Document:

Exhibit
4.3

 

 

 

 

GUARANTEE
AGREEMENT

 

between

 

REPUBLIC
BANCORP, INC.,

As Guarantor,

 

and

 

WILMINGTON
TRUST COMPANY,

As Guarantee Trustee

 

Dated
as of  August 16, 2005 

REPUBLIC BANCORP CAPITAL TRUST

 

 

 

 

 

TABLE
OF CONTENTS

 

	
  ARTICLE I INTERPRETATION AND DEFINITIONS

  	
   

  
	
  SECTION 1.1

  	
  Interpretation

  	
   

  
	
  SECTION 1.2

  	
  Definitions

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE II REPORTS

  	
   

  
	
  SECTION 2.1

  	
  List
  of Holders

  	
   

  
	
  SECTION 2.2

  	
  Periodic Reports to the Guarantee Trustee

  	
   

  
	
  SECTION 2.3

  	
  Event of Default; Waiver

  	
   

  
	
  SECTION 2.4

  	
  Event of Default; Notice

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III POWERS, DUTIES AND RIGHTS
  OF THE GUARANTEE TRUSTEE

  	
   

  
	
  SECTION 3.1

  	
  Powers and Duties of the Guarantee Trustee

  	
   

  
	
  SECTION 3.2

  	
  Certain Rights of the Guarantee Trustee

  	
   

  
	
  SECTION 3.3

  	
  Compensation

  	
   

  
	
  SECTION 3.4

  	
  Indemnity

  	
   

  
	
  SECTION 3.5

  	
  Securities

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV GUARANTEE TRUSTEE

  	
   

  
	
  SECTION 4.1

  	
  Guarantee Trustee; Eligibility

  	
   

  
	
  SECTION 4.2

  	
  Appointment, Removal and Resignation of the Guarantee Trustee

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V GUARANTEE

  	
   

  
	
  SECTION 5.1

  	
  Guarantee

  	
   

  
	
  SECTION 5.2

  	
  Waiver of Notice and Demand

  	
   

  
	
  SECTION 5.3

  	
  Obligations Not Affected

  	
   

  
	
  SECTION 5.4

  	
  Rights of Holders

  	
   

  
	
  SECTION 5.5

  	
  Guarantee of Payment

  	
   

  
	
  SECTION 5.6

  	
  Subrogation

  	
   

  
	
  SECTION 5.7

  	
  Independent Obligations

  	
   

  
	
  SECTION 5.8

  	
  Enforcement

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI COVENANTS AND SUBORDINATION

  	
   

  
	
  SECTION 6.1

  	
  Dividends, Distributions and Payments

  	
   

  
	
  SECTION 6.2

  	
  Subordination

  	
   

  
	
  SECTION 6.3

  	
  Pari Passu Guarantees

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII TERMINATION

  	
   

  
	
  SECTION 7.1

  	
  Termination

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII MISCELLANEOUS

  	
   

  
	
  SECTION 8.1

  	
  Successors and Assigns

  	
   

  
	
  SECTION 8.2

  	
  Amendments

  	
   

  
	
  SECTION 8.3

  	
  Notices

  	
   

  
	
  SECTION 8.4

  	
  Benefit

  	
   

  

 

i

 

	
  SECTION 8.5

  	
  Governing
  Law

  	
   

  
	
  SECTION 8.6

  	
  Submission to Jurisdiction

  	
   

  
	
  SECTION 8.7

  	
  Kentucky Revised Statutes

  	
   

  
	
  SECTION 8.8

  	
  Counterparts

  	
   

  

 

ii

 

GUARANTEE
AGREEMENT, dated as of August 16, 2005, executed and delivered by REPUBLIC
BANCORP, INC., a Kentucky corporation (the “Guarantor”)
having its principal office at 601 West Market Street, Louisville, Kentucky
40202, and WILMINGTON TRUST COMPANY, a Delaware banking corporation, as trustee
(in such capacity, the “Guarantee Trustee”),
for the benefit of the Holders (as defined herein) from time to time of the
Preferred Securities (as defined herein) of Republic Bancorp Capital Trust, a
Delaware statutory trust (the “Issuer”).

 

W I T N E S S E T H :

 

WHEREAS,
pursuant to an Amended and Restated Trust Agreement, dated as of the date hereof
(the “Trust Agreement”), among the Guarantor,
as Depositor, the Property Trustee, the Delaware Trustee and the Administrative
Trustees named therein and the holders from time to time of the Preferred
Securities (as hereinafter defined), the Issuer is issuing $40,000,000 aggregate
Liquidation Amount (as defined in the Trust Agreement) of its Preferred
Securities (Liquidation Amount $1,000 per preferred security) (the “Preferred Securities”) representing preferred undivided
beneficial interests in the assets of the Issuer and having the terms set forth
in the Trust Agreement;

 

WHEREAS,
the Preferred Securities will be issued by the Issuer and the proceeds thereof,
together with the proceeds from the issuance of the Issuer’s Common Securities
(as defined below), will be used to purchase the Notes (as defined in the Trust
Agreement) of the Guarantor; and

 

WHEREAS,
as incentive for the Holders to purchase Preferred Securities the Guarantor
desires irrevocably and unconditionally to agree, to the extent set forth
herein, to pay to the Holders of the Preferred Securities the Guarantee
Payments (as defined herein) and to make certain other payments on the terms
and conditions set forth herein.

 

NOW,
THEREFORE, in consideration of the purchase by each Holder of Preferred
Securities, which purchase the Guarantor hereby agrees shall benefit the
Guarantor, the Guarantor executes and delivers this Guarantee Agreement to
provide as follows for the benefit of the Holders from time to time of the
Preferred Securities:

 

 

ARTICLE I

INTERPRETATION AND DEFINITIONS

 

SECTION 1.1                          Interpretation.

 

In
this Guarantee Agreement, unless the context otherwise requires:

 

(a)                                  capitalized
terms used in this Guarantee Agreement but not defined in the preamble hereto
have the respective meanings assigned to them in Section 1.2;

 

(b)                                 the
words “include”, “includes” and “including” shall be deemed to be followed by
the phrase “without limitation”;

 

(c)                                  all
references to “the Guarantee Agreement” or “this Guarantee Agreement” are to
this Guarantee Agreement as modified, supplemented or amended from time to
time;

 

(d)                                 all
references in this Guarantee Agreement to Articles and Sections are to Articles
and Sections of this Guarantee Agreement unless otherwise specified;

 

(e)                                  the
words “hereby”, “herein”, “hereof” and “hereunder” and other words of similar
import refer to this Guarantee Agreement as a whole and not to any particular
Article, Section or other subdivision;

 

(f)                                    a
reference to the singular includes the plural and vice versa; and

 

(g)                                 the
masculine, feminine or neuter genders used herein shall include the masculine,
feminine and neuter genders.

 

SECTION 1.2                          Definitions.

 

As
used in this Guarantee Agreement, the terms set forth below shall, unless the
context otherwise requires, have the following meanings:

 

“Affiliate” of any specified Person means any
other Person directly or indirectly controlling or controlled by or under
direct or indirect common control with such specified Person; provided, that the Issuer shall not be deemed to be an
Affiliate of the Guarantor.  For the
purposes of this definition, “control” when
used with respect to any specified Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled”
have meanings correlative to the foregoing.

 

“Beneficiaries” means any Person to whom the
Issuer is or hereafter becomes indebted or liable.

 

2

 

“Board of Directors” means either the board of
directors of the Guarantor or any duly authorized committee of that board.

 

“Common Securities” means the securities
representing common undivided beneficial interests in the assets of the Issuer.

 

“Debt” means with respect to any Person,
whether recourse is to all or a portion of the assets of such Person, whether
currently existing or hereafter incurred, and whether or not contingent and
without duplication, (i) every obligation of such Person for money
borrowed; (ii) every obligation of such Person evidenced by bonds,
debentures, notes or other similar instruments, including obligations incurred
in connection with the acquisition of property, assets or businesses; (iii) every
reimbursement obligation of such Person with respect to letters of credit,
bankers’ acceptances or similar facilities issued for the account of such
Person; (iv) every obligation of such Person issued or assumed as the
deferred purchase price of property or services (but excluding trade accounts
payable arising in the ordinary course of business); (v) every capital
lease obligation of such Person; (vi) all indebtedness of such Person,
whether incurred on or prior to the date of this Guarantee Agreement or thereafter
incurred, for claims in respect of derivative products, including interest
rate, foreign exchange rate and commodity forward contracts, options, swaps and
similar arrangements; (vii) every obligation of the type referred to in
clauses (i) through (vi) of another Person and all dividends of
another Person the payment of which, in either case, such Person has guaranteed
or is responsible or liable for, directly or indirectly, as obligor or
otherwise; and (viii) any renewals, extensions, refundings, amendments or
modifications of any obligation of the type referred to in clauses (i) through
(vii).

 

“Event of Default” means a default by the
Guarantor on any of its payment or other obligations under this Guarantee
Agreement; provided, that except with respect to a default in payment of any
Guarantee Payments, the Guarantor shall have received notice of default from
the Guarantee Trustee and shall not have cured such default within thirty (30)
days after receipt of such notice.

 

“Guarantee Payments” means the following
payments or distributions, without duplication, with respect to the Preferred
Securities, to the extent not paid or made by or on behalf of the Issuer: (i) any
accumulated and unpaid Distributions (as defined in the Trust Agreement)
required to be paid on the Preferred Securities, to the extent the Issuer shall
have funds on hand available therefor at such time, (ii) the Redemption
Price with respect to any Preferred Securities to the extent the Issuer shall
have funds on hand available therefor at such time, and (iii) upon a
voluntary or involuntary termination, winding up or liquidation of the Issuer,
unless Notes are distributed to the Holders, the lesser of (a) the
aggregate of the Liquidation Amount of $1,000 per Preferred Security plus
accumulated and unpaid Distributions on the Preferred Securities to the date of
payment, to the extent that the Issuer shall have funds available therefor at
such

 

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time and (b) the amount of assets of the
Issuer remaining available for distribution to Holders in liquidation of the
Issuer after satisfaction of liabilities to creditors of the Issuer in
accordance with applicable law (in either case, the “Liquidation
Distribution”).

 

“Guarantee Trustee” means Wilmington Trust
Company in its capacity as trustee hereunder, until a Successor Guarantee
Trustee, as defined below, has been appointed and has accepted such appointment
pursuant to the terms of this Guarantee Agreement, and thereafter means each
such Successor Guarantee Trustee.

 

“Holder” means any holder, as registered on
the books and records of the Issuer, of any Preferred Securities; provided, that, in determining whether the holders of the
requisite percentage of Preferred Securities have given any request, notice,
consent or waiver hereunder, “Holder” shall not include the Guarantor, the
Guarantee Trustee or any Affiliate of the Guarantor or the Guarantee Trustee.

 

“Indenture” means the Junior Subordinated
Indenture, dated as of the date hereof, as supplemented and amended, between
the Guarantor and Wilmington Trust Company, as trustee.

 

“List of Holders” has the meaning specified in
Section 2.1.

 

“Majority in Liquidation Amount of the Preferred Securities”
means a vote by the Holder(s), voting separately as a class, of more than fifty
percent (50%) of the aggregate Liquidation Amount of all then outstanding
Preferred Securities issued by the Issuer.

 

“Obligations” means any costs, expenses or
liabilities (but not including liabilities related to taxes) of the Issuer,
other than obligations of the Issuer to pay to holders of any Trust Securities
the amounts due such holders pursuant to the terms of the Trust Securities.

 

“Officers’ Certificate” means, with respect to
any Person, a certificate signed by the Chief Executive Officer, Chief
Financial Officer, President or a Vice President of such Person, and by the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of
such Person, and delivered to the Guarantee Trustee.  Any Officers’ Certificate delivered with
respect to compliance with a condition or covenant provided for in this
Guarantee Agreement (other than the certificate provided pursuant to Section 2.4) shall include:

 

(a)                                  a
statement that each officer signing the Officers’ Certificate has read the
covenant or condition and the definitions relating thereto;

 

(b)                                 a
brief statement of the nature and scope of the examination or investigation
undertaken by each officer in rendering the Officers’ Certificate;

 

4

 

(c)                                  a
statement that each officer has made such examination or investigation as, in
such officer’s opinion, is necessary to enable such officer to express an
informed opinion as to whether or not such covenant or condition has been complied
with; and

 

(d)                                 a
statement as to whether, in the opinion of each officer, such condition or
covenant has been complied with.

 

“Person” means a legal person, including any
individual, corporation, estate, partnership, joint venture, association, joint
stock company, limited liability company, trust, unincorporated association,
government or any agency or political subdivision thereof or any other entity
of whatever nature.

 

“Responsible Officer” means, with respect to
the Guarantee Trustee, any Senior Vice President, any Vice President, any
Assistant Vice President, the Secretary, any Assistant Secretary, the
Treasurer, any Assistant Treasurer, any Trust Officer or Assistant Trust
Officer or any other officer in the Corporate Trust Office of the Guarantee
Trustee with direct responsibility for the administration of this Guarantee
Agreement and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of that officer’s
knowledge of and familiarity with the particular subject.

 

“Senior Debt” means the principal of and any
premium and interest on (including interest accruing on or after the filing of
any petition in bankruptcy or for reorganization relating to the Guarantor
whether or not such claim for post-petition interest is allowed in such
proceeding) all Debt of the Guarantor, whether incurred on or prior to the date
of the Indenture or thereafter incurred, unless it is provided in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, that such obligations are not superior in right of payment to the
Preferred Securities; provided, however,
that if the Guarantor is subject to the regulation and supervision of an “appropriate
Federal banking agency” within the meaning of 12 U.S.C. 1813(q),  the Guarantor shall have received the
approval of such appropriate Federal banking agency prior to issuing any such
obligation if not otherwise generally approved; provided
further, that Senior Debt shall not include any other debt
securities, and guarantees in respect of such debt securities, issued to any
trust other than the Issuer (or a trustee of such trust), partnership or other
entity affiliated with the Guarantor that is a financing vehicle of the
Guarantor (a “financing entity”), in connection with the issuance by such
financing entity of equity securities or other securities that are treated as
equity capital for regulatory capital purposes guaranteed by the Guarantor
pursuant to an instrument that ranks pari passu with
or junior in right of payment to this Guarantee Agreement.

 

“Successor Guarantee Trustee” means a
successor Guarantee Trustee possessing the qualifications to act as Guarantee
Trustee under Section 4.1.

 

5

 

“Trust Indenture Act” means the Trust
Indenture Act of 1939, as amended and as in effect on the date of this
Guarantee Agreement.

 

Capitalized or otherwise defined terms used but not otherwise defined
herein shall have the meanings assigned to such terms in the Trust Agreement as
in effect on the date hereof.

 

ARTICLE II

REPORTS

 

SECTION 2.1                          List of Holders.

 

The
Guarantor shall furnish or cause to be furnished to the Guarantee Trustee at
such times as the Guarantee Trustee may request in writing, within thirty (30)
days after the receipt by the Guarantor of any such request, a list, in such
form as the Guarantee Trustee may reasonably require, of the names and
addresses of the Holders (the “List of Holders”)
as of a date not more than fifteen (15) days prior to the time such list is
furnished, in each case to the extent such information is in the possession or
control of the Guarantor and is not identical to a previously supplied list of
Holders or has not otherwise been received by the Guarantee Trustee in its
capacity as such.  The Guarantee Trustee
may destroy any List of Holders previously given to it on receipt of a new List
of Holders.

 

SECTION 2.2                          Periodic Reports to the Guarantee Trustee.

 

The
Guarantor shall deliver to the Guarantee Trustee, within one hundred and twenty
(120) days after the end of each fiscal year of the Guarantor ending after the
date of this Guarantee Agreement, an Officers’ Certificate covering the
preceding fiscal year, stating whether or not to the knowledge of the signers
thereof the Guarantor is in default in the performance or observance of any of
the terms or provisions or any of the conditions of this Guarantee Agreement
(without regard to any period of grace or requirement of notice provided
hereunder) and, if the Guarantor shall be in default thereof, specifying all
such defaults and the nature and status thereof of which they have knowledge.

 

SECTION 2.3                          Event of Default; Waiver.

 

The
Holders of a Majority in Liquidation Amount of the Preferred Securities may,  on behalf of the Holders, waive any past Event
of Default and its consequences.  Upon
such waiver, any such Event of Default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Guarantee Agreement, but no such waiver shall extend to any subsequent
or other default or Event of Default or impair any right consequent therefrom.

 

6

 

SECTION 2.4                          Event of Default; Notice.

 

(a)                                  The
Guarantee Trustee shall, within ninety (90) days after the occurrence of a
default, transmit to the Holders notices of all defaults actually known to the
Guarantee Trustee, unless such defaults have been cured or waived before the
giving of such notice, provided, that,
except in the case of a default in the payment of a Guarantee Payment, the
Guarantee Trustee shall be protected in withholding such notice if and so long
as the Board of Directors, the executive committee or a trust committee of
directors and/or Responsible Officers of the Guarantee Trustee in good faith
determine that the withholding of such notice is in the interests of the
Holders.  For the purpose of this Section 2.4,
the term “default” means any event that is, or
after notice or lapse of time or both would become, an Event of Default.

 

(b)                                 The
Guarantee Trustee shall not be deemed to have knowledge of any default or Event
of Default unless the Guarantee Trustee shall have received written notice, or
a Responsible Officer charged with the administration of this Guarantee
Agreement shall have received written notice, of such default or Event of
Default from the Guarantor or a Holder.

 

ARTICLE III

POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

 

SECTION 3.1                          Powers and Duties of the Guarantee Trustee.

 

(a)                                  This
Guarantee Agreement shall be held by the Guarantee Trustee for the benefit of
the Holders, and the Guarantee Trustee shall not transfer this Guarantee
Agreement to any Person except a Holder exercising its rights pursuant to Section 5.4(d) or to a Successor Guarantee Trustee
upon acceptance by such Successor Guarantee Trustee of its appointment to act
as Successor Guarantee Trustee.  The
right, title and interest of the Guarantee Trustee shall automatically vest in
any Successor Guarantee Trustee, upon acceptance by such Successor Guarantee
Trustee of its appointment hereunder, and such vesting and cessation of title
shall be effective whether or not conveyancing documents have been executed and
delivered pursuant to the appointment of such Successor Guarantee Trustee.

 

(b)                                 The
rights, immunities, duties and responsibilities of the Guarantee Trustee shall
be as provided by this Guarantee Agreement and there shall be no other duties
or obligations, express or implied, of the Guarantee Trustee.  Notwithstanding the foregoing, no provisions
of this Guarantee Agreement shall require the Guarantee Trustee to expend or
risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.  Whether or
not herein expressly so provided, every provision of this Guarantee Agreement
relating to the conduct or affecting the liability of or affording protection
to the Guarantee Trustee shall be

 

7

 

subject to the provisions of
this Section 3.1.  To the
extent that, at law or in equity, the Guarantee Trustee has duties and
liabilities relating to the Guarantor or the Holders, the Guarantee Trustee
shall not be liable to any Holder for the Guarantee Trustee’s good faith
reliance on the provisions of this Guarantee Agreement.  The provisions of this Guarantee Agreement,
to the extent that they restrict the duties and liabilities of the Guarantee
Trustee otherwise existing at law or in equity, are agreed by the Guarantor and
the Holders to replace such other duties and liabilities of the Guarantee
Trustee.

 

(c)                                  No
provision of this Guarantee Agreement shall be construed to relieve the
Guarantee Trustee from liability for its own negligent action, negligent
failure to act or own willful misconduct, except that:

 

(i)                                     the
Guarantee Trustee shall not be liable for any error of judgment made in good
faith by a Responsible Officer of the Guarantee Trustee, unless it shall be
proved that the Guarantee Trustee was negligent in ascertaining the pertinent
facts upon which such judgment was made; and

 

(ii)                                  the
Guarantee Trustee shall not be liable with respect to any action taken or
omitted to be taken by it in good faith in accordance with the direction of the
Holders of not less than a Majority in Liquidation Amount of the Preferred
Securities relating to the time, method and place of conducting any proceeding
for any remedy available to the Guarantee Trustee, or exercising any trust or
power conferred upon the Guarantee Trustee under this Guarantee Agreement.

 

SECTION 3.2                          Certain Rights of the Guarantee Trustee.

 

(a)                                  Subject
to the provisions of Section 3.1:

 

(i)                                     the
Guarantee Trustee may conclusively rely and shall be fully protected in acting
or refraining from acting in good faith and in accordance with the terms hereof
upon any resolution, certificate, statement, instrument, opinion, report,
notice, request, direction, consent, order, bond, debenture, note, other
evidence of indebtedness or other paper or document reasonably believed by it
to be genuine and to have been signed, sent or presented by the proper party or
parties;

 

(ii)                                  any
direction or act of the Guarantor contemplated by this Guarantee Agreement
shall be sufficiently evidenced by an Officers’ Certificate unless otherwise
prescribed herein;

 

(iii)                               the
Guarantee Trustee may consult with counsel, and the advice of such counsel
shall be full and complete authorization and protection in respect of any
action taken, suffered or omitted to be taken by it hereunder in good faith and
in reliance thereon and in accordance with such advice.  Such counsel may be counsel to the Guarantee
Trustee,

 

8

 

the Guarantor
or any of its Affiliates and may be one of its employees.  The Guarantee Trustee shall have the right at
any time to seek instructions concerning the administration of this Guarantee
Agreement from any court of competent jurisdiction;

 

(iv)                              the
Guarantee Trustee shall be under no obligation to exercise any of the rights or
powers vested in it by this Guarantee Agreement at the request or direction of
any Holder, unless such Holder shall have provided to the Guarantee Trustee
reasonable security or indemnity against the costs, expenses (including
reasonable attorneys’ fees and expenses) and liabilities that might be incurred
by it in complying with such request or direction, including such reasonable
advances as may be requested by the Guarantee Trustee; provided,
that, nothing contained in this Section 3.2(a)(iv) shall be
taken to relieve the Guarantee Trustee, upon the occurrence of an Event of
Default, of its obligation to exercise the rights and powers vested in it by
this Guarantee Agreement;

 

(v)                                 the
Guarantee Trustee shall not be bound to make any investigation into the facts
or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document, but the
Guarantee Trustee, in its discretion, may make such further inquiry or investigation
into such facts or matters as it may see fit, and if the Guarantee Trustee
shall determine to make such inquiry or investigation, it shall be entitled to
examine the books, records and premises of the Guarantor, personally or by
agent or attorney;

 

(vi)                              the
Guarantee Trustee may execute any of the trusts or powers hereunder or perform
any duties hereunder either directly or by or through its agents, attorneys,
custodians or nominees and the Guarantee Trustee shall not be responsible for
any misconduct or negligence on the part of any such agent, attorney, custodian
or nominee appointed with due care by it hereunder;

 

(vii)                           whenever
in the administration of this Guarantee Agreement the Guarantee Trustee shall
deem it desirable to receive instructions with respect to enforcing any remedy
or right hereunder, the Guarantee Trustee (A) may request instructions
from the Holders of a Majority in Liquidation Amount of the Preferred
Securities, (B) may refrain from enforcing such remedy or right or taking
such other action until such instructions are received and (C) shall be
protected in acting in accordance with such instructions;

 

(viii)                        except as
otherwise expressly provided by this Guarantee Agreement, the Guarantee Trustee
shall not be under any obligation to take any action that is discretionary
under the provisions of this Guarantee Agreement;

 

9

 

(ix)                                whenever,
in the administration of this Guarantee Agreement, the Guarantee Trustee shall
deem it desirable that a matter be proved or established before taking,
suffering or omitting to take any action hereunder, the Guarantee Trustee
(unless other evidence is herein specifically prescribed) may, in the absence
of bad faith on its part, request and rely upon an Officers’ Certificate which,
upon receipt of such request from the Guarantee Trustee, shall be promptly
delivered by the Guarantor; and

 

(x)                                   the
Guarantee Trustee shall have no duty to see to any recording, filing or
registration of any instrument or other writing (or any rerecording, refilling
or reregistration thereof).

 

(b)                                 No
provision of this Guarantee Agreement shall be deemed to impose any duty or
obligation on the Guarantee Trustee to perform any act or acts or exercise any
right, power, duty or obligation conferred or imposed on it in any jurisdiction
in which it shall be illegal, or in which the Guarantee Trustee shall be
unqualified or incompetent in accordance with applicable law, to perform any
such act or acts or to exercise any such right, power, duty or obligation.  No permissive power or authority available to
the Guarantee Trustee shall be construed to be a duty to act in accordance with
such power and authority.

 

SECTION 3.3                          Compensation.

 

The
Guarantor agrees to pay to the Guarantee Trustee from time to time reasonable
compensation for all services rendered by it hereunder (which compensation
shall not be limited by any provisions of law in regard to the compensation of
a trustee of an express trust) and to reimburse the Guarantee Trustee upon
request for all reasonable expenses, disbursements and advances (including the
reasonable fees and expenses of its attorneys and agents) incurred or made by
the Guarantee Trustee in accordance with any provisions of this Guarantee
Agreement.

 

SECTION 3.4                          Indemnity.

 

The
Guarantor agrees to indemnify and hold harmless the Guarantee Trustee
(including in its individual capacity) and any of its Affiliates and any of
their officers, directors, shareholders, employees, representatives or agents
from and against any loss, damage, liability, tax (other than income, franchise
or other taxes imposed on amounts paid pursuant to Section 3.3),
penalty, expense or claim of any kind or nature whatsoever incurred without
negligence, bad faith or willful misconduct on its part, arising out of or in
connection with the acceptance or administration of this Guarantee Agreement,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its rights, powers
or duties hereunder.  The Guarantee
Trustee will not claim or exact any lien or charge on any Guarantee Payments as
a result of any amount due to it under this Guarantee Agreement.  This indemnity shall survive the termination
of this Agreement or the resignation or removal of the Guarantee Trustee.

 

10

 

In
no event shall the Guarantee Trustee be liable for any indirect, special,
punitive or consequential loss or damage of any kind whatsoever, including, but
not limited to, lost profits, even if the Guarantee Trustee has been advised of
the likelihood of such loss or damage and regardless of the form of action.

 

In
no event shall the Guarantee Trustee be liable for any failure or delay in the
performance of its obligations hereunder because of circumstances beyond its
control, including, but not limited to, acts of God, flood, war (declared or
undeclared), terrorism, fire, riot, embargo or government action, including any
laws, ordinances, regulations, governmental action or the like which delay,
restrict or prohibit the providing of the services contemplated by this
Guarantee Agreement.

 

SECTION 3.5                          Securities.

 

The
Guarantee Trustee or any other agent of the Guarantee Trustee, in its
individual or any other capacity, may become the owner or pledgee of Common or
Preferred Securities.

 

ARTICLE IV

GUARANTEE TRUSTEE

 

SECTION 4.1                          Guarantee Trustee; Eligibility.

 

(a)                                  There
shall at all times be a Guarantee Trustee which shall:

 

(i)                                     not
be an Affiliate of the Guarantor; and

 

(ii)                                  be
a corporation organized and doing business under the laws of the United States
or of any State thereof, authorized to exercise corporate trust powers, having
a combined capital and surplus of at least fifty million dollars ($50,000,000),
subject to supervision or examination by Federal or State authority and having
an office within the United States. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of such
supervising or examining authority, then, for the purposes of this Section 4.1,
the combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of
condition so published.

 

(b)                                 If
at any time the Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a),
the Guarantee Trustee shall immediately resign in the manner and with the
effect set out in Section 4.2(c).

 

(c)                                  If
the Guarantee Trustee has or shall acquire any “conflicting interest” within
the meaning of Section 310(b) of the Trust Indenture Act, the
Guarantee Trustee shall either eliminate such interest or resign in the manner
and with the effect set out in Section 4.2(c).

 

11

 

SECTION 4.2                          Appointment, Removal and Resignation of the Guarantee
Trustee.

 

(a)                                  Subject
to Section 4.2(b), the Guarantee Trustee may be appointed or
removed without cause at any time by the Guarantor, except during an Event of
Default.

 

(b)                                 The
Guarantee Trustee shall not be removed until a Successor Guarantee Trustee has
been appointed and has accepted such appointment by written instrument executed
by such Successor Guarantee Trustee and delivered to the Guarantor.

 

(c)                                  The
Guarantee Trustee appointed hereunder shall hold office until a Successor
Guarantee Trustee shall have been appointed or until its removal or
resignation.  The Guarantee Trustee may
resign from office (without need for prior or subsequent accounting) by an
instrument in writing executed by the Guarantee Trustee and delivered to the
Guarantor, which resignation shall not take effect until a Successor Guarantee
Trustee has been appointed and has accepted such appointment by instrument in
writing executed by such Successor Guarantee Trustee and delivered to the
Guarantor and the resigning Guarantee Trustee.

 

(d)                                 If
no Successor Guarantee Trustee shall have been appointed and accepted
appointment as provided in this Section 4.2 within thirty (30) days
after delivery to the Guarantor of an instrument of resignation, the resigning
Guarantee Trustee may petition, at the expense of the Guarantor, any court of
competent jurisdiction for appointment of a Successor Guarantee Trustee.  Such court may thereupon, after prescribing
such notice, if any, as it may deem proper, appoint a Successor Guarantee
Trustee.

 

ARTICLE V

GUARANTEE

 

SECTION 5.1                          Guarantee.

 

(a)                                  The
Guarantor irrevocably and unconditionally agrees to pay in full to the Holders
the Guarantee Payments (without duplication of amounts theretofore paid by or
on behalf of the Issuer), as and when due, regardless of any defense (except
for the defense of payment by the Issuer), right of set-off or counterclaim
which the Issuer may have or assert.  The
Guarantor’s obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Guarantor to the Holders or by causing
the Issuer to pay such amounts to the Holders. 
The Guarantor shall give prompt written notice to the Guarantee Trustee
in the event it makes any direct payment to the Holders hereunder.

 

12

 

(b)                                 The
Guarantor hereby also agrees to assume any and all Obligations of the Issuer,
and, in the event any such Obligation is not so assumed, subject to the terms
and conditions hereof, the Guarantor hereby irrevocably and unconditionally
guarantees to each Beneficiary the full payment, when and as due, of any and
all Obligations to such Beneficiaries. 
This Guarantee is intended to be for the Beneficiaries who have received
notice hereof.

 

SECTION 5.2                          Waiver of Notice and Demand.

 

The
Guarantor hereby waives notice of acceptance of the Guarantee Agreement and of
any liability to which it applies or may apply, presentment, demand for
payment, any right to require a proceeding first against the Guarantee Trustee,
Issuer or any other Person before proceeding against the Guarantor, protest,
notice of nonpayment, notice of dishonor, notice of redemption and all other
notices and demands.

 

SECTION 5.3                          Obligations Not Affected.

 

The
obligations, covenants, agreements and duties of the Guarantor under this
Guarantee Agreement shall in no way be affected or impaired by reason of the
happening from time to time of any of the following:

 

(a)                                  the
release or waiver, by operation of law or otherwise, of the performance or
observance by the Issuer of any express or implied agreement, covenant, term or
condition relating to the Preferred Securities to be performed or observed by
the Issuer;

 

(b)                                 the
extension of time for the payment by the Issuer of all or any portion of the
Distributions (other than an extension of time for payment of Distributions
that results from the extension of any interest payment period on the Notes as
provided in the Indenture), Redemption Price, Liquidation Distribution or any
other sums payable under the terms of the Preferred Securities or the extension
of time for the performance of any other obligation under, arising out of, or
in connection with, the Preferred Securities;

 

(c)                                  any
failure, omission, delay or lack of diligence on the part of the Holders to
enforce, assert or exercise any right, privilege, power or remedy conferred on
the Holders pursuant to the terms of the Preferred Securities, or any action on
the part of the Issuer granting indulgence or extension of any kind;

 

(d)                                 the
voluntary or involuntary liquidation, dissolution, sale of any collateral,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition or readjustment of debt of, or other
similar proceedings affecting, the Issuer or any of the assets of the Issuer;

 

(e)                                  any
invalidity of, or defect or deficiency in, the Preferred Securities;

 

13

 

(f)                                    the
settlement or compromise of any obligation guaranteed hereby or hereby
incurred; or

 

(g)                                 any
other circumstance whatsoever that might otherwise constitute a legal or
equitable discharge or defense of a guarantor, it being the intent of this Section 5.3
that the obligations of the Guarantor hereunder shall be absolute and
unconditional under any and all circumstances.

 

There
shall be no obligation of the Holders to give notice to, or obtain the consent
of, the Guarantor with respect to the happening of any of the foregoing.

 

SECTION 5.4                          Rights of Holders.

 

The
Guarantor expressly acknowledges that:  (a) this
Guarantee Agreement will be deposited with the Guarantee Trustee to be held for
the benefit of the Holders; (b) the Guarantee Trustee has the right to
enforce this Guarantee Agreement on behalf of the Holders; (c) the Holders
of a Majority in Liquidation Amount of the Preferred Securities have the right
to direct the time, method and place of conducting any proceeding for any
remedy available to the Guarantee Trustee in respect of this Guarantee
Agreement or exercising any trust or power conferred upon the Guarantee Trustee
under this Guarantee Agreement; and (d) any Holder may institute a legal
proceeding directly against the Guarantor to enforce its rights under this
Guarantee Agreement, without first instituting a legal proceeding against the
Guarantee Trustee, the Issuer or any other Person.

 

SECTION 5.5                          Guarantee of Payment.

 

This
Guarantee Agreement creates a guarantee of payment and not of collection.  This Guarantee Agreement will not be
discharged except by payment of the Guarantee Payments in full (without
duplication of amounts theretofore paid by the Issuer) or upon distribution of
Notes to Holders as provided in the Trust Agreement.

 

SECTION 5.6                          Subrogation.

 

The
Guarantor shall be subrogated to all (if any) rights of the Holders against the
Issuer in respect of any amounts paid to the Holders by the Guarantor under
this Guarantee Agreement and shall have the right to waive payment by the
Issuer pursuant to Section 5.1; provided, that,
the Guarantor shall not (except to the extent required by mandatory provisions
of law) be entitled to enforce or exercise any rights it may acquire by way of
subrogation or any indemnity, reimbursement or other agreement, in all cases as
a result of payment under this Guarantee Agreement, if, at the time of any such
payment, any amounts are due and unpaid under this Guarantee Agreement.  If any amount shall be paid to the Guarantor
in violation of the preceding sentence, the Guarantor agrees to hold such
amount in trust for the Holders and to pay over such amount to the Holders.

 

14

 

SECTION 5.7                          Independent Obligations.

 

The
Guarantor acknowledges that its obligations hereunder are independent of the
obligations of the Issuer with respect to the Preferred Securities and that the
Guarantor shall be liable as principal and as debtor hereunder to make
Guarantee Payments pursuant to the terms of this Guarantee Agreement
notwithstanding the occurrence of any event referred to in subsections (a) through
(g), inclusive, of Section 5.3.

 

SECTION 5.8                          Enforcement.

 

A
Beneficiary may enforce the Obligations of the Guarantor contained in Section 5.1(b) directly
against the Guarantor, and the Guarantor waives any right or remedy to require
that any action be brought against the Issuer or any other person or entity
before proceeding against the Guarantor.

 

ARTICLE VI

COVENANTS AND SUBORDINATION

 

SECTION 6.1                          Dividends, Distributions and Payments.

 

So
long as any Preferred Securities remain outstanding, if there shall have
occurred and be continuing an Event of Default or the Guarantor shall have
entered into an Extension Period as provided for in the Indenture and such
period, or any extension thereof, shall have commenced and be continuing, then
the Guarantor may not (a) declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make liquidation payment with respect to,
any of the Guarantor’s capital stock or (b) make any payment of principal
of or any interest or premium on or repay, repurchase or redeem any debt
securities of the Guarantor that rank pari passu in
all respects with or junior in interest to the Preferred Securities (other than
(i) repurchases, redemptions or other acquisitions of shares of capital
stock of the Guarantor in connection with any employment contract, benefit plan
or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Guarantor (or securities convertible into or
exercisable for such capital stock) as consideration in an acquisition
transaction entered into prior to the occurrence of such Event of Default or
the applicable Extension Period, (ii) as a result of an exchange or
conversion of any class or series of the Guarantor’s capital stock (or any
capital stock of a subsidiary of the Guarantor) for any class or series of the
Guarantor’s capital stock or any class of series of the Guarantor’s
indebtedness for any class or series of the Guarantor’s capital stock, (iii) the
purchase of fractional interests in shares of the Guarantor’s capital stock
pursuant to the conversions or exchange provisions of such capital stock or the
security being converted or exchanged, (iv) any declaration of a dividend
in connection with any rights plan, the issuance of rights, stock or other
property under any rights plan or the redemption or repurchase of rights
pursuant thereto, or (v) any dividend in the form of stock, warrants,
options or other rights where the dividend stock or the stock issuable upon
exercise of such warrants, options or other rights is the same stock as that on
which the dividend is being paid or ranks pari passu with
or junior to such stock).

 

15

 

SECTION 6.2                          Subordination.

 

The
obligations of the Guarantor under this Guarantee Agreement will constitute
unsecured obligations of the Guarantor and will rank subordinate and junior in
right of payment to all Senior Debt of the Guarantor.

 

SECTION 6.3                          Pari Passu Guarantees.

 

(a)                                  The
obligations of the Guarantor under this Guarantee Agreement shall rank pari passu with the obligations of the Guarantor under any
similar guarantee agreements issued by the Guarantor with respect to preferred
securities (if any) similar to the Preferred Securities, issued by trusts other
than the Issuer established or to be established by the Guarantor (if any), in
each case similar to the Issuer.

 

(b)                                 The
right of the Guarantor to participate in any distribution of assets of any of
its subsidiaries upon any such subsidiary’s liquidation or reorganization or
otherwise is subject to the prior claims of creditors of that subsidiary,
except to the extent the Guarantor may itself be recognized as a creditor of
that subsidiary.  Accordingly, the
Guarantor’s obligations under this Guarantee will be effectively subordinated
to all existing and future liabilities of the Guarantor’s subsidiaries, and
claimants should look only to the assets of the Guarantor for payments
thereunder. This Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of the Guarantor, including Senior Debt of the
Guarantor, under any indenture or agreement that the Guarantor may enter into
in the future or otherwise.

 

ARTICLE VII

TERMINATION

 

SECTION 7.1                          Termination.

 

This
Guarantee Agreement shall terminate and be of no further force and effect upon (a) full
payment of the Redemption Price of all Preferred Securities, (b) the
distribution of Notes to the Holders in exchange for all of the Preferred
Securities or (c) full payment of the amounts payable in accordance with
the Trust Agreement upon liquidation of the Issuer.  Notwithstanding the foregoing, this Guarantee
Agreement will continue to be effective or will be reinstated, as the case may
be, if at any time any Holder must restore payment of any sums paid with
respect to Preferred Securities or this Guarantee Agreement.  The obligations of the Guarantor under Sections
3.3 and 3.4 shall survive any such termination or the resignation
and removal of the Guarantee Trustee.

 

16

 

ARTICLE VIII

MISCELLANEOUS

 

SECTION 8.1                          Successors and Assigns.

 

All
guarantees and agreements contained in this Guarantee Agreement shall bind the
successors, assigns, receivers, trustees and representatives of the Guarantor
and shall inure to the benefit of the Holders of the Preferred Securities then
outstanding.  Except in connection with a
consolidation, merger or sale involving the Guarantor that is permitted under Article VIII
of the Indenture and pursuant to which the successor or assignee agrees in
writing to perform the Guarantor’s obligations hereunder, the Guarantor shall
not assign its rights or delegate its obligations hereunder without the prior
approval of the Holders of a Majority in Liquidation Amount of the Preferred
Securities.

 

SECTION 8.2                          Amendments.

 

Except
with respect to any changes that do not adversely affect the rights of the
Holders in any material respect (in which case no consent of the Holders will
be required), this Guarantee Agreement may only be amended with the prior
approval of the Guarantor, the Guarantee Trustee and the Holders of not less
than a Majority in Liquidation Amount of the Preferred Securities.  The provisions of Article VI of the
Trust Agreement concerning meetings or consents of the Holders shall apply to
the giving of such approval.

 

SECTION 8.3                          Notices.

 

Any
notice, request or other communication required or permitted to be given
hereunder shall be in writing, duly signed by the party giving such notice, and
delivered, telecopied or mailed by first class mail as follows:

 

(a)                                  if
given to the Guarantor, to the address or facsimile number set forth below or
such other address, facsimile number or to the attention of such other Person
as the Guarantor may give notice to the Guarantee Trustee and the Holders:

 

Republic Bancorp, Inc.

601 West Market Street

Louisville, Kentucky 40202

Facsimile No.: (502) 561-7188

Attention: Chief Financial Officer

 

(b)                                 if
given to the Issuer, at the Issuer’s address or facsimile number set forth
below or such other address, facsimile number or to the attention of such other
Person as the Issuer may give notice to the Guarantee Trustee and the Holders:

 

Republic Bancorp Capital Trust

c/o Republic Bancorp, Inc.

601 West Market Street

Louisville, Kentucky 40202

Facsimile No.: (502) 561-7188

Attention: Administrative Trustee

 

17

 

(c)                                  if
given to the Guarantee Trustee, at the address or facsimile number set forth
below or such other address, facsimile number or to the attention of such other
Person as the Guarantee Trustee may give notice to the Guarantor and the
Holders:

 

Wilmington Trust Company

Rodney Square North, 1100 North Market Street

Wilmington, Delaware 19890-0001

Facsimile No.: (302) 636-4140

Attention: Corporate Capital Markets

 

(d)                                 if
given to any Holder, at the address set forth on the books and records of the
Issuer.

 

All
notices hereunder shall be deemed to have been given when received in person,
telecopied with receipt confirmed, or mailed by first class mail, postage
prepaid, except that if a notice or other document is refused delivery or
cannot be delivered because of a changed address of which no notice was given,
such notice or other document shall be deemed to have been delivered on the
date of such refusal or inability to deliver.

 

SECTION 8.4                          Benefit.

 

This
Guarantee Agreement is solely for the benefit of the Holders and is not
separately transferable from the Preferred Securities.

 

SECTION 8.5                          Governing Law.

 

This
Guarantee Agreement and the rights and obligations of each party hereto, shall
be construed and enforced in accordance with and governed by the laws of the
State of New York without reference to its conflict of laws provisions (other
than Section 5-1401 of the General Obligations Law).

 

SECTION 8.6                          Submission to Jurisdiction.

 

ANY
LEGAL ACTION OR PROCEEDING BY OR AGAINST ANY PARTY HERETO OR WITH RESPECT TO OR
ARISING OUT OF THIS GUARANTEE AGREEMENT MAY BE BROUGHT IN OR REMOVED TO
THE COURTS OF THE STATE OF NEW YORK, IN AND FOR THE COUNTY OF NEW YORK, OR OF
THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH
CASE SITTING IN THE BOROUGH OF MANHATTAN). BY EXECUTION AND DELIVERY OF THIS
GUARANTEE AGREEMENT, EACH PARTY ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS (AND COURTS OF APPEALS THEREFROM) FOR LEGAL PROCEEDINGS ARISING OUT OF
OR IN CONNECTION WITH THIS GUARANTEE AGREEMENT.

 

18

 

SECTION 8.7                          Kentucky Revised Statutes.

 

To
the extent that Section 371.065 of the Kentucky Revised Statutes is
applicable to any matters of construction, validity or performance of this
Guarantee, (a) the maximum aggregate liability of the Guarantor under this
Guarantee shall not exceed $45,000,000 plus interest and Distributions accruing
on the guaranteed indebtedness, as set forth in the Preferred Securities and
the Trust Agreement (and interest and Distributions accruing on such interest
and Distributions), and fees, charges and costs of collecting such guaranteed
indebtedness, including reasonable attorneys’ fees, and (b) unless
terminated earlier in accordance with the terms hereof, this Guarantee will
terminate on  September 30 , 2042, but such termination
shall not affect the liability of the Guarantor with respect to (i) obligations
created or incurred prior to such date or (ii) extensions or renewals of,
interest accruing on, or fees, costs or expenses incurred with respect to such
obligation on or after such date.  The
parties hereto do not intend that Section 371.065 of the Kentucky Revised
Statutes shall govern any action or proceeding arising out of or in connection
with this Guarantee Agreement and nothing herein shall be construed to imply
that Section 371.065 of the Kentucky Revised Statutes governs any such
action or proceeding.

 

SECTION 8.8                          Counterparts.

 

This
instrument may be executed in any number of counterparts, each of which so
executed shall be deemed to be an original, but all such counterparts shall
together constitute but one and the same instrument.

 

[THE
NEXT PAGE IS THE SIGNATURE PAGE]

 

19

 

IN
WITNESS WHEREOF, the undersigned have executed this Guarantee Agreement as of
the date first above written.

 

	
   

  	
  REPUBLIC BANCORP, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kevin Sipes

  
	
   

  	
   

  	
  Kevin Sipes

  
	
   

  	
   

  	
  Executive Vice President and Chief

  
	
   

  	
   

  	
  Financial Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  WILMINGTON TRUST COMPANY,

  
	
   

  	
   

  	
  not in its individual capacity, but solely
  as

  Guarantee Trustee

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ W.T. Morris, II

  
	
   

  	
   

  	
  Name:

  	
  W. Thomas Morris, II

  
	
   

  	
   

  	
  Title:

  	
  Senior Financial Services OfficerExhibit 10.1

 

CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY

 

FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2004 (CONSOLIDATED) AND 2003

 

 

CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY

 

CONTENTS

 

	
  Report of
  Independent Registered Public Accounting Firm

  	
   

  
	
   

  	
   

  
	
  Balance Sheets as of December 31,
  2004 (Consolidated) and 2003

  	
   

  
	
   

  	
   

  
	
  Statements of
  Operations and Comprehensive income for the years ended December 31,
  2004 (Consolidated) and 2003

  	
   

  
	
   

  	
   

  
	
  Statements of
  Stockholders’ Equity for the years ended December 31, 2004 (Consolidated)
  and 2003

  	
   

  
	
   

  	
   

  
	
  Statements of Cash Flows for
  the years ended December 31, 2004 (Consolidated) and 2003

  	
   

  
	
   

  	
   

  
	
  Notes to the
  Consolidated Financial Statements

  	
   

  

 

 

	
  

  	
  Jimmy C.H. Cheung & Co

  
	
  Certified Public Accountants

  
	
  (A member of Kreston International)

  

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To
the Board of Directors of:

China
Kangtai Cactus Bio-tech Company Limited and subsidiary

 

We
have audited the accompanying balance sheets of China Kangtai Cactus Bio-tech
Company Limited and subsidiary, as of December 31, 2004 (Consolidated) and
2003 and the related statements of operations and comprehensive income,
stockholders’ equity and cash flows for the years ended December 31, 2004
(Consolidated) and 2003. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.

 

We
conducted our audits in accordance with the 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 of the financial statements provide a reasonable basis for our opinion.

 

In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Kangtai Cactus Bio-tech
Company Limited, as of December 31, 2004 (Consolidated) and 2003, and the
profits of its operations and its cash flows for the years ended December 31,
2004 (Consolidated) and 2003, in conformity with accounting principles
generally accepted in the United States of America.

 

JIMMY C.H. CHEUNG & CO

Certified
Public Accountants

 

Hong
Kong

 

Date:
January 28, 2005, except for Note 12, which the date is June 10, 2005

 

	
   

  	
   

  	
  1607 Dominion Centre, 43
  Queen’s Road East, Wanchai, Hong Kong

  	
   

  	
  

  
	
   

  	
   

  	
  Tel: (852) 25295500 Fax:
  (852) 28651067 Email: jchc@krestoninternational.com.hk

  	
   

  
	
   

  	
   

  	
  Website:
  http://www.jimmycheungco.com

  	
   

  

 

1

 

CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY

 

BALANCE SHEETS

AS OF DECEMBER 31, 2004 (CONSOLIDATED) AND 2003

 

	
   

  	
   

  	
  Note

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  (Consolidated)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  ASSETS

  	
   

  
	
  CURRENT ASSETS

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash equivalents

  	
   

  	
   

  	
   

  	
  $

  	
  701,234

  	
   

  	
  $

  	
  142,398

  	
   

  
	
  Accounts receivable, net of allowances

  	
   

  	
  2

  	
   

  	
  429,866

  	
   

  	
  386,801

  	
   

  
	
  Due from a related company

  	
   

  	
   

  	
   

  	
  845,411

  	
   

  	
  809,179

  	
   

  
	
  Due from a stockholder

  	
   

  	
   

  	
   

  	
  —

  	
   

  	
  4,831

  	
   

  
	
  Inventories, net

  	
   

  	
  3

  	
   

  	
  3,960,319

  	
   

  	
  2,783,266

  	
   

  
	
  Other receivables

  	
   

  	
   

  	
   

  	
  36,147

  	
   

  	
  31,316

  	
   

  
	
  Total Current Assets

  	
   

  	
   

  	
   

  	
  5,972,977

  	
   

  	
  4,157,791

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  PROPERTY AND EQUIPMENT, NET

  	
   

  	
  4

  	
   

  	
  4,649,792

  	
   

  	
  4,780,743

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OTHER ASSETS

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Intangible assets

  	
   

  	
  5

  	
   

  	
  827,536

  	
   

  	
  940,580

  	
   

  
	
  Land use rights, net

  	
   

  	
   

  	
   

  	
  55,658

  	
   

  	
  56,865

  	
   

  
	
  TOTAL ASSETS

  	
   

  	
   

  	
   

  	
  $

  	
  11,505,963

  	
   

  	
  $

  	
  9,935,979

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  LIABILITIES AND STOCKHOLDERS’ EQUITY

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CURRENT LIABILITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts payable

  	
   

  	
   

  	
   

  	
  $

  	
  159,971

  	
   

  	
  $

  	
  152,356

  	
   

  
	
  Other payables and accrued liabilities

  	
   

  	
  6

  	
   

  	
  282,210

  	
   

  	
  59,620

  	
   

  
	
  Notes payable

  	
   

  	
  7

  	
   

  	
  730,677

  	
   

  	
  1,213,769

  	
   

  
	
  Other taxes payable

  	
   

  	
   

  	
   

  	
  27

  	
   

  	
  —

  	
   

  
	
  Value added tax payables

  	
   

  	
   

  	
   

  	
  666,075

  	
   

  	
  294,853

  	
   

  
	
  Total Current Liabilities

  	
   

  	
   

  	
   

  	
  1,838,960

  	
   

  	
  1,720,598

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  COMMITMENTS AND CONTINGENCIES

  	
   

  	
   

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  STOCKHOLDERS’ EQUITY

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $1.00 par value, 20,000,000 shares
  authorized, 500,000 shares issued and outstanding

  	
   

  	
  9

  	
   

  	
  500,000

  	
   

  	
  500,000

  	
   

  
	
  Additional paid-in capital

  	
   

  	
   

  	
   

  	
  4,702,559

  	
   

  	
  4,202,559

  	
   

  
	
  Retained earnings

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unappropriated

  	
   

  	
   

  	
   

  	
  3,701,862

  	
   

  	
  2,612,768

  	
   

  
	
  Appropriated

  	
   

  	
   

  	
   

  	
  696,182

  	
   

  	
  459,474

  	
   

  
	
  Due to stockholders

  	
   

  	
   

  	
   

  	
  66,400

  	
   

  	
  440,580

  	
   

  
	
  Total Stockholders’ Equity

  	
   

  	
   

  	
   

  	
  9,667,003

  	
   

  	
  8,215,381

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  	
   

  	
   

  	
   

  	
  $

  	
  11,505,963

  	
   

  	
  $

  	
  9,935,979

  	
   

  

 

The accompanying notes are an integral part of these
financial statements

 

2

 

CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY

 

STATEMENTS
OF OPERATIONS AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003 

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
  (Consolidated)

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  NET SALES

  	
   

  	
  $

  	
  6,447,510

  	
   

  	
  $

  	
  5,264,792

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  COST OF SALES

  	
   

  	
  (4,257,305

  	
  )

  	
  (3,506,952

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  GROSS PROFIT

  	
   

  	
  2,190,205

  	
   

  	
  1,757,840

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OPERATING EXPENSES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Selling expenses

  	
   

  	
  298,165

  	
   

  	
  221,826

  	
   

  
	
  General and administrative expenses

  	
   

  	
  239,550

  	
   

  	
  250,196

  	
   

  
	
  Professional fees

  	
   

  	
  298,424

  	
   

  	
  3,527

  	
   

  
	
  Depreciation

  	
   

  	
  14,379

  	
   

  	
  8,841

  	
   

  
	
  Amortization of land use rights

  	
   

  	
  1,207

  	
   

  	
  1,207

  	
   

  
	
  Amortization of intangible assets

  	
   

  	
  113,044

  	
   

  	
  113,043

  	
   

  
	
  Total Operating Expenses

  	
   

  	
  964,769

  	
   

  	
  598,640

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  INCOME FROM OPERATIONS

  	
   

  	
  1,225,436

  	
   

  	
  1,159,200

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OTHER INCOME (EXPENSES)

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Government grant

  	
   

  	
  121,980

  	
   

  	
  95,411

  	
   

  
	
  Interest income

  	
   

  	
  180

  	
   

  	
  136

  	
   

  
	
  Interest expenses

  	
   

  	
  (21,543

  	
  )

  	
  (17,137

  	
  )

  
	
  Other expenses

  	
   

  	
  (251

  	
  )

  	
  (184

  	
  )

  
	
  Total Other Income

  	
   

  	
  100,366

  	
   

  	
  78,226

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  INCOME FROM OPERATIONS BEFORE TAXES

  	
   

  	
  1,325,802

  	
   

  	
  1,237,426

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  INCOME TAX EXPENSE

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  NET INCOME

  	
   

  	
  1,325,802

  	
   

  	
  1,237,426

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OTHER COMPREHENSIVE LOSS

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Foreign currency translation loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  COMPREHENSIVE INCOME

  	
   

  	
  $

  	
  1,325,802

  	
   

  	
  $

  	
  1,237,426

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income per share-basic and diluted

  	
   

  	
  $

  	
  2.65

  	
   

  	
  $

  	
  2.47

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Weighted average number of shares
  outstanding during the year- basis and diluted

  	
   

  	
  500,000

  	
   

  	
  500,000

  	
   

  

 

The accompanying notes are an integral part of these
financial statements

 

3

 

CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY

STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003

 

	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Additional

  	
   

  	
  Unappropriated

  	
   

  	
  Appropriated

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Common
  Stock

  	
   

  	
  paid-in

  	
   

  	
  retained

  	
   

  	
  retained

  	
   

  	
  Due to

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Shares

  	
   

  	
  Amount

  	
   

  	
  capital

  	
   

  	
  earnings

  	
   

  	
  earnings

  	
   

  	
  stockholders

  	
   

  	
  Total

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance at
  December 31, 2002

  	
   

  	
  500,000 

  	
   

  	
  $

  	
  500,000 

  	
   

  	
  $

  	
  4,202,559

  	
   

  	
  $

  	
  1,560,956

  	
   

  	
  $

  	
  273,860 

  	
   

  	
  $

  	
  440,580

  	
   

  	
  $

  	
  6,977,955

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income for the
  year

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,237,426

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,237,426

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Transfer of statutory
  and staff welfare reserves

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (185,614

  	
  )

  	
  185,614

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance at
  December 31, 2003

  	
   

  	
  500,000

  	
   

  	
  500,000

  	
   

  	
  4,202,55 9

  	
   

  	
  2,612,768

  	
   

  	
  459,474

  	
   

  	
  440,580

  	
   

  	
  8,215,381

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Contribution by
  stockholders

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  500,000

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  500,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income for the
  year

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,325,802

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  1,325,802

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Repayment

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (374,180

  	
  )

  	
  (374,180

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Transfer of statutory
  and staff welfare reserves

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (236,708

  	
  )

  	
  236,708

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Balance at
  December 31, 2004 (Consolidated)

  	
   

  	
  500,000 

  	
   

  	
  $

  	
  500,000 

  	
   

  	
  $

  	
  4,702,559

  	
   

  	
  $

  	
  3,701,862

  	
   

  	
  $

  	
  696,182 

  	
   

  	
  $

  	
  66,400

  	
   

  	
  $

  	
  9,667,003

  	
   

  

 

The
accompanying are an integral part of these financial statements

 

4

 

CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004 (CONSOLIDATED) AND 2003

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
  (Consolidated)

  	
   

  	
   

  	
   

  
	
  CASH FLOWS FROM OPERATING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income

  	
   

  	
  $

  	
  1,325,802

  	
   

  	
  $

  	
  1,237,426

  	
   

  
	
  Adjusted to reconcile net income to cash
  provided by operating activities:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Depreciation - cost of sales

  	
   

  	
  313,434

  	
   

  	
  250,128

  	
   

  
	
  Depreciation-operating expenses

  	
   

  	
  14,379

  	
   

  	
  8,841

  	
   

  
	
  Amortization of land use rights

  	
   

  	
  1,207

  	
   

  	
  1,207

  	
   

  
	
  Amortization of intangible assets

  	
   

  	
  113,044

  	
   

  	
  113,043

  	
   

  
	
  Provision for doubtful debts

  	
   

  	
  38,530

  	
   

  	
  21,999

  	
   

  
	
  Changes in operating assets and liabilities
  (Increase) decrease in:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts receivable, net allowances

  	
   

  	
  (81,595

  	
  )

  	
  (153,368

  	
  )

  
	
  Other receivable and prepaid expenses

  	
   

  	
  (4,831

  	
  )

  	
  (906

  	
  )

  
	
  Inventories

  	
   

  	
  (1,177,053

  	
  )

  	
  (371,970

  	
  )

  
	
  Increase (decrease) in:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts payable

  	
   

  	
  7,615

  	
   

  	
  (115,002

  	
  )

  
	
  Other payables and accrued liabilities

  	
   

  	
  222,590

  	
   

  	
  18,954

  	
   

  
	
  Other tax payables

  	
   

  	
  27

  	
   

  	
  —

  	
   

  
	
  Value added tax payables

  	
   

  	
  371,222

  	
   

  	
  294,615

  	
   

  
	
  Net cash provided by operating activities

  	
   

  	
  1,144,371

  	
   

  	
  1,304,967

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH FLOWS FROM INVESTING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Purchase of property and equipment

  	
   

  	
  (196,862

  	
  )

  	
  (860,889

  	
  )

  
	
  Net cash used in investing activities

  	
   

  	
  (196,862

  	
  )

  	
  (860,889

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH FLOWS FROM FINANCING ACTIVITIES

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Proceeds from issuance of common stock

  	
   

  	
  500,000

  	
   

  	
  —

  	
   

  
	
  Due from a stockholder

  	
   

  	
  4,831

  	
   

  	
  (4,831

  	
  )

  
	
  Due from a related company

  	
   

  	
  (36,232

  	
  )

  	
  (809,179

  	
  )

  
	
  Due to stockholders

  	
   

  	
  (374,180

  	
  )

  	
  —

  	
   

  
	
  Notes payable

  	
   

  	
  (483,092

  	
  )

  	
  416,668

  	
   

  
	
  Net cash used in financing activities

  	
   

  	
  (388,673

  	
  )

  	
  (397,342

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  NET INCREASE IN CASH AND CASH EQUIVALENTS

  	
   

  	
  558,836

  	
   

  	
  46,736

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH AND CASH EQUIVALENTS AT BEGINNING OF
  YEAR

  	
   

  	
  142,398

  	
   

  	
  95,662

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CASH AND CASH EQUIVALENTS AT END OF YEAR

  	
   

  	
  $

  	
  701,234

  	
   

  	
  $

  	
  142,398

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash paid for interest expenses

  	
   

  	
  $

  	
  21,543

  	
   

  	
  $

  	
  17,137

  	
   

  

 

The accompanying notes are an integral part of
these financial statements

 

5

 

CHINA KANGTAI CACTUS BIO-TECH COMPANY LIMITED

AND SUBSIDIARY

NOTES
TO THE FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2004
(CONSOLIDATED) AND 2003

 

1.     SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES AND ORGANIZATION

 

(A)    Organization

 

China Kangtai Cactus Bio-tech Company Limited (“China
Kangtai”) was incorporated in the British Virgin Islands (“BVI”) on November 26,
2004. Harbin Hainan Kangda Cacti Hygienical Foods Joint-Stock Co., Ltd. (“Harbin
Hainan Kangda”) was incorporated in the People’s Republic of China (“PRC”) on December 30,
1998 as a company with limited liability and restructured as a joint stock
company on July 7, 2004 under the laws of PRC.

 

China Kangtai is an investment holding company and
Harbin Hainan Kangda’s principal activities are planting cactus, developing new
types of cactus, producing and trading of cactus health foods and related
products in the PRC.

 

During 2004, Harbin Hainan Kangda’s shareholders
exchanged 100% of their ownership of Harbin Hainan Kangda for 500,000 shares of
China Kangtai under a reorganization plan. The transfer has been accounted for
as a reorganization of entities under common control as the companies were
beneficially owned by principally identical stockholders and share common
management.  The financial statements
have been prepared as if the reorganization had occurred retroactively.  China Kangtai and Harbin Hainan Kangda are
hereafter referred to as (the “Company”)

 

(B)     Principles of consolidation

 

The accompanying consolidated financial statements
for 2004 include the accounts of the Company and its wholly owned subsidiary,
Harbin Hainan Kangda. The financial statements for 2003 include the accounts of
Harbin Hainan Kangda. All significant inter-company accounts and transactions
have been eliminated on consolidation.

 

(C)     Use of estimates

 

The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

 

(D)    Cash and cash equivalents

 

For purpose of the statements of cash flows, cash and
cash equivalents include cash on hand and demand deposits with a bank with a
maturity of less than 3 months.

 

(E)     Accounts receivable

 

The Company extends unsecured credit to its customers
in the ordinary course of business but mitigates the associated risks by
performing credit checks and actively pursuing past due accounts.  An allowance for doubtful accounts is
established and recorded based on managements’ assessment of the credit history
with the customer and current relationships with them.

 

(F)     Inventories

 

Inventories are stated at lower of cost or market
value, cost being determined on a first in first out method.  The Company provided inventory allowances
based on excess and obsolete inventories determined principally by customer
demand.

 

6

 

(G)     Property and equipment

 

Property and equipment are stated at cost, less
accumulated depreciation.  Expenditures
for additions, major renewals and betterments are capitalized and expenditures
for maintenance and repairs are charged to expense as incurred.

 

Depreciation is provided on a straight-line basis,
less estimated residual value over the assets’ estimated useful lives.  The estimated useful lives are as follows:

 

	
  Buildings

  	
   

  	
  40 Years

  	
   

  
	
  Plant and machinery

  	
   

  	
  12 Years

  	
   

  
	
  Motor vehicles

  	
   

  	
  10 Years

  	
   

  
	
  Furniture, fixtures and equipment

  	
   

  	
  8
  Years

  	
   

  

 

Land use rights are stated at cost, less accumulated
amortization and are amortized over the term of the relevant rights of 50 years
from the date of acquisition.

 

(H)    Long-lived assets

 

In accordance with Statement of Financial Accounting
Standards No. 144, “Accounting for the impairment or disposal of
Long-Lived Assets”, long-lived assets and certain identifiable intangible
assets held and used by the Company are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. For purposes of evaluating the recoverability of long-lived
assets, the recoverability test is performed using undiscounted net cash flows
related to the long- lived assets. The Company reviews long-lived assets to
determine that carrying values are not impaired.

 

(I)      Fair value of financial instruments

 

Statement of Financial Accounting Standards No. 107,
“Disclosure About Fair Value of Financial Instruments,” requires certain
disclosures regarding the fair value of financial instruments. Trade accounts
receivable, accounts payable, and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity of the
instruments.

 

(J)      Intangible assets

 

Under the Statement of Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets”, all goodwill and certain intangible
assets determined to have indefinite lives will not be amortized but will be
tested for impairment at least annually. 
Intangible assets other than goodwill will be amortized over their
useful lives of 10 years and reviewed for impairment in accordance with SFAS No. 144,
“Accounting for Impairment or Disposal of Long-Lived Assets”.

 

(K)    Revenue recognition

 

The Company recognizes revenue upon delivery or
shipment of the products, at which time title passes to the customer provided
that: there are no uncertainties regarding customer acceptance; persuasive
evidence of an arrangement exists; the sales price is fixed or determinable;
and collectability is deemed probable.

 

The local agricultural department in Harbin, PRC
approved a grant to the Company to encourage the planting of cactus. The
Company recognizes the grant as revenue upon receipt from the local government.

 

7

 

(L)     Income taxes

 

PRC income tax is computed according to the relevant
laws and regulations in the PRC.  The
Company is organized in the People’s Republic of China and no tax benefit is
expected from the tax credits in the future. The Company located its factories
in a special economic region in China. This economic region allows these
enterprises a two-year income tax exemption beginning in the December 2002
after they become profitable and a 50% income tax reduction for the following
three years. No income tax expense has been recorded for 2004 and 2003 as the
Company was exempt under the special economic region rules.

 

(M)   Foreign currency translation

 

The functional currency of the Company is the Chinese
Renminbi (“RMB”).  Transactions
denominated in currencies other than RMB are translated into United States
dollars using year end exchange rates as to assets and liabilities and average
exchange rates as to revenues and expenses. 
Capital accounts are translated at their historical exchange rates when
the capital transaction occurred.  Net
gains and losses resulting from foreign exchange translations are included in
the statements of operations and stockholder’s equity as other comprehensive
income (loss). Cumulative translation adjustment amounts were insignificant at
and for the years ended December 31, 2004 and 2003 as the RMB is pegged to
the United States dollar.

 

(N)    Comprehensive income

 

The foreign currency translation gain or loss
resulting from translation of the financial statements expressed in RMB to
United States Dollar is reported as other comprehensive income (loss) in the
statements of operations and stockholders’ equity. Cumulative translation
adjustment amounts were insignificant and for the years ended December 31,
2004 and 2003.

 

(O)    Income share

 

Basic income per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding during the year. 
Diluted income per share is computed similar to basic income per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. There are no
potentially dilutive securities for 2004 and 2003.

 

(P)     Segments

 

The Company operates in only one segment, thereafter
segment disclosure is not presented.

 

(Q)    Recent Accounting Pronouncements

 

Statement of Financial Accounting Standards (“SFAS”) No. 151,
“Inventory Costs – an amendment of ARB No. 43, Chapter 4”“ SFAS No. 152,
“Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB
Statements No. 66 and 67,” SFAS No. 153, “Exchanges of Non-monetary
Assets – an amendment of APB Opinion No. 29,” and SFAS No. 123
(revised 2004), “Share-Based Payment,” were recently issued.  SFAS No. 151, 152, 153 and 123 (revised
2004) have no current applicability to the Company and have no effect on the
financial statements.

 

8

 

2.     ACCOUNTS RECEIVABLE

 

Accounts receivable at December 31, 2004 and
2003 consisted of the following:

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts receivable

  	
   

  	
  $

  	
  490,395

  	
   

  	
  $

  	
  408,800

  	
   

  
	
  Less: allowance for doubtful accounts

  	
   

  	
  (60,529

  	
  )

  	
  (21,999

  	
  )

  
	
  Accounts receivable, net

  	
   

  	
  $

  	
  429,866

  	
   

  	
  $

  	
  386,801

  	
   

  

 

For the years ended December 31, 2004 and 2003,
provision for doubtful accounts recorded by the Company was $38,530 and $21,999
respectively.

 

3.     INVENTORIES

 

Inventories at December 31, 2004 and 2003
consisted of the following:

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cactus stock

  	
   

  	
  $

  	
  3,486,358

  	
   

  	
  $

  	
  2,718,914

  	
   

  
	
  Work-in-progress

  	
   

  	
  12,012

  	
   

  	
  38,626

  	
   

  
	
  Finished goods

  	
   

  	
  461,949

  	
   

  	
  25,726

  	
   

  
	
   

  	
   

  	
  3,960,319

  	
   

  	
  2,783,266

  	
   

  
	
  Less: provision of obsolescence

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  $

  	
  3,960,319

  	
   

  	
  $

  	
  2,783,266

  	
   

  

 

For the years ended December 31, 2004 and 2003,
no provision for obsolete inventories was recorded by the Company.

 

4.     PROPERTY AND EQUIPMENT

 

The following is a summary of property and equipment
at December 31:

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Buildings

  	
   

  	
  $

  	
  3,887,142

  	
   

  	
  $

  	
  3,887,142

  	
   

  
	
  Plant and machinery

  	
   

  	
  1,331,045

  	
   

  	
  1,260,282

  	
   

  
	
  Motor vehicles

  	
   

  	
  211,588

  	
   

  	
  87,818

  	
   

  
	
  Furniture and office equipment

  	
   

  	
  10,995

  	
   

  	
  8,667

  	
   

  
	
   

  	
   

  	
  5,440,770

  	
   

  	
  5,243,909

  	
   

  
	
  Less: accumulated depreciation

  	
   

  	
  790,978

  	
   

  	
  463,166

  	
   

  
	
  Property and equipment, net

  	
   

  	
  $

  	
  4,649,792

  	
   

  	
  $

  	
  4,780,743

  	
   

  

 

Depreciation expenses for the years ended December 31,
2004 and 2003 were $327,813 and $258,969 respectively.

 

9

 

5.     INTANGIBLE ASSETS

 

Intangible assets related to registered patent rights
and formulations of various cactus health and pharmaceutical products acquired
by the Company from third parties; $888,889 were first acquired by the
stockholders and injected into the Company at cost as registered capital in
2002 (note 9(A)) and $241,546 were acquired from third parties in 2002.

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Patents

  	
   

  	
  $

  	
  1,130,435

  	
   

  	
  $

  	
  1,130,435

  	
   

  
	
  Less: accumulated amortization

  	
   

  	
  302,899

  	
   

  	
  189,855

  	
   

  
	
   

  	
   

  	
  $

  	
  827,536

  	
   

  	
  $

  	
  940,580

  	
   

  

 

 

The intangible assets are amortized over ten years on
a straight line basis.  The amortization
expense for both 2004 and 2003 was $113,044 and 113,043, respectively.

 

6.     OTHER PAYABLES AND ACCRUED LIABILITIES

 

Other payables and accrued liabilities at December 31,
2004 and 2003 consist of the following:

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other payables

  	
   

  	
  $

  	
  12,078

  	
   

  	
  $

  	
  12,078

  	
   

  
	
  Accrued liabilities

  	
   

  	
  72,817

  	
   

  	
  47,542

  	
   

  
	
  Professional fees due

  	
   

  	
  197,315

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  $

  	
  282,210

  	
   

  	
  $

  	
  59,620

  	
   

  

 

7.     NOTES PAYABLE

 

Balance at December 31:

 

	
   

  	
   

  	
  2004

  	
   

  	
  2003

  	
   

  
	
  Note payable to a bank, interest rate of
  5.7525% per annum, unsecured, due June, 2004

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  483,092

  	
   

  
	
  Note payable to a third party, unsecured,
  interest-free, due on demand

  	
   

  	
  730,677

  	
   

  	
  730,677

  	
   

  
	
   

  	
   

  	
  $

  	
  730,677

  	
   

  	
  $

  	
  1,213,769

  	
   

  

 

8.     COMMITMENTS AND CONTINGENCIES

 

(A)    Employee benefits

 

The full time employees of the Company are entitled
to employee benefits including medical care, welfare subsidies, unemployment
insurance and pension benefits through a Chinese government mandated
multi-employer defined contribution plan. The Company is required to accrue for
those benefits based on certain percentages of the employees’ salaries and make
contributions to the plans out of the amounts accrued for medical and pension
benefits.  The total provisions and
contributions made for such employee benefits was $5,757 and $4,618 for the
years ended December 31, 2004 and 2003, respectively. The Chinese
government is responsible for the medical benefits and the pension liability to
be paid to these employees.

 

10

 

(B)     Operating leases commitments

 

The Company leases office and land spaces from third
parties under fourteen operating leases which expire from April 8, 2005 to
September 20, 2030.

 

As at December 31, 2004, the Company has
outstanding commitments with respect to the above non-cancelable operating
leases, which are due as follows:

 

	
  2005

  	
   

  	
  $

  	
  139,280

  	
   

  
	
  2006

  	
   

  	
  99,073

  	
   

  
	
  2007

  	
   

  	
  47,238

  	
   

  
	
  2008

  	
   

  	
  4,967

  	
   

  
	
  2009

  	
   

  	
  1,440

  	
   

  
	
  Thereafter

  	
   

  	
  51,695

  	
   

  
	
   

  	
   

  	
  $

  	
  343,693

  	
   

  

 

9.     SHAREHOLDERS’ EQUITY

 

(A)    Registered capital

 

In accordance with the Articles of Association of the
Company, the registered capital of the Company at the date of incorporation of December 30,
1998 was $241,546 (RMB2,000,000) which was fully paid on December 8, 1998
in cash by the shareholders. The registered capital of the Company was
subsequently increased to $4,444,444 (RMB36,800,000) by an increase of
$4,202,898 (RMB34,800,000) on April 18, 2000. The increase in registered
capital was paid for by the contribution of four patents transferred to the
Company amounting to $888,889 (RMB7,360,000) in lieu of cash and the remaining
balance has been fully paid in cash.

 

(B)     Appropriated retained earnings

 

The Company’s subsidiary, Harbin Hainan Kanda is
required to make appropriations to reserves funds, comprising the statutory
surplus reserve, statutory public welfare fund and discretionary surplus
reserve, based on after-tax net income determined in accordance with generally
accepted accounting principles of the People’s Republic of China (the “PRC GAAP”).  Appropriation to the statutory surplus
reserve should be at least 10% of the after tax net income determined in
accordance with the PRC GAAP until the reserve is equal to 50% of the entities’
registered capital.  Appropriations to
the statutory public welfare fund are at 5% to 10% of the after tax net income
determined in accordance with the PRC GAAP. 
The statutory public welfare fund is established for the purpose of
providing employee facilities and other collective benefits to the employees
and is non-distributable other than in liquidation.  Appropriations to the discretionary surplus
reserve are made at the discretion of the Board of Directors.

 

During 2004 and 2003, the Company’s subsidiary,
Harbin Hainan Kanda appropriated $236,708 and $185,614 respectively to the
reserve funds based on its net income under PRC GAAP.

 

10.   RELATED PARTY TRANSACTIONS

 

The Company had advanced funds totaling $4,831 to a
stockholder as of December 31, 2003 as a short-term, unsecured and
interest-free loan.  This loan was fully repaid
in 2004.  The Company had advanced funds
totaling $845,411 and $809,179 to a related company as of December 31,
2004 and 2003 respectively, unsecured, interest-free loan and repayable on
demand.

 

The Company owed $66,400 and $440,580 to stockholders
as of December 31, 2004 and 2003 respectively as short-term, unsecured and
interest-free loans.

 

11

 

11.   CONCENTRATIONS AND RISKS

 

During 2004 and 2003, 100% of the Company’s assets
were located in China and 100% of the Company’s revenues were derived from
companies located in China.

 

12.   SUBSEQUENT EVENT

 

(A)    Plan of reorganization

 

On May 13, 2005, pursuant to a Stock Purchase
Agreement, InvestNet, Inc. (“InvestNet”) sold 30,000,000 shares to China
Kangtai for $300,000.  On the same date,
InvestNet entered into an Agreement and Plan of Reorganization with the
shareholders of China Kangtai to exchange 110,130,615 shares of InvestNet for
12% of the issued and outstanding stock of China Kangtai .  In addition, InvestNet issued a Convertible
Promissory Note for $8,070,000 due on October 28, 2005 (“the Note”) for
the remaining 88% of China Kangtai.  The
Note is convertible into 14,248,395 (post a one for seventy reverse split)
shares of InvestNet.  The Agreement and
Plan of Reorganization was completed on June 3, 2005.  As of August 15, 2005 the Note has not
been exercised.

 

(B)     Change of the name of the Company subsidiary

 

On March 22, 2005, the Company’s subsidiary
changed its name to Harbin Hainan Kangda Cacti Hygienical Foods Co., Ltd. (“Harbin
Hainan Kangda”) and restructured as a limited liability company.

 

12

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