions are
determined. Provisions for any estimated losses on uncompleted contracts are
made in the period in which such losses are determinable. In instances when the
work performed on fixed price agreements is of relatively short duration, we use
the completed contract method of accounting whereby revenue is recognized when
the work is completed. Revenue arising from waste water treatment is recognized
based on waste water treated as recorded by meters read during the quarter.
INCOME PER SHARE: Basic income per share is computed by dividing the net income
for the year by the weighted average number of common shares outstanding during
the year. Diluted income per share is computed by dividing the net income for
the year by the weighted average number of common and common equivalent shares
outstanding during the year. Common equivalent shares, composed of incremental
common shares issuable upon the exercise of stock options, unvested restricted
common stock and contingently issuable shares that are probable of being issued,
are included in diluted income per share to the extent such shares are dilutive.
In accordance with SFAS 128, "Earnings Per Share", the Company uses income from
continuing operations, net of income taxes as the "control number" in
determining whether common equivalent shares are dilutive or anti-dilutive in
periods where discontinued operations are reported.
F-32
NOTE 4 - REVENUE
The Company reported total revenue of $2,120,882 for the three month period
ended June 30, 2005 as compared to $111,228 for the three month period ended
June 30, 2004. During the six month periods ended June 30, 2005 and 2004, the
revenue increase to $4,000,954 from 191,014. This increase in the three and six
month revenue are mainly due to the completion of one turnkey engineering waste
water project in Le Chang City in the first quarter of 2005 and the completion
of the remaining 15% construction of the waste water treatment plant of Xian
Yang City and one turnkey engineering waste water project in Yong Ji Economic
Development Zone coupled with the revenue from Tian Jin BOT waste water
treatment plant.
NOTE 5 - BASIC NET INCOME PER SHARE
The basic net income per share is calculated using the net income and the
weighted average number of shares outstanding during the period.
Six months ended June 30,
2005 2004
---- ----
Net income / (loss) $ 836,148 $ (7,288)
Weighted average number of
common shares outstanding 99,999,997 86,970,079
Basic net income / (loss) per share 0.00836 (0.00008)
NOTE 6 - CONVERTIBLE DEBENTURE
In April 2005, the Company conducted the private placement sale of 20 units, at
USD25,000 per unit, for the gross proceeds of USD500,000. Each unit consisted of
(a) one 12% convertible debenture in the original principal amount of USD25,000,
convertible into shares of the Company's common stock at the rate of the lesser
of (i) USD0.20 per share or (ii) a 10% discount to the price per share of common
stock (or conversion price per share of common stock) of the next private
placement conducted by the Company prior to any conversion of the debenture, and
(b) 125,000 detachable warrants to purchase one share each of the Company's
common stock at an exercise price of USD0.20 per share, expiring ten years from
their date of issuance. The debentures are due and payable August 1, 2005. The
debenture holders have, however, extended the payment period to September 1,
2005.
F-33
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Nevada law and China Evergreen's articles of incorporation and bylaws
provide that China Evergreen shall, under certain circumstances and subject to
certain limitations, indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity of the person, against judgments, fines,
settlements and reasonable expenses incurred by the person in connection with
the proceeding if certain statutory standards are met. Any such person is also
entitled, subject to certain limitations, to payment or reimbursement of
reasonable expenses in advance of the final disposition of the proceeding.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimated expenses we expect to incur in
connection with the resale of the shares being registered. All such expenses are
estimated except for the SEC registration fee.
SEC registration fee..........................................$2,653.60
Printing expenses................................................$2,000
Fees and expenses of counsel for the Company....................$50,000
Fees and expenses of accountants for Company....................$25,000
Miscellaneous....................................................$5,000
*Total..................................................$84,653.60
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the fiscal year ended December 31, 2004, we issued 83,500,000
unregistered shares of common stock to the shareholders of Evergreen Asset Group
Limited. This offering was made pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 and Rule 506 of
thereunder.
In April 2005, we conducted a private placement of 20 investment units,
at $25,000 per unit, to accredited investors only for gross proceeds of
$500,000. Each unit consisted of (a) a 12% convertible debenture in the original
principal amount of $25,000, convertible into shares of our common stock at the
rate of the lesser of (i) $0.20 per share or (ii) a 10% discount to the price
per share of common stock (or conversion price per share of common stock) of the
next private placement conducted by us prior to any conversion of the debenture,
and (b) 125,000 detachable warrants to purchase one share each of our common
stock at an exercise price of $0.20 per share, expiring ten years from their
date of issuance. The debentures were due and payable August 1, 2005. The
debentures have been converted into 3,703,704 shares of our common stock.
Pursuant to the terms of the subscription agreements, we granted the investors
limited registration rights for all common shares comprising the units,
including the common shares issuable on exercise of the warrants and conversion
of the debentures. Westminster Securities Corporation acted as placement agent
for this offering on our behalf. This offering was made pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 and Rule 506 of thereunder
On September 14, 2005, we closed the private placement sale to
accredited investors of units consisting of shares of our common stock and
warrants to purchase shares of our common stock for aggregate gross proceeds of
$4.83 million. Pursuant to the subscription agreements entered into with the
investors, we issued to the investors 161 units at a price of $30,000 per unit.
Each unit consisted of 200,000 shares of our common stock, priced at $0.15 per
share, and warrants to purchase 200,000 shares of our common stock over a five
year period at an exercise price of $0.20 per share. Pursuant to the terms of
the subscription agreements, we granted the investors limited registration
rights for all common shares comprising the units, including the common shares
II-1
issuable on exercise of the warrants. Westminster Securities Corporation acted
as placement agent for this offering on our behalf. This offering was made
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 and Rule 506 of thereunder
ITEM 27. EXHIBITS.
The exhibits to this registration statement are listed in the Index to Exhibits
on Page II-4.
ITEM 28. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described herein, or otherwise, the
registrant 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 registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant 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 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.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the People's Republic of China, on October 16, 2005.
CHINA EVERGREEN ENVIRONMENTAL CORPORATION
Date: October 14, 2005 By: /s/ Chong Liang Pu
-------------------------------------
Chong Liang Pu,
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
- --------- ----- ----
/s/ Chong Liang Pu President, Chief Executive Officer, October 16, 2005
- ------------------ and Director
CHONG LIANG PU
/s/ Ren Cai Ding Chief Financial Officer October 16, 2005
- ------------------
REN CAI DING
/s/ Lin Hong Ye Director October 16, 2005
- ------------------
LIN HONG YE
/s/ Shi Rong Jiang Director October 16, 2005
- ------------------
SHI RONG JIANG
II-3
INDEX TO FINANCIAL STATEMENTS
2.1 Securities Purchase Agreement and Plan of Reorganization (1)
2.2 Amendment No. 1 to Securities Purchase Agreement and Plan of
Reorganization (1)
3.3 Certificate of Amended and Restated Articles of Incorporation
(3)
3.4 Amendments to Bylaws (3)
10.1 BOT Investment and Operation Contract for Sewage Treatment
Plant between Guangdong Xinsheng Environmental Protection Co.,
Ltd. and City Administration of Feng Feng Mining Area of
Handon City, Hebei Province (4)
10.2 Investment Management Contract dated August 14, 2002 between
Guangdong Xinxingmei Environmental Protection Science and
Technology Investment Co., Ltd. and The People's Government of
Wuqing District, Tianjin City (4)
10.3 BOT Investment Contract dated July 4, 2003 between Guandong
Xinsheng Environmental Co., Ltd. and People's Government of
Shunyi District, Beijing (4)
10.4 Contract for BOT Project Investment and Operation dated
between Guandong Xingsheng Environmental Co., Ltd. and
Shandong Haiyang Planning and Construction Administration (4)
16 Letter re Change in Certified Registered Public Account (2)
21.1 List of Subsidiaries (4)
23.1 Consent of PKF, Hong Kong
- ---------------
(1) Previously filed as part of the Company's current report on Form 8-K
filed with the Securities and Exchange Commission on October 21, 2004.
(2) Previously filed as part of the Company's current report on Form 8-K/A
filed with the Securities and Exchange Commission on December 30, 2004.
(3) Previously filed as part of our annual report on Form 10-KSB filed with
the Securities and Exchange Commission on April 15, 2005.
(4) Previously filed as part of our annual report on Form 10-KSB/A filed
with the Securities and Exchange Commission on July 15, 2005.
II-4