Document:

Unassociated Document

    NET
      PROFITS AGREEMENT

     

    THIS
      NET
      PROFITS AGREEMENT (the “Agreement”)
      is
      executed and entered into as of the 4th day of January, 2007 (the “Execution
      Date”),
      by
      and among LEHMAN BROTHERS HOLDINGS INC., a Delaware corporation, its successors
      and/or assigns (“Lehman”),
      whose
      address is 399 Park Avenue, 8th Floor, New York, New York 10022, and 1407
      BROADWAY REAL ESTATE LLC, a Delaware limited liability company (“Borrower”),
      whose
      address is c/o The Lightstone Group, 326 Third Street, Lakewood, New Jersey
      08701, and, solely with respect to the provisions of Article 6 and Sections
      7.15
      and 7.13, each of the other parties hereto (each, an “Owning
      Entity”)
      

     

    W I T N E S S E TH:

     

    WHEREAS,
      Lehman is making a loan in the amount of $127,250,000 (the “Loan”)
      to
      Borrower pursuant to that certain Loan Agreement dated of even date herewith
      between Borrower and Lehman (the “Loan
      Agreement”).

     

    WHEREAS,
      as a condition to making the Loan, Lehman has required that Borrower and each
      Owning Entity enter into this Agreement. 

     

    NOW,
      THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that for and in consideration of
      the
      mutual covenants contained herein and other good and valuable consideration,
      the
      receipt and sufficiency of which are hereby acknowledged and confessed, Borrower
      and Lehman hereby agree as follows:

     

    ARTICLE
      1

     

    DEFINITIONS

     

    A. DEFINED
      TERMS. For purposes of this Agreement, unless the context otherwise requires,
      the following terms shall have the respective meanings assigned to them in
      this
      Article I or in the sections and subsections referred to below:

     

    1.1   “Allowed
      Rate”
shall
      mean a rate of interest equal to six percent (6%) per annum, compounded
      annually. 

     

    1.2   “Approved
      Budget”
shall
      have the meaning assigned to it in Section
      3.5
      hereof.

     

    1.3   “Borrower’s
      Allowed Return”
as
      of
      any date shall mean a cumulative return on the Borrower’s cash equity investment
      in the Property at the Allowed Rate. 

     

    1.4   “Borrower’s
      Cash Flow Amount”
shall
      mean an amount equal to the amount of any distributions to members of Borrower
      at any time other than as a result of clause (i) of the definition of Net
      Profits plus the amount of any fees or other compensation paid by or on behalf
      of Borrower to Affiliates of Borrower and not either (x) disclosed on the
      closing statement delivered to and approved by Lehman or (y) permitted by the
      Approved Budget or otherwise approved by Lehman. 

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    1.5   “Borrower’s
      Maximum Permitted Return”
as
      of
      any date shall mean a cumulative return on the Borrower’s cash equity investment
      in the Property at a rate of interest equal to nine percent (9%) per annum,
      compounded annually.

     

    1.6   “Business
      Plan”
shall
      have the meaning assigned to it in Section
      3.5
      hereof.

     

    1.7   “Capital
      Proceeds”
shall
      mean the gross cash receipts of Borrower from any Capital
      Transaction.

     

    1.8   “Capital
      Transaction”
shall
      mean any transaction involving the sale, assignment, transfer, liquidation,
      condemnation or settlement in lieu thereof, disposition, financing, refinancing
      or any other conversion to cash of all or any portion of the Property or the
      equity or membership interests in Borrower, directly or indirectly (including,
      without limitation, through merger, consolidation, an initial public offering
      or
      otherwise), other than the leasing of space for occupancy and/or any other
      transaction with respect to the Property or the direct or indirect ownership
      interests in Borrower outside the ordinary course of business.

     

    1.9   “Event
      of Default”
shall
      have the meaning assigned to it in Section 5.1 hereof.

     

    1.10   “Major
      Decision”
shall
      mean any of the following:

     

    (i) Approving
      the merger, consolidation, dissolution, transfer or winding up of the
      Borrower;

     

    (ii) Approving
      any changes in the purposes of the Borrower or engaging in any other business
      not related to the purpose of the Borrower.

     

    (iii) Approving
      any financing or refinancing of the Property or any material modification of
      amendment thereof,

     

    (iv) Admitting
      an additional member or selling or issuing any additional ownership interests
      in
      the Borrower;

     

    (v) Entering
      into, amending, terminating or enforcing the rights of the Borrower under any
      (x) Affiliate Agreement or (y) transaction with any Affiliate; provided,
      however, that Lehman shall not unreasonably withhold its consent if the terms
      of
      such Affiliate Agreement or transaction are on fair market terms and
      conditions;

     

    (vi) (a)
      Responding to a petition filed against the Borrower for a proceeding under
      any
      bankruptcy, insolvency, reorganization, or similar act; (b) filing of any
      consent to any such proceeding against the Borrower; (c) making any decision
      to
      contest or not to contest such proceeding against the Borrower; (d) commencing
      a
      voluntary case or proceeding under any bankruptcy, insolvency, reorganization,
      or similar act (e) making a general assignment of the property of the Borrower
      for the benefit of creditors; (f) appointing, or acquiescing in the appointment
      of; a custodian or receiver; and (g) taking any actions with respect to any
      of
      the foregoing proceedings other than those which are routine and
      non-substantive;

     

    
      
        
        

      

      
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    (vii) Approving
      the terms and conditions of any direct or indirect sale, transfer, assignment,
      exchange, mortgage, pledge, security interest, ground lease, master lease or
      other disposition of any kind of all or any part of any Property or the other
      material assets of the Borrower, except for (a) any lease or installment sales
      contract for personal property and equipment in the ordinary course of business,
      (b) any sale or disposition and/or replacement of personal property in the
      ordinary course of business or (c) a Permitted Transfer (as defined in the Loan
      Agreement);

     

    (viii) Acquiring,
      directly or indirectly through one or more other entities, of (A) any material
      assets, other than in the ordinary course of business or (B) any equity interest
      in any person on behalf of or by the Borrower;

     

    (ix) Entering
      into any partnership, joint venture or similar relationship with, or acquiring
      any interest in, any corporation, limited liability company, partnership,
      association or other business organization by the Borrower;

     

    (x) Doing
      any
      act in contravention of this Agreement or any applicable law, or receive (or
      cause any of its affiliates to receive) any rebate or give-up or participate
      in
      any reciprocal business arrangements or receive any benefit separate from the
      Borrower based on the business or activities of the Borrower which circumvent
      the provisions of this Agreement;

     

    (xi) Approving
      any material amendment to the Operating Agreement;

     

    (xii) Any
      decision to undertake any expansion, or addition to, the Property or any new
      development of the Property;

     

    (xiii) Initiating
      or settling any litigation on behalf of the Borrower other than: (a) tenant
      dispossessory and/or collection actions with tenants or other occupants
      involving defaults of such tenants; (b) actions with service providers in the
      ordinary course of business; and (c) matters covered by insurance, excluding
      deductibles, and (d) matters where the claim is less than
      $5,000,000;

     

    (xiv) Any
      decision to undertake any development, alteration, modification, improvement
      or
      renovation of any portion of the Property costing individually or, if in a
      series of related transactions, in the aggregate, in excess of
      $2,500,000;

     

    (xv) Approving
      all material matters relating to: (a) uninsured casualties affecting any portion
      of any Property where the damage arising from any single casualty event or
      series of related casualty events is in excess of $5,000,000 in the aggregate;
      and (b) any condemnation or eminent domain proceeding affecting the
      Property;

     

    (xvi) Approving
      changes to the insurance coverage to be maintained for the Property or the
      Borrower that are inconsistent with the standard insurance requirements of
      institutional lenders;

     

    (xvii) Creating
      or modifying any mortgage, lien, security interest, charge or encumbrance in
      any
      portion of the Property or any other Borrower assets, provided, however, that
      incurring any personal property lease obligation or similar lien in the ordinary
      course of business shall not be deemed to constitute the creation of a mortgage,
      lien or other security interest in Borrower assets; 

     

    
      
        
        

      

      
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    (xviii) Distributing
      of cash, other than in strict accordance with the terms of the distribution
      provisions of the Operating Agreement and this Agreement;

     

    (xix) Redeeming,
      purchasing or otherwise acquiring all or any portion of any interest in
      Borrower;

     

    (xx) Entering
      into, terminating (except following a default by the tenant thereunder) or
      modifying the Sublease, the Ground Lease or any Major Lease, or any renewal
      of a
      Major Lease or entering into any other lease not in accordance with the then
      current leasing guidelines approved by Lehman; 

     

    (xxi) Making
      any loan or other extension of credit by the Borrower (except in connection
      with
      tenant work under a Lease or any other lease of space at the Property approved
      by Lehman or not requiring Lehman’s approval);

     

    (xxii) Other
      than pursuant to the Loan Documents, entering into any swap, hedge, collar
      or
      other interest rate protection agreement other than as may be required in
      connection with any financing or refinancing approved by Lehman;

     

    (xxiii) Doing
      any
      act in contravention of any documents binding upon or otherwise affecting the
      Borrower; 

     

    (xxiv) Except
      as
      permitted hereby and strictly in accordance herewith, amending or modifying,
      or
      deviating from, the Business Plan or the then-effective Approved Budget; and
      

     

    (xxv) Entering
      into, or permitting any Affiliate to enter into, any agreement with the
      sublessor under the Sublease, including without limitation, any purchase
      agreement with respect to sublessor’s interest under the Sublease.

     

    1.11   “Net
      Profits”
shall
      mean (i) the Capital Proceeds less the costs and expenses actually paid in
      cash,
      associated and incurred in connection with such Capital Transaction and which
      have been approved by Lehman in its reasonable discretion less
      (ii)
      the
      amount of any principal payment on the Loan and the Mezzanine Loan as a result
      of such Capital Transaction, less
      (iii)
      Borrower’s cash equity investment in the Property less
      (iv) the
      difference, if positive, between (A) Borrower’s Allowed Return and (B)
      Borrower’s Cash Flow Amount as of the date of determination of Net Profits plus
      interest on Borrower’s Cash Flow Amount from the date of receipt until such date
      of determination at six percent (6%) per annum, plus
      (v) the
      difference, if positive, between (A) Borrower’s Cash Flow Amount as of the date
      of determination of Net Profits plus interest on Borrower’s Cash Flow Amount
      from the date of receipt until such date of determination at nine percent (9%)
      per annum and (B) Borrower’s Maximum Permitted Return.

     

    1.12   “Net
      Profits Amount”
shall
      mean thirty-five percent (35%) of all Net Profits.

     

    1.13   “Operating
      Agreement”
shall
      mean the Limited Liability Company Agreement of Borrower as in existence from
      time to time.

     

    
      
        
        

      

      
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    1.14   “Organizational
      Documents”
shall
      have the meaning assigned to in Section
      4.2
      hereof.

     

    1.15   “Person”
shall
      mean any individual, corporation, partnership, limited liability company, joint
      venture, estate, trust, unincorporated association, any federal, state, county
      or municipal government or any bureau, department or agency thereof and any
      fiduciary acting in such capacity on behalf of any of the foregoing.

     

    1.16   “Proposed
      Budget”
shall
      have the meaning assigned to it in Section
      3.5
      hereof.

     

    1.17   “Uncontrollable
      Expenses”
means:
      (a) insurance premiums, (b) utility costs, (c) labor costs
      controlled by union or collective bargaining agreements
      or other
      industry-wide cost increases which are beyond the reasonable control of
      Borrower,
      (d) those costs required by applicable legal requirements, including
      property taxes, (e) leasing fees, brokerage commissions and other costs which
      vary based on the amount of space leased during the relevant period, including
      legal fees, (f) unanticipated elevator repair costs, (g) costs associated with
      an emergency or other circumstance where prompt action is necessary to alleviate
      conditions that require an immediate expenditure of funds in order to avoid,
      or
      lessen or reduce the likelihood of, personal injury or material damage to any
      real or personal property and (h) snow removal and
      other
      costs which vary based on weather or other factors beyond Borrower’s
      control.

     

    1.18   Further
      Definitional Provisions.

     

    (a) Defined
      terms used herein and not otherwise defined herein shall have the meaning set
      forth in the Loan Agreement.

     

    (b) Defined
      terms used in the singular shall include the plural and vice versa.

     

    (c) The
      words
“hereof”, “herein”, “hereunder” and similar terms when used in this Agreement,
      shall refer to this Agreement as a whole and not to any particular provision
      of
      this Agreement. “Including” means “including without limitation”.

     

    (d) All
      computations of Net Profits shall be determined in accordance with cash basis
      accounting principles reasonably acceptable to Lehman. If a promissory note
      or
      notes are delivered as all or a portion of the consideration for any Capital
      Transaction, then the cash proceeds, if and when received as a result of
      payments on such notes, shall be treated as Capital Proceeds only when actually
      received, and the receipt of any such notes shall not be deemed the receipt
      of
      cash for purposes hereof.

     

    ARTICLE
      2

     

    NET
      PROFITS AMOUNT

     

    2.1   Net
      Profits Amount.

     

    (a) Borrower
      shall pay to Lehman the Net Profits Amount in accordance with the terms of
      this
      Agreement simultaneously with receipt of any cash pursuant to any Capital
      Transactions; provided, however, that Borrower may establish a reasonable
      reserve or holdback for anticipated costs or expenses associated and incurred
      in
      connection with such Capital Transaction and which have not yet been determined;
      provided, however, that any amounts remaining in such reserve or holdback after
      payment of such costs or expenses shall be deemed Net Profits and shall be
      paid
      in accordance with the provisions of this Agreement. After the Net Profits
      Amount with respect to any Capital Transactions is paid to Lehman any remaining
      Net Profits with respect to such Capital Transaction may be distributed to
      Borrower’s members in accordance with the Operating Agreement. In all cases,
      Lehman must receive the Net Profits Amount with respect to any Capital
      Transactions prior to the distribution of any Net Profits with respect to any
      Capital Transactions to the members of Borrower. Lehman’s rights pursuant to
      this Agreement are independent of the Loan and shall survive the repayment
      of
      the Loan. Borrower’s obligation to pay the Net Profit Amount to Lehman shall be
      secured by a pledge of all the membership interests in Borrower as well as
      by
      pledges of
      all of
      the interests in the sole member of Borrower, subject to any pledges granted
      in
      connection with the Mezzanine Loan. The Borrower Parties acknowledge that Lehman
      may, subject to the terms hereof, transfer and assign Lehman’s rights pursuant
      to this Agreement separately from any of Lehman’s rights with respect to the
      Loan. Lehman’s rights with respect to the Net Profits Amount are fully earned
      upon execution and delivery of the Loan Agreement and are not conditioned on
      any
      act or occurrence whatsoever. In no event shall Lehman have any obligation
      to
      make any contributions to Borrower in exchange for Lehman’s rights with respect
      to the Net Profits Amount. If any portion of the Net Profits Amount is not
      timely paid to Lehman, any such amounts shall bear interest at the Default
      Rate.

     

    
      
        
        

      

      
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    (b) Lehman
      may not assign or encumber all or any part of its rights with respect to this
      Agreement without the consent or approval of Borrower, which shall not be
      unreasonably withheld, conditioned or delayed. If Borrower fails to respond
      to
      any request for any such approval within ten Business Days (which request for
      approval shall state in boldface type that if Borrower fails to respond, its
      approval shall be conclusively presumed to have been granted),
      such
      approval shall be conclusively presumed to have been granted. Any assignment
      (but not an encumbrance by Lehman) shall be subject to Section 7.6 as to
      Lehman. Lehman shall give Borrower written notice of any such assignment or
      encumbrance and in the absence of such notice, Borrower shall fulfill its
      obligations hereunder with respect to the payment of the Net Profits Amount
      by
      paying or causing any such amounts to be paid to Lehman. Upon any default by
      any
      Borrower Party with respect to this Agreement, in addition to any other remedies
      which Lehman may have at law or in equity, Lehman shall have the right to bring
      a suit for specific performance against any of the Borrower
      Parties.

     

    (c) The
      Borrower Parties and Lehman stipulate and agree that none of the terms and
      provisions contained in this Agreement shall ever be construed to create a
      contract to pay for the use, forbearance or detention of money in an amount
      in
      excess of the maximum amount permitted to be charged by applicable law, if
      any.
      None of Borrower Parties or other Person now or hereafter becoming liable for
      payment of the Loan shall ever be required to pay interest on the Loan in an
      amount in excess of the maximum amount which lawfully may be charged under
      Legal
      Requirements and the provisions of this paragraph shall control over all other
      provisions of this Agreement. If this Agreement, taken together with the
      interest otherwise contracted for, charged or received with respect to the
      Loan,
      shall exceed the maximum amount of interest allowed under applicable law, Lehman
      shall, at the option of Lehman, either refund to Borrower the amount of such
      excess or shall reduce the amount of this Agreement to the extent of such excess
      or shall credit the amount of such excess against the principal balance of
      the
      Loan then outstanding in such order and manner as Lehman may elect. The terms
      and provisions of this paragraph shall control every other provision of this
      Agreement, the Note, the Loan Agreement and all other agreements in connection
      with the Loan. All amounts not payable to Lehman under this Agreement on account
      of the foregoing limitation shall be retained by Borrower, provided that, if
      at
      a later date Lehman determines that a greater amount of the Net Profits could
      lawfully be paid to Lehman, all Net Profits thereafter received shall be paid
      to
      Lehman until Lehman shall have received, on a cumulative basis, the Net Profits
      Amount to which Lehman is entitled pursuant to this Agreement, subject to the
      limitations of this paragraph.

     

    
      
        
        

      

      
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    2.2   Relationship.
      It is
      not the intention of the parties that Lehman be or become a member, partner,
      joint venturer or other owner of or with Borrower unless and until Lehman
      exercises the Conversion Option . By entering into this Agreement and/or by
      accepting the Net Profits Amount, Lehman does not become a member, partner,
      joint venturer or owner of or with Borrower, and in no event shall Lehman become
      a member, a partner, joint venturer or owner of or with Borrower or be or become
      liable for any of the debts, obligations, or liabilities of Borrower as a result
      of the acceptance of the Net Profits Amount.

     

    2.3   Adjustment.
      Borrower shall not directly or indirectly, pay, distribute or cause to be paid
      or distributed to the holders of any of the interests in Borrower, prior to
      the
      exercise of the Conversion Option, any (i) cash (except for (a) cash flow (other
      than Capital Proceeds) distributed pursuant to Borrower’s Organizational
      Documents and (b) Capital Proceeds after payment of the Net Profits Amount);
      or
      (ii) any evidence of indebtedness, any further or additional interests in
      Borrower or any property of any nature whatsoever; or (iii) warrants, options
      or
      other rights to subscribe for or purchase any evidences of Borrower’s
      indebtedness or any interest in Borrower or in any other property of any nature
      whatsoever unless such warrants, options or other rights allow the holder to
      acquire only a portion of the existing rights of the existing owners of Borrower
      and are subject in all respects to the rights of Lehman hereunder; or (iv)
      any
      right to acquire any of the foregoing. Borrower shall not, directly or
      indirectly, prior to the exercise of the Conversion Option, reorganize its
      capital, reclassify its ownership interests, or consolidate or merge with any
      other Person, or take any similar action without the prior written consent
      of
      Lehman not to be unreasonably withheld. Additionally, Borrower shall not,
      directly or indirectly, prior to exercise of the Conversion Option, by
      any
      action, including without limitation, amend its Organizational Documents or
      through any reorganization, transfer of assets, consolidation, merger,
      dissolution, issue or sale of ownership interests or any other action, avoid
      or
      seek to avoid the observance or performance of the rights of Lehman pursuant
      to
      this Agreement (or pursuant to the Organizational Documents, after exercise
      of
      the Conversion Option), but will at all times in good faith assist in the
      carrying out of all such terms and in the taking of all such actions as may
      be
      necessary or appropriate to protect the rights of Lehman set forth in this
      Agreement (or pursuant to the Organizational Documents, after exercise of the
      Conversion Option). In the event of the taking of any action to dilute or
      otherwise adversely affect Lehman’s rights pursuant to this Agreement (and
      pursuant to the Organizational Documents after exercise of the Conversion
      Option), Lehman’s rights with respect to the Net Profits Amount shall be
      increased (but not decreased) automatically and without further action in order
      to maintain Lehman’s rights with respect to the Net Profits Amount as
      contemplated by this Agreement (and Lehman’s rights pursuant to the
      Organizational Documents after exercise of the Conversion Option) and Borrower
      agrees to take all actions necessary to evidence any such adjustment (although
      no such action shall be necessary). In no event may any of Borrower Parties
      amend or modify or take other action pursuant to the Organizational Documents
      of
      Borrower that would adversely affect Lehman’s rights to the Net Profits Amount
      or Lehman’s rights after the exercise of the Conversion Option and Borrower
      shall cause the Organizational Documents to provide (i) that such Organizational
      Documents are subject to this Agreement, (ii) that such Organizational Documents
      cannot be amended without Lehman’s prior written consent, and (iii) that the
      taking of any action to dilute or otherwise adversely affect Lehman’s rights
      pursuant to this Agreement or pursuant to the Organizational Documents of
      Borrower is prohibited. Notwithstanding the foregoing, after the Net Profits
      Amount with respect to any Capital Transaction then due to Lehman has been
      paid,
      Borrower may distribute any remaining Net Profits with respect to such Capital
      Transaction to its members, subject to the terms and conditions of the Loan
      Documents. In all events, however, the Net Profits Amount must be paid to Lehman
      prior to or simultaneously with the payment or distribution of any Net Profits
      to the members of Borrower.

     

    
      
        
        

      

      
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    2.4   Survival.
      Lehman’s rights pursuant to this Agreement shall survive the repayment of the
      Loan, until all of the Property is sold to a Person that is not an Affiliate
      of
      Borrower and payment in full is made to Lehman of the full Net Profits Amount
      or
      Borrower purchases Lehman’s interest pursuant to Section 7.6, at which time this
      Agreement will terminate and be of no further force or effect. 

     

    ARTICLE
      3

     

    AFFIRMATIVE
      COVENANTS

     

    Unless
      and until all of the Property is sold to a Person that is not an Affiliate
      of
      Borrower and Lehman is paid the Net Profits Amount in full (and notwithstanding
      any repayment of the Loan) Borrower covenants and agrees that unless Lehman
      otherwise consents in writing:

     

    3.1   Notifications
      from
      Borrower.
      Borrower shall promptly notify Lehman in writing of each of the
      following:

     

    (a) Any
      change in any material fact or circumstance represented or warranted in this
      Agreement; and

     

    (b) Any
      proposed Major Decision.

     

    3.2   Maintenance
      and Granting of Liens and Security Interests.
      Borrower shall execute and deliver to Lehman all security agreements, financing
      statements, documents and instruments, and do such other things as are required
      by this Agreement, or as Lehman shall reasonably request or deem reasonably
      necessary in order to maintain the validity, enforceability and perfection
      of
      Lehman’s rights pursuant to this Agreement.

     

    3.3   No
      Encumbrances or Liens.
      Except
      for the Loan Documents, Borrower shall not permit any other liens, encumbrances,
      mortgages, deeds of trust or unbonded mechanic’s or materialman’s liens to
      affect any portion of the Property without Lehman’s written consent. Lehman
      shall have no obligation to consent to any such lien. Notwithstanding the
      foregoing, after prior written notice to Lender, Borrower, at its own expense,
      shall have the right to contest the existence of any liens, encumbrances,
      mortgages, deeds of trust or unbonded mechanic’s or materialman’s liens
      affecting any portion of the Property, subject to the terms and conditions
      set
      forth in Section 5.4 of the Loan Agreement.

     

    
      
        
        

      

      
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    3.4   Major
      Decisions.
      Notwithstanding anything to the contrary contained in this Agreement, no act
      shall be taken, sum expended, decision made or obligation incurred by Borrower
      or any Affiliate with respect to a Major Decision without the prior written
      consent of Lehman; provided, however, that Lehman will not unreasonably withhold
      its consent with respect to the matters listed in clauses (xiii), (xiv), (xv),
      (xvi) or (xxi) of the definition of Major Decision.

     

    3.5   Budget.
      Borrower shall prepare and deliver to Lehman, within sixty (60) days prior
      to
      the beginning of each calendar year, an annual expenditure budget for Borrower
      and the Property, if any, including all planned capital expenditures and all
      anticipated costs and expenses for such ensuing calendar year (“Proposed
      Budget”).
      The
      Proposed Budget shall also include a business plan for the Borrower’s proposed
      operations during the forthcoming calendar year, including Borrower’s proposed
      leasing guidelines. The Proposed Budget shall be prepared and submitted in
      a
      form reasonably acceptable to Lehman and shall set forth in reasonable detail
      budgeted capital and other expenses. Lehman shall have the right to approve
      each
      Proposed Budget in Lehman’s reasonable discretion. In the event that Lehman
      objects to the Proposed Budget submitted by the Borrower, Lehman shall advise
      the Borrower of such objections within fifteen (15) Business Days after receipt
      thereof (and deliver to the Borrower a reasonably detailed description of such
      objection) and the Borrower shall promptly revise such Proposed Budget and
      resubmit the same to Lehman. Lehman shall advise the Borrower of any objections
      to such revised Proposed Budget, in Lehman’s reasonable discretion, within ten
      (10) Business Days after receipt thereof (and deliver to the Borrower a
      reasonably detailed description of such objection) and the Borrower shall
      promptly revise the same in accordance with the process described in this
Section
      3.5
      until
      Lehman approves a Proposed Budget, in Lehman’s reasonable discretion; provided
      that, if Lehman fails to approve such a Proposed Budget, the operating budget
      and the capital expenditure budget for such calendar year shall be the budget
      attached hereto as Exhibit
      A
      (the
“Business
      Plan”).
      Each
      such Proposed Budget approved by Lehman in accordance with terms hereof (or,
      if
      applicable, the Proposed Budget for such year included in the Business Plan
      referred to in the proviso to the immediately preceding sentence) shall
      hereinafter be referred to as an “Approved
      Budget.”
      Notwithstanding the foregoing, Borrower may exceed the Approved Budget for
      all
      line items by up to five percent (5%) of the total amount of the Budget for
      all
      line items in any calendar year and may incur Uncontrollable Expenses without
      Lehman’s consent. 

     

    ARTICLE
      4

     

    REPRESENTATIONS
      AND WARRANTIES

     

    To
      induce
      Lehman to enter into this Agreement, Borrower hereby represents and warrants
      to
      Lehman as follows:

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    4.1   Authorization.
      Borrower is duly authorized to execute and deliver this Agreement and all other
      documents to be executed in connection herewith, and is and will continue to
      be
      authorized to perform its obligations under this Agreement and such other
      agreements.

     

    4.2   Organizational
      Documents.
      Attached hereto as Exhibit
      B
      is a
      true and correct copy of the Operating Agreement and all other Organizational
      Documents of Borrower together with all amendments thereto, if any (the
“Organizational
      Documents”).
      Borrower shall not amend, modify, or supplement the Operating Agreement or
      any
      of the Organizational Documents of Borrower and shall not admit any additional
      members in Borrower, without the prior written consent of Lehman in each
      instance, which consent may be withheld in Lehman’s sole and absolute
      discretion. Any attempt to do so shall be null and void and of no force or
      effect.

     

    4.3   Consents.
      No
      consent, approval, authorization or order of any court or governmental
      authority, or third party is required in connection with the execution and
      delivery by Borrower of this Agreement and the other documents to be executed
      in
      connection herewith, or to consummate the transactions contemplated
      hereby.

     

    4.4   Enforceable
      Obligations.
      This
      Agreement and the other documents to be executed in connection herewith, when
      duly executed and delivered in accordance with this Agreement, will be the
      legal
      and binding obligations of Borrower and enforceable in accordance with their
      respective terms, except as limited by bankruptcy, insolvency or other laws
      of
      general application relating to the enforcement of creditors’
rights.

     

    4.5   Restatement
      and Representations.
      Borrower hereby restates all of the representations and warranties made by
      each
      of the Borrower Parties in the Loan Agreement for the benefit of Lehman as
      if
      such representations were fully set forth herein.

     

    ARTICLE
      5

     

    DEFAULTS

     

    5.1   Events
      of
      Default.
      An
      Event of Default shall exist if any one or more of the following events (herein
      called “Events
      of Default”)
      shall
      occur:

     

    (a) The
      failure by Borrower to make any payment (other than the failure to pay the
      Net
      Profits Amount) on or before the fifth (5th) Business Day after the same are
      due
      to Lehman as required by this Agreement or the failure by Borrower to pay the
      Net Profits Amount on the date when due;

     

    (b) The
      failure or refusal of Borrower to keep or perform any covenant or other term
      or
      condition specified herein for a period of thirty (30) days after written notice
      from Lehman;

     

    (c) The
      incorrectness in any material respect, as of the date hereof, of any
      representation or warranty made by Borrower to Lehman herein;

     

    (d) The
      application for or the appointment of a receiver, trustee, intervenor, custodian
      or liquidator of Borrower;

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (e) The
      act
      of Borrower in taking or permitting to be taken any action seeking relief or
      an
      order for relief under, or any other action taking advantage of, any bankruptcy,
      debtor relief or similar laws;

     

    (f) The
      filing of an involuntary petition against Borrower under any bankruptcy,
      insolvency or reorganization provision of any debtor relief or similar laws
      if
      such petition (1) results in the entry of an order for relief or any such
      adjudication or appointment or (2) remains undismissed, undischarged or
      unbonded for a period of ninety (90) days; or 

     

    (g) any
      “Event of Default” as defined in the Loan Agreement if the Loan Agreement is
      still in effect.

     

    5.2 Rights
      of Lehman.
      Upon
      the occurrence of an Event of Default, Lehman shall have the right, at its
      sole
      option and without further notice to Borrower, to pursue all available rights
      or
      remedies, at law or in equity or under this Agreement and any documents securing
      this Agreement, including any pledge agreements. In this regard, in addition
      to
      any other remedies which Lehman may have at law or in equity, Borrower
      acknowledges that an action for damages is inadequate to protect Lehman’s rights
      and thus Lehman shall have the right to bring a suit for specific performance
      or
      injunctive or other equitable relief. 

     

    ARTICLE
      6

     

    RIGHT
      OF FIRST OFFER

     

    6.1   Right
      of First Offer on Property or Interests in Borrower.
      If at
      any time Borrower wishes to transfer the Property or any portion thereof, or
      any
      Owning Entity wishes to Transfer its direct or indirect interest (or any portion
      thereof) in Borrower (the “Equity
      Interest”;
      and/or
      the Property shall be referred to as the “Subject
      Interests”)
      such
      Person (“a
      Transferring Party”)
      shall
      provide not less than fifteen (15) days’ prior written notice (the “ROFO
      Notice”)
      to
      Lehman. The ROFO Notice shall set forth all of the material terms of the
      proposed transfer (including the identification of the Subject Interest to
      be
      transferred and the price payable in cash, at which the Transferring Party
      would
      be willing to sell the Subject Interest (the “ROFO
      Price”)
      and
      specifying any liens or encumbrances that will not be discharged in connection
      with any such sale). Upon receipt of a ROFO Notice, Lehman will have the right
      to purchase the Subject Interest of the Transferring Party on the terms set
      forth in such ROFO Notice by Lehman delivering written notice thereof to the
      Transferring Party (the “Election
      Notice”)
      within
      fifteen (15) days after receipt of the applicable ROFO Notice together with
      a
      deposit in an amount equal to ten percent (10%) of the ROFO Price (“Deposit”).
      The
      Deposit shall be delivered to an escrow agent acceptable to Lehman and the
      Transferring Party and will be held in an interest-bearing, segregated account
      at a federally insured financial institution. If Lehman fails to timely deliver
      an Election Notice and/or the Deposit, Lehman shall be deemed to have
      irrevocably waived its rights under this Section
      6.1
      with
      respect to the applicable ROFO Notice, except as provided below. Notwithstanding
      anything to the contrary herein, any Owning Entity may Transfer its direct
      or
      indirect interest (or any portion thereof) in Borrower in connection with a
      Permitted Transfer (as defined in the Loan Agreement), so long as such
      transferee executes and delivers to Lehman a Joinder and Consent in
      substantially the same form as the Joinder and Consent attached hereto whereby
      it agrees to be bound by the terms of this Agreement.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    6.2   If
      Lehman
      validly and timely delivers an Election Notice and the Deposit, the closing
      of
      the purchase shall be on a date (the “ROFO
      Closing Date”)
      designated by Lehman which is not more than forty-five (45) days after the
      delivery of the Election Notice and at a place designated in the ROFO Notice
      (or
      if the ROFO Notice does not designate a closing place, at such place as may
      be
      mutually agreed upon between the Transferring Party and Lehman, and otherwise
      such closing shall be in escrow). At the closing:

     

    (i) The
      Transferring Party shall deliver to Lehman (or a nominee thereof) a duly
      executed and acknowledged instrument of assignment or conveyance transferring
      the Subject Interest to Lehman (or its nominee) free and clear of all liens
      and
      encumbrances (other than the liens and encumbrances which the ROFO Notice
      specified would not be discharged at closing), which instrument shall contain
      surviving representations concerning due organization and authority of the
      Transferring Party and the absence of liens and encumbrances (other than the
      liens and encumbrances which the ROFO Notice specified would not be discharged
      at closing) and shall contain a provision indemnifying and holding Lehman (or
      its nominee) harmless from any loss, liability, cost or expense (including
      reasonable attorneys’ fees) it may incur by reason of any breach of such
      representation;

     

    (ii) Lehman
      shall pay or cause to be paid the ROFO Price to the Transferring Party in
      immediately available funds;

     

    (iii) all
      prorations shall be apportioned between the Transferring Party and Lehman for
      the current calendar period, as of 11:59 p.m. of the day preceding the ROFO
      Closing Date; and

     

    (iv) the
      Transferring Party shall discharge of record all liens and encumbrances
      affecting its Subject Interest (other than the liens and encumbrances which
      the
      ROFO Notice specified would not be discharged at closing), and if the
      Transferring Party fails to do so, Lehman (or its nominee) may use any portion
      of the ROFO Price to pay and discharge any such liens and/or encumbrances and
      any related expenses and adjourn the closing for such period as may be necessary
      for such purpose.

     

    6.3   If
      Lehman
      waives (or is deemed to have waived) its right to acquire the Subject Interest
      offered by the Transferring Party in a given ROFO Notice, the Subject Interest
      offered by the Transferring Party may be sold by the Transferring Party, for
      not
      less than ninety-five percent (95%) of the ROFO Price offered to Lehman, at
      any
      time during the next one hundred eighty (180) day period subsequent to the
      earlier of receipt of the written waiver by all of Lehman of its right to
      purchase the interests being offered by the Transferring Party under
Section
      6.1
      and the
      expiration of the thirty (30) day period for Lehman to respond to the ROFO
      Notice with no such written waiver being delivered. 

     

    6.4   In
      the
      event the Transferring Party fails to consummate any sale or transfer of the
      Subject Interest for the ROFO Price or within the time period provided in
Section
      6.3,
      then
      the Subject Interest shall be re-offered to Lehman in connection with any
      further proposed transfer. 

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    6.5   Lehman
      shall be deemed to
      have waived its right of first offer with respect to a Subject Interest that
      is
      part of a settlement arrangement entered into with respect to the Kamber
      Litigation if and to the extent the terms of the settlement arrangement are
      approved by Lehman. 

     

    ARTICLE
      7

     

    GENERAL
      TERMS AND CONDITIONS

     

    7.1   Notices.
      All
      notices, demands, requests and other communications shall be given and become
      effective as provided in the Loan Agreement, the provisions of which are
      incorporated hereby by reference as if fully set forth herein.

     

    7.2   Modifications.
      No
      provisions of this Agreement or any other documents executed in connection
      herewith may be modified, waived or terminated, except by an instrument in
      writing executed by the party against whom a modification, waiver or termination
      is sought to be enforced.

     

    7.3   Severability.
      In case
      any of the provisions of this Agreement shall for any reason be held to be
      invalid, illegal or unenforceable, such invalidity, illegality or
      unenforceability shall not affect any other provision hereof, and the Agreement
      shall be construed as if such invalid, illegal or unenforceable provision had
      never been contained herein.

     

    7.4   Binding
      Effect.
      This
      Agreement shall be binding upon, and inure to the benefit of Lehman and Borrower
      and their respective permitted successors and/or assigns.

     

    7.5   Governing
      Laws.
      THIS
      AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF
      THE
      STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. THIS CHOICE
      OF LAW IS MADE PURSUANT TO NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1401.
      THE
      BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE
      OR
      FEDERAL COURT SITTING IN THE COUNTY OF NEW YORK IN ANY ACTION OR PROCEEDING
      ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER DOCUMENT DELIVERED
      IN
      CONNECTION HEREWITH OR THEREWITH, AND THE BORROWER HEREBY IRREVOCABLY AGREES
      THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MUST BE HEARD AND
      DETERMINED IN SUCH NEW YORK STATE COURT, OR TO THE EXTENT PERMITTED BY LAW,
      IN
      SUCH FEDERAL COURT. THE BORROWER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST
      EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE
      MAINTENANCE OF SUCH ACTION OR PROCEEDING. TO THE EXTENT PERMITTED BY LAW, THE
      BORROWER ALSO IRREVOCABLY CONSENTS TO THE SERVICE OF ANY AND ALL PROCESS IN
      ANY
      SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES (CERTIFIED MAIL, RETURN
      RECEIPT REQUESTED AND POSTAGE PREPAID) OF SUCH PROCESS TO THE BORROWER AT ITS
      ADDRESS SET FORTH ABOVE. THE BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH
      ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER
      JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW.
      THIS CONSENT TO JURISDICTION IS MADE PURSUANT TO NEW YORK GENERAL OBLIGATIONS
      LAW SECTION 5-1402.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    7.6   Assignment
      by Lehman;
      Right of First Offer in Agreement.
      Lehman
      may not assign or transfer its rights pursuant to this Agreement without
      Borrower’s prior written consent, which consent shall not be unreasonably
      withheld, conditioned or delayed. In addition, if at any time Lehman wishes
      to
      transfer its interest in this Agreement (the “NPA
      Interest”),
      Lehman shall provide not less than thirty (30) days’ prior written notice (the
“NPA
      ROFO Notice”)
      to
      Borrower. The NPA ROFO Notice shall set forth all of the material terms of
      the
      proposed transfer (including the identification of the NPA Interest to be
      transferred and the price payable in cash, at which Lehman would be willing
      to
      sell the NPA Interest (the “NPA
      ROFO Price”)
      and
      specifying any liens or encumbrances that will not be discharged in connection
      with any such sale). Upon receipt of a NPA ROFO Notice, Borrower will have
      the
      right to purchase the NPA Interest of Lehman on the terms set forth in such
      NPA
      ROFO Notice by Borrower delivering written notice thereof to Lehman (the
“NPA
      Election Notice”)
      within
      thirty (30) days after receipt of the applicable NPA ROFO Notice together with
      a
      deposit in an amount equal to ten percent (10%) of the NPA ROFO Price
      (“NPA
      Deposit”).
      The
      NPA Deposit shall be delivered to an escrow agent acceptable to Borrower and
      Lehman and will be held in an interest-bearing, segregated account at a
      federally insured financial institution. If Borrower fails to timely deliver
      an
      NPA Election Notice and/or the NPA Deposit, Borrower shall be deemed to have
      irrevocably waived its rights under this Section
      7.6
      with
      respect to the applicable NPA ROFO Notice, except as provided below.

     

    7.7   If
      Borrower validly and timely delivers an NPA Election Notice, the closing of
      the
      purchase shall be on a date (the “NPA
      ROFO Closing Date”)
      designated by Borrower which is not more than forty-five (45) days after the
      delivery of the NPA Election Notice and at a place designated in the NPA ROFO
      Notice (or if the NPA ROFO Notice does not designate a closing place, at such
      place as may be mutually agreed upon between Lehman and Borrower, and otherwise
      such closing shall be in escrow). At the closing:

     

    (i) Lehman
      shall deliver to Borrower (or a nominee thereof) a duly executed and
      acknowledged instrument of assignment or conveyance transferring the NPA
      Interest to Borrower (or its nominee) free and clear of all liens and
      encumbrances (other than the liens and encumbrances which the NPA ROFO Notice
      specified would not be discharged at closing), which instrument shall contain
      surviving representations concerning due organization and authority of Lehman
      and the absence of liens and encumbrances (other than the liens and encumbrances
      which the NPA ROFO Notice specified would not be discharged at closing) and
      shall contain a provision indemnifying and holding Borrower (or its nominee)
      harmless from any loss, liability, cost or expense (including reasonable
      attorneys’ fees) it may incur by reason of any breach of such
      representation;

     

    (ii) Borrower
      shall pay or cause to be paid the NPA ROFO Price to Lehman in immediately
      available funds; and

     

    (iii) Lehman
      shall discharge of record all liens and encumbrances affecting its NPA Interest
      (other than the liens and encumbrances which the NPA ROFO Notice specified
      would
      not be discharged at closing), and if Lehman fails to do so, Borrower (or its
      nominee) may use any portion of the NPA ROFO Price to pay and discharge any
      such
      liens and/or encumbrances and any related expenses and adjourn the closing
      for
      such period as may be necessary for such purpose.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    7.8   If
      Borrower waives (or is deemed to have waived) its right to acquire the NPA
      Interest offered by Lehman in a given NPA ROFO Notice, the NPA Interest offered
      by Lehman may be sold by Lehman, for not less than ninety-five percent (95%)
      of
      the NPA ROFO Price offered to Borrower, at any time during the next one hundred
      eighty (180) day period subsequent to the earlier of receipt of the written
      waiver by all of Borrower of its right to purchase the interests being offered
      by Lehman under Section
      7.6
      and the
      expiration of the thirty (30) day period for Borrower to respond to the NPA
      ROFO
      Notice with no such written waiver being delivered. 

     

    7.9   In
      the
      event Lehman fails to consummate any sale or transfer of the NPA Interest for
      the NPA ROFO Price or within the time period provided in Section
      7.8,
      then
      the NPA Interest shall be re-offered to Borrower in connection with any further
      proposed transfer. 

     

    7.10   Assignment
      by Borrower.
      Borrower may not transfer or assign, directly or indirectly, any of its
      obligations pursuant to this Agreement.

     

    7.11   Counterparts.
      This
      Agreement may be executed in any number of separate counterparts, each of which
      shall, collectively and separately, constitute one agreement.

     

    7.12   Sole
      Discretion; Reasonable Discretion.
      Except
      as specifically provided, whenever in this Agreement, Lehman may or must consent
      to or approve any action or inaction or any fact or condition must be
      satisfactory to Lehman, such consent or approval must be satisfactory to Lehman,
      in Lehman’s sole and absolute discretion, without any express or implied
      obligation of reasonableness or good faith unless otherwise provided to the
      contrary provided herein. In the event Lehman has agreed not to unreasonably
      withhold its consent, Borrower’s sole remedy in the event Lehman refuses to
      grant such consent shall be to seek specific performance or other equitable
      relief, and in no event shall Borrower have the right to seek monetary damages
      as a result of Lehman withholding its consent pursuant to any provision of
      this
      Agreement.

     

    7.13 Waiver
      of Jury Trial.
      THE
      BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF
      RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT
      ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS AGREEMENT,
      OR
      ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS
      WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY THE
      BORROWER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH
      ISSUE
      AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. LEHMAN IS
      HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS
      CONCLUSIVE EVIDENCE OF THIS WAIVER BY THE BORROWER.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    7.14   Certain
      Provisions
      Relating to Lehman and its Affiliates.
      The
      Borrower and each of the Owning Entities expressly acknowledge that (y) Lehman
      or one of its Affiliates (in such capacity, “Lender”)
      has
      provided the Loan and Mezzanine Loan, and (z) in the future Lender may purchase
      or acquire indebtedness of the Borrower or any Owning Entity from time to time
      without notice to or approval by the Borrower or any Owning Entity and whether
      or not any such financing or indebtedness is in default. Notwithstanding any
      common ownership between the Lehman and the Lender: (a) Lehman, on the one
      hand, and the Lender, on the other hand, may or may not be separate and distinct
      legal entities but in all events have different investment goals and objectives;
      (b) the Lender may exercise all the rights, privileges and benefits of the
      holder of any such financing or indebtedness and enforce all remedies and other
      provisions under the applicable documents evidencing or describing such
      financing or indebtedness without regard to the fact that Lehman is the
      beneficiary of this Agreement; and (c) to the maximum extent permitted by
      applicable law, (I) the Borrower and the Owning Entities waive any claims
      that the Borrower and the Owning Entity may have against Lehman arising by
      reason of the fact that Lehman is the Lender and (ii) the Borrower and the
      Owning Entities waive any claims that the Borrower and such Owning Entities
      may
      have against Lehman arising by reason of the fact that Lender is making, or
      that
      the Lender is holding, the Loan or any other financing or indebtedness of the
      Borrower.

     

    7.15   Proposal
      for New Debt Financing.
      

     

    (i) In
      addition to Lehman’s rights set forth in Article 9, Lehman shall have the right
      to propose to Borrower New Debt Financing (as hereinafter defined) at any time
      and from time to time provided that such New Debt Financing (a) shall be
      prepayable without premium after 1 year following the closing date of such
      New
      Debt Financing, (b) results in Net Profits of at least five percent (5%) of
      the
      total debt and equity invested in the Property by Borrower and its Affiliates
      at
      the time in question, (c) is on terms and conditions no worse than then market
      terms and conditions, and (d) is non-recourse except for customary carve-outs,
      and (e) is for an amount no less than the Loan (including any unfunded
      amount).

     

    (ii) In
      the
      event that Lehman makes any such proposal to Borrower, Borrower shall have
      thirty (30) days to evaluate the proposal and advise Lehman as to whether
      Borrower will enter into such New Debt Financing. 

     

    (iii) In
      the
      event Borrower fails to agree to enter into such New Debt Financing within
      such
      30-day period, Lehman may at any time within the following thirty (30) days
      advise Borrower of the terms and conditions of a proposed New Debt Financing
      that satisfies the criteria set forth in clause (i) above. In such event,
      Borrower shall effectuate such New Debt Financing within ninety (90) days
      following Lehman’s proposal. 

     

    (iv) In
      all
      events, the provisions of Article 9 shall apply to any financing or refinancing
      described in this Section
      7.15.

     

    7.16   Lehman’s
      Approval.
      If
      Lehman fails to grant or withhold its consent or approval in writing
      (i) within a period of ten (10) Business Days after it has received a
      request for consent or approval under this Agreement and (ii) within an
      additional period of five (5) Business Days after it has received a second
      request for consent and which second notice shall advise Lehman (in 14-point
      type or larger) that if Lehman fails to respond to Borrower’s second request for
      consent within such five (5) Business Day period Lehman shall be deemed to
      have
      approved or consented to the matter in question, then Lehman shall be deemed
      to
      have approved or consented to such matter.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      8

     

    CONVERSION
      OPTION 

     

    8.1   Conversion
      Option.
      Lehman
      shall have the option (the “Conversion
      Option”),
      at
      any time in Lehman’s sole discretion, by delivering written notice to Borrower
      and its constituent member(s), to elect to convert Lehman’s rights pursuant to
      this Agreement into a membership interest in Borrower (the “Conversion”)
      as
      more fully set forth in this Article. Upon exercise of the Conversion Option,
      Lehman and Borrower and the members of Borrower shall execute and deliver such
      documentation as either party may reasonably request in order to evidence the
      exercise of the Conversion Option and the admission of Lehman to Borrower.
      In
      the event Lehman exercises such option, Lehman shall thereafter have no further
      right to any Net Profits Amount thereafter received pursuant to this Agreement
      (Lehman’s rights with respect thereto being governed by the Operating Agreement
      of Borrower after Lehman so elects to convert). In no event may any of the
      Borrower Parties amend or modify or take other action pursuant to the
      Organizational Documents of any of the Borrower Parties that would adversely
      affect Lehman’s rights to the Net Profits Amount and the Organizational
      Documents of the Borrower Parties shall prohibit the taking of any such action
      and the Borrower Parties shall comply with such provisions of the Organizational
      Documents. 

     

    8.2   Amendment
      of Operating Agreement.
      Upon
      Lehman’s exercise of the Conversion Option, the Operating Agreement of the
      Borrower shall be amended to grant to Lehman a special membership interest
      whereby Lehman will receive 35% of all distributions resulting from a Capital
      Transaction after the return to the members of Borrower of their cash equity
      investment in Borrower plus the Borrower’s Allowed Return. All members of the
      Borrower hereby irrevocably consent and agree to (a) the issuance of such
      special membership interest to Lehman upon the date of the Conversion (the
      “Conversion
      Date”)
      and
      (b) the admission of Lehman as a Special Member (the “Special
      Member”)
      effective on the Conversion Date. On the Conversion Date, the members of
      Borrower shall execute an amendment to the Operating Agreement of Borrower
      effectuating the transactions contemplated by this Article in form and substance
      acceptable to Borrower and Lehman (the “Amendment”)
      and
      acknowledging the admission of Lehman as the Special Member subject to the
      terms, rights and obligations of this Agreement and the Amendment. The failure
      to execute the Amendment shall be an Event of Default under this Agreement.
      Simultaneously with any distributions to the members of Borrower, the Special
      Member shall receive the Net Profits Amount in full in cash as the result of
      a
      Capital Transaction.

     

    8.3   Rights
      of Special Member.
      Without
      limiting the foregoing, upon and after admission to the Borrower: (i) the
      Special Member shall have the rights afforded to Lehman under this Agreement,
      including, without limitation, rights to approve the Major Decisions, and (ii)
      the Special Member shall not have any obligation to contribute money or property
      for any reason or any circumstance, and shall have no obligation or liability
      in
      respect of debts, liabilities or other obligations of the Borrower, or to make
      loans to the Borrower. 

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      9

     

    NEW
      DEBT FINANCING 

     

    If
      Borrower or its constituent member(s) or the direct or indirect members of
      such
      constituent member(s) desires to obtain additional or replacement debt
      financing, which is in any way related to the Property, whether in the form
      of
      refinancing or restructuring of all or part of any existing debt financing
      or by
      obtaining additional debt financing (whether secured or unsecured) for any
      purpose (collectively, “New
      Debt Financing”),
      Borrower shall notify Lehman of its intent to seek such New Debt Financing.
      Within ten (10) days of receiving such notification from Borrower, Lehman (or
      its Affiliates) shall have the right (but without any obligation to do so)
      to
      submit to Borrower a term sheet, which shall contain all of the material terms
      for the proposed New Debt Financing (the “Lehman
      Offer”).
      Borrower shall not obtain New Debt Financing offered by a third party lender
      unless such New Debt Financing proposed by such third party lender (the
“Third
      Party Offer”)
      taken
      as a whole is materially better in terms of proceeds, rate and structure than
      the Lehman Offer, in which case Borrower shall notify Lehman of such Third
      Party
      Offer and Lehman (or its Affiliates) shall have the right (but without any
      obligation to do so), within five (5) Business Days of receipt of such notice
      from Borrower, to propose New Debt Financing which, taken as a whole, is on
      terms at least as favorable as those contained in the Third Party Offer. In
      such
      event, Borrower shall consummate such transaction with Lehman and not with
      the
      third party lender. Notwithstanding anything to the contrary, Lehman shall
      not
      be required to approve any New Debt Financing that would result in no Net
      Profits or that would result in New Debt Financing less than 75% loan to value
      (based on the Property’s stabilized value) in Lehman’s reasonable determination.
      In the event the parties dispute the stabilized value of the Property, each
      party will obtain an appraisal from a third party appraiser. In the event the
      appraisers cannot agree, the appraisers will select a third appraiser whose
      valuation of the Property (assuming stabilization) shall be deemed the value
      of
      the Property for purposes of determining the loan to value ratio.

     

    [SIGNATURES
      APPEAR ON THE FOLLOWING PAGE]

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

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

     

    
      	 	 	 
	 	1407
              BROADWAY REAL ESTATE LLC
	 
 	 
 	 
 
	 	By:  	/s/
              David Lichtenstein
	 	
              
Name:
              David Lichtenstein
	 	Title:
              President  

    

     

     

    
      	 	/s/
              LEHMAN BROTHERS HOLDINGS INC.
	 	 
	 	 	 
	 	 	 
	 	THE
              FOLLOWING PARTIES ARE EXECUTING THIS AGREEMENT SOLELY FOR THE PURPOSE
              OF
              ARTICLE 6 AND SECTIONS 7.15 AND 7.13:
	 	 
	 	1407 BROADWAY MEZZ
              LLC
	 
 	 
 	 
 
	 	By:  	/s/ David Lichtenstein
	 	
              
Name:
              David Lichtenstein
	 	Title:
              President  

    
      	 	 	 
	 	1407
              BROADWAY MEZZ II LLC
	 
 	 
 	 
 
	 	By:  	/s/ David Lichtenstein
	 	
              
Name:
              David Lichtenstein
	 	Title:
              President 

    

    

    
      	 	 	 
	 	LIGHTSTONE
              1407 MANAGER LLC
	 
 	 
 	 
 
	 	By:  	/s/ David Lichtenstein
	 	
              
Name:
              David Lichtenstein
	 	Title:
              President  

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	 	 	 
	 	LVP
              1407 BROADWAY LLC,
              
	 	a Delaware limited liability
              company
	 
 	 
 	 
 
	 	By:  	Lightstone
              Value Plus REIT LP, 
	 	 	a Delaware limited partnership, 
	 	 	its sole member

    

     

    
      	 	 	 
	 	By:  	Lightstone
              Value
              Plus Real Estate   
	 	Investment Trust, Inc.,
              a
              Maryland 
	 	corporation,
              its
              general partner

    

     

    
      	 	 	 
	 	By:  	 
	 	
              
Name:
              David Lichtenstein
	 	Title:
              President  

    

    

    
      	 	 	 
	 	LIGHTSTONE
              HOLDINGS, LLC
	 
 	 
 	 
 
	 	By:  	 
	 	
              
Name:
              David Lichtenstein
	 	Title:
              President  
	 	 
	 	
              
SHIFRA
              LICHTENSTEIN

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    JOINDER
      AND CONSENT

     

    The
      undersigned (“Joinder
      Party”)
      has
      reviewed the Net Profits Agreement (“Agreement”)
      dated
      as of January 4, 2007 between Lehman Brothers Holdings Inc. (“Lehman”),
      and
      1407 Broadway LLC, a Delaware limited liability company (“Borrower”),
      to
      which this Joinder and Consent has been attached, and hereby covenants,
      represents, warrants, acknowledges and agrees that:

     

    (a) Joinder
      Party has read and reviewed the Agreement, and is familiar with the terms and
      provisions thereof.

     

    (b) Joinder
      Party consents to the Borrower’s execution of the Agreement without reservation
      or qualification.

     

    (c) Joinder
      Party covenants and agrees to cooperate with Borrower and each other Borrower
      Party in the performance and observance of all covenants and agreements
      contained in the Agreement on the part of Borrower or any other Borrower Party
      as necessary to comply or facilitate Borrower’s or such other Borrower Party’s
      compliance therewith.

     

    (d) Joinder
      Party hereby agrees to be primarily liable, on a joint and several basis with
      Borrower, for the amount of any Net Profits Amount due and payable to Lehman
      pursuant to this Agreement.

     

    (e) WHENEVER
      ANY PROVISION OF THE AGREEMENT PROVIDES FOR OR REFERS TO (i) THE ACKNOWLEDGMENT
      OR AGREEMENT OF A JOINDER PARTY, (ii) THE WAIVER OR RELEASE OF RIGHTS BY ANY
      JOINDER PARTY, (iii) THE GRANT BY SUCH JOINDER PARTY OF A POWER OF ATTORNEY
      IN
      FAVOR OF LEHMAN OR (iv) THE APPOINTMENT BY A JOINDER PARTY OF AN AGENT FOR
      THE
      SERVICE OF PROCESS, EACH JOINDER PARTY HEREBY CONSENTS TO AND CONFIRMS SUCH
      ACKNOWLEDGMENT, AGREEMENT, WAIVER, GRANT OR APPOINTMENT (AS THE CASE MAY BE)
      AS
      BEING ITS ACKNOWLEDGMENT, AGREEMENT, WAIVER, GRANT AND APPOINTMENT AS FULLY
      AS
      IF SUCH ACKNOWLEDGMENT, AGREEMENT, WAIVER, GRANT OR APPOINTMENT (AS THE CASE
      MAY
      BE) WERE FULLY SET FORTH HEREIN.

     

    (f) JOINDER
      PARTY HEREBY WAIVES ANY AND ALL RIGHTS OR CLAIMS JOINDER PARTY NOW HAS OR MAY
      HEREAFTER HAVE AGAINST BORROWER OR ANY BORROWER PARTY OR ANY OTHER PARTY TO
      THE
      AGREEMENT, WHETHER BY WAY OF SUBROGATION, CONTRIBUTION, REIMBURSEMENT OR
      OTHERWISE, ARISING BECAUSE OF JOINDER PARTY’S PAYMENT OR PERFORMANCE OF ANY OF
      THE OBLIGATIONS. JOINDER PARTY WAIVES ALL SURETYSHIP DEFENSES OF EVERY KIND
      AND
      NATURE. 

     

    (g) JOINDER
      PARTY ACKNOWLEDGES AND AGREES THAT ANY INDEBTEDNESS (AS SUCH TERM IS DEFINED
      IN
      THE LOAN AGREEMENT) OF BORROWER TO JOINDER PARTY OR TO ANY AFFILIATE OF JOINDER
      PARTY (“AFFILIATE
      INDEBTEDNESS”),
      WHETHER EXISTING PRIOR TO, ON OR AFTER SUCH MATURITY DATE, IS AND SHALL AT
      ALL
      TIMES BE SUBJECT AND SUBORDINATE TO ALL OF THE OBLIGATIONS OF BORROWER TO
      LEHMAN. JOINDER PARTY, ON BEHALF OF ITSELF AND ITS AFFILIATES, HEREBY
      IRREVOCABLY WAIVES ANY RIGHT, CLAIM OR CAUSE OF ACTION TO COLLECT OR OBTAIN
      ANY
      REIMBURSEMENT, RETURN OR REPAYMENT OF SUCH INDEBTEDNESS. UNLESS AND UNTIL THE
      NET PROFITS HAVE BEEN PAID IN FULL TO LEHMAN AND ALL OTHER OBLIGATIONS HAVE
      BEEN
      FULLY SATISFIED, ANY AMOUNTS RECEIVED BY BORROWER OR ANY BORROWER PARTY WITH
      RESPECT TO ANY SUCH AFFILIATE INDEBTEDNESS BEFORE ALL OBLIGATIONS HAVE BEEN
      PAID
      IN FULL SHALL BE HELD IN TRUST BY BORROWER AND EACH BORROWER PARTY AND APPLIED
      IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT. 

    

    

    [SIGNATURES
      ON FOLLOWING PAGE]

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    IN
      WITNESS WHEREOF, the undersigned have duly executed this Joinder and Consent
      the
      day and year first above written.

     

    
      	 	 	 
	 	LIGHTSTONE
              HOLDINGS, LLC
	 
 	 
 	 
 
	 	By:  	/s/ David
              Lichtenstein
	 	
              
David
              Lichtenstein
	 	Title:
              President  

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    EXHIBIT
      A

     

    Budget
      and Business Plan

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
      B

    

    Organizational
      Documents of BorrowerSHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    

    

    FINANCIAL
      STATEMENTS

    

    DECEMBER
      31, 2005 AND 2004

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    TABLE
      OF CONTENTS

     

    
      	
               

            	 	
               

            	 
	
              Report
                of Independent Registered Public Accounting Firm

            	 	 	
              F-3

            	 
	
               

            	 	 	
            	 
	
              Balance
                Sheets 

            	 	 	
              F-4

            	 
	
               

            	 	 	
            	 
	
              Statements
                of Income

            	 	 	
              F-5

            	 
	
               

            	 	 	
            	 
	
              Statements
                of Cash Flows

            	 	 	
              F-6

            	 
	
               

            	 	 	
            	 
	
              Statements
                of Stockholders Equity

            	 	 	
              F-7

            	 
	
               

            	 	 	
            	 
	
              Notes
                to Financial Statements

            	 	 	
              F-8
                - 17

            	 

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    MORGENSTERN,
      SVOBODA, & BAER, CPA’s, P.C.

     

    CERTIFIED
      PUBLIC ACCOUNTANTS

    40
      Exchange Place, Suite 1820

    New
      York,
      NY 10005 

    TEL:
      (212)
      925-9490 

    FAX:
      (212)
      226-9134 

    E-MAIL:
      MSBCPAS@GMAIL.COM 

    

    

    Board
      of
      Directors and Stockholders of

    Shanghai
      Joy & Harmony Electronics Company Limited

    

    We
      have
      audited the accompanying balance sheet of Shanghai Joy & Harmony Electronics
      Company Limited (“Company”) as of December 31, 2005 and 2004, and the related
      statements of income, comprehensive losses, statement of stockholders’ equity,
      and cash flows for the years then ended. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audit.

     

    We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States of America). Those standards require
      that we plan and perform the audit to obtain reasonable assurance about whether
      the consolidated 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 consolidated financial statement presentation. We
      believe that our audit provides 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 Shanghai
      Joy & Harmony Electronics Company Limited as
      of
      December 31, 2005 and 2004, and the results of their operations and their cash
      flows for the
      periods then ended.,
      in
      conformity with generally accepted accounting principles in the United States
      of
      America.

    

    

    Morgenstern,
      Svoboda & Baer, CPAs, P.C.

    Certified
      Public Accountants

    

    New
      York,
      NY 

    December
      17, 2006

    

    
      
        
        

      

      
        F-3

        
          

        

      

      
        
        

      

    

    

    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              BALANCE
                SHEET

            
	
              DECEMBER
                31, 2005 AND 2004

            

    

    

    
      	
              ASSETS

            	 	
              2005

            	 	
              2004

            	 
	
              Current
                Assets

            	 	 	 	 	 	
            	 
	
              Cash
                and cash equivalents

            	 	
              $

            	
              642,897

            	 	
              $

            	
              609,059

            	 
	
              Accounts
                receivable, net

            	 	 	
              773,623

            	 	 	
              227,164

            	 
	
              Inventory

            	 	 	
              543,379

            	 	 	
              185,749

            	 
	
              Other
                receivables & Trade Deposits

            	 	 	
              601,076

            	 	 	
              478,937

            	 
	
              Prepaid
                expenses

            	 	 	
              620

            	 	 	
              1,636

            	 
	
              Total
                Current Assets

            	 	 	
              2,561,595

            	 	 	
              1,502,545

            	 
	
               

            	 	 	 	 	 	
            	 
	
              Property
                & equipment, net

            	 	 	
              2,913

            	 	 	
              4,133

            	 
	
               

            	 	 	 	 	 	
            	 
	
              Total
                Assets

            	 	
              $

            	
              2,564,508

            	 	
              $

            	
              1,506,678

            	 
	
               

            	 	 	 	 	 	
            	 
	
               LIABILITIES
                AND STOCKHOLDERS’ EQUITY 

            	 	 	 	 	 	
            	 
	
               

            	 	 	 	 	 	
            	 
	
              Current
                Liabilities

            	 	 	 	 	 	
            	 
	
              Short
                Term Loans

            	 	
              $

            	
              -

            	 	
              $

            	
              182,017

            	 
	
              Accounts
                payable and accrued expenses

            	 	 	
              170,973

            	 	 	
              40,577

            	 
	
              Income
                tax payable

            	 	 	
              167,303

            	 	 	
              -

            	 
	
              Total
                Current Liabilities 

            	 	 	
              338,276

            	 	 	
              222,594

            	 
	
               

            	 	 	 	 	 	
            	 
	
              Stockholders’
                Equity

            	 	 	 	 	 	
            	 
	
               

            	 	 	 	 	 	
            	 
	
              Common
                stock, par value, “nil”

            	 	 	 	 	 	
            	 
	
              shares
                authorized, 500,000 and 500,000 issued and outstanding

            	 	 	
              606,722

            	 	 	
              606,722
                

            	 
	
              Statutory
                reserve

            	 	 	
              238,047

            	 	 	
              101,767
                

            	 
	
              Other
                comprehensive income

            	 	 	
              38,979

            	 	 	
              326

            	 
	
              Retained
                earnings

            	 	 	
              1,342,484

            	 	 	
              575,269

            	 
	
              Total
                Stockholders’ Equity

            	 	 	
              2,226,232

            	 	 	
              1,284,084

            	 
	
              Total
                Liabilities and Stockholders’ Equity

            	 	
              $

            	
              2,564,508

            	 	
              $

            	
              1,506,678

            	 

    

     

     

    The
      accompanying notes are an integral part of these financial
      statements. 

     

    
      
        
        

      

      
        F-4

        
          

        

      

      
        
        

      

    

    

    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENTS
                OF INCOME

            
	
              FOR
                THE YEARS ENDING DECEMBER 31, 2005 AND 2004
                

            

    

     

    
      	
               

            	 	
               2005

            	 	
               2004

            	 
	
               

            	 	
               

            	 	
               

            	 
	
              Sales,
                net

            	 	
              $

            	
              10,409,742

            	 	
              $

            	
              4,711,158

            	 
	
               

            	 	 	 	 	 	
            	 
	
              Cost
                of sales

            	 	 	
              8690,611

            	 	 	
              3,764,637
                

            	 
	
              Gross
                profit

            	 	 	
              1,719,131

            	 	 	
              946,521

            	 
	
               

            	 	 	
            	 	 	
            	 
	
              General
                and administrative expenses

            	 	 	
              365,253

            	 	 	
              266,973

            	 
	
              Income
                from operations

            	 	 	
              1,353,878

            	 	 	
              679,548

            	 
	
               

            	 	 	 	 	 	
            	 
	
              Other
                (Income) Expense

            	 	 	
            	 	 	
            	 
	
              Interest
                income

            	 	 	
              (5,189

            	
              )

            	 	
              (4,400

            	
              )

            
	
              Other
                expense

            	 	 	
              5,394

            	 	 	
              5,476

            	 
	
              Bad
                debt provision

            	 	 	
              2,691

            	 	 	
              1,141

            	 
	
              Total
                Other (Income) Expense

            	 	 	
              2,896

            	 	 	
              2,217

            	 
	
              Income
                before income taxes

            	 	 	
              1,350,982

            	 	 	
              677,331

            	 
	
               

            	 	 	
            	 	 	
            	 
	
              Provision
                for income taxes

            	 	 	
              447,487

            	 	 	
              -0-

            	 
	
              Net
                income 

            	 	
              $

            	
              903,495

            	 	
              $

            	
              677,331

            	 

    

    

    

    The
      accompanying notes are an integral part of these financial
      statements.

     

    
      
        
        

      

      
        F-5

        
          

        

      

      
        
        

      

    

     

    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENTS
                OF CASH FLOWS

            
	
              FOR
                THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                

            

    

     

    
      	 	 	 	
               2005

            	 	 	 	 	
               2004

            	 	 	 
	
              CASH
                FLOWS FROM OPERATING ACTIVITIES 

            	 	 	 	 	 	 	 	 	 	 	 
	
              Net
                Income

            	 	
              $

            	
              903,495

            	 	 	 	
              $

            	
              677,331

            	 	 	 
	
              Adjustments
                to reconcile net income to net cash

            	 	 	 	 	 	 	 	 	 	 	 
	
              provided
                by operating activities:

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Depreciation
                

            	 	 	
              1,701

            	 	 	 	 	
              645
                

            	 	 	 
	
              Provision
                for doubtful accounts

            	 	 	
              2,691

            	 	 	 	 	
              1,141

            	 	 	 
	
              (Increase)
                / decrease in assets:

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Accounts
                receivables

            	 	 	
              (549,149

            	
              )

            	 	 	 	
              (210,108

            	
              )

            	 	 
	
              Inventory

            	 	 	
              (357,630

            	
              )

            	 	 	 	
              175,766

            	 	 	 
	
              Other
                current assets

            	 	 	
              (121,123

            	
              )

            	 	 	 	
              (400,280

            	
              )

            	 	 
	
              Increase
                / (decrease) in current liabilities:

            	 	 	 	 	 	 	 	 	 	 	 
	
              Accounts
                payable and accrued expenses

            	 	 	
              130,396

            	 	 	 	 	
              29,483

            	 	 	 
	
              Income
                tax payable

            	 	 	
              167,303

            	 	 	 	 	
              -0-

            	 	 	 
	
               

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Net
                cash provided by operating activities

            	 	 	
              177,684

            	 	 	 	 	
              273,978

            	 	 	 
	
               

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              CASH
                FLOWS FROM INVESTING ACTIVITIES

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Purchase
                of property & equipment

            	 	 	
              (481

            	
              )

            	 	 	 	
              (4,777

            	
              )

            	 	 
	
              Net
                cash provided by Investing activities

            	 	 	
              (481

            	
              )

            	 	 	 	
              (4,777

            	
              )

            	 	 
	
              CASH
                FLOWS FROM FINANCING ACTIVITIES

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Short-term
                loans / borrowings (repayments)

            	 	 	
              (182,017

            	
              )

            	 	 	 	
              192,798

            	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 
	
              Net
                cash (used in) provided by financing activities 

            	 	 	
              (182,017

            	
              )

            	 	 	 	
              192,798

            	 	 	 
	
              Effect
                of exchange rate changes on cash and cash equivalents

            	 	 	
              38,653

            	 	 	 	 	
              326

            	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 
	
               

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Net
                change in cash and cash equivalents

            	 	 	
              33,838

            	 	 	 	 	
              462,325

            	 	 	 
	
              Cash
                and cash equivalents, beginning balance

            	 	 	
              609,059

            	 	 	 	 	
              146,734

            	 	 	 
	
              Cash
                and cash equivalents, ending balance

            	 	
              $

            	
              642,897

            	 	 	 	
              $

            	
              609,059

            	 	 	 
	
              SUPPLEMENTAL
                DISCLOSURES:

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Cash
                paid during the year for:

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Income
                tax payments

            	 	
              $

            	
              280,184

            	 	 	 	
              $

            	
              -0

            	- 	 	 
	
              Interest
                payments

            	 	
              $

            	
              -0

            	- 	 	 	
              $

            	
              -0

            	- 	 	 

    

    

    

    The
      accompanying notes are an integral part of these financial
      statements.

    

    
      
        
        

      

      
        F-6

        
          

        

      

      
        
        

      

    

    

    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENT
                OF STOCKHOLDERS’ EQUITY

            
	
              FOR
                THE YEAR ENDED DECEMBER 31, 2005 AND
                2004

            

    

     

    
      	 	 	 	 	 	 	 	 	 	
               Other

            	 	 	
               Retained
                Earnings

            	 	 	
               Total

            	 
	 	 	 	
               Common
                Stock

            	 	 	
               Statutory

            	 	 	 Comprehensive	 	 	
               (Accumulated

            	 	 	
               Stockholders’

            	 
	 	 	 	
               Shares

            	 	 	
               Amount

            	 	 	
               Reserve

            	 	 	
               Income

            	 	 	
               Deficit)

            	 	 	
               Equity/Deficit

            	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              Balance
                January 1, 2004 

            	 	 	
              500,000

            	 	 	
              606,722
                

            	 	 	
            	 	 	
              -0-

            	 	 	
              (295

            	
              )

            	 	
              606,427
                

            	 
	
               

            	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 
	
              Transfer
                to statutory reserve

            	 	 	 	 	 	 	 	 	
              101,767

            	 	 	 	 	
              $

            	
              (101,767

            	
              )

            	 	
              -0-

            	 
	
              Foreign
                currency translation adjustments

            	 	 	 	 	 	 	 	 	
            	 	
              $

            	
              326
                

            	 	 	 	 	 	
              326

            	 
	
              net
                income for the period ended 12/31/2004

            	 	 
	 
 	 	 
	  	 	 
	  
  
 
	 	 
	 
  	 	 	
              677,331

            	 	 	
              677,331

            	 
	
              Balance
                December 31, 2004 

            	 	 	
              500,000
                

            	 	 	
              606,722

            	 	 	
              101,767

            	 	 	
              326

            	 	 	
              575,268

            	 	 	
              1,284,084

            	 
	 	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 
	
              Foreign
                currency translation adjustments

            	 	 	 	 	 	 	 	 	 	 	 	
              38,653

            	 	 	 	 	 	
              38653

            	 
	
              net
                income for the year ended 12/31/2005

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              903,495

            	 	 	
              903,495

            	 
	
              Transferred
                to statutory reserve

            	 	 
	 
	 	 
	 
	 	 	
              136,280

            	 	 
	  
	 	 	
              (136,280

            	
              )

            	 	
              -0-

            	 
	
              Balance
                December 31, 2005

            	 	 	
              500,000

            	 	
              $

            	
              606,722

            	 	
              $

            	
              238,047

            	 	
              $

            	
              38,979

            	 	
              $

            	
              1,342,483

            	 	
              $

            	
              2,226,232

            	 

    

     

    
      
        
        

      

      
        F-7

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTE
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004 

    

    Note
      1 - ORGANIZATION

    

    Shanghai
      Joy & Harmony Electronic Company Limited (the “Company”) was incorporated on
      August 20, 2003 under the laws of the People’s Republic of China (“PRC”). The
      Company is engaged in the business of distributing MP3 and MP4 players, iPod,
      electronic dictionaries, CD players, radios, Walkman, and audio systems and
      speakers at company maintained shops at various retail
      establishments.

    

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES

    

    Basis
      of Presentation

    

    The
      accompanying financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America. The
      Company’s functional currency is the Chinese Renminbi; however the accompanying
      consolidated financial statements have been translated and presented in United
      States Dollars.

    

    Translation
      Adjustment

    

    As
      of
      December 31, 2005 and 2004, the accounts of Shanghai Joy & Harmony
      Electronics Company Limited were maintained, and its financial statements were
      expressed, in Chinese Yuan Renminbi (“CNY”). Such financial statements were
      translated into U.S. Dollars (“USD”) in accordance with Statement of Financial
      Accounts Standards (“SFAS”) No. 52, Foreign Currency Translation with the CNY as
      the functional currency. According to the Statement, all assets and liabilities
      were translated at the current exchange rate, stockholders equity are translated
      at the historical rates and income statement items are translated at the average
      exchange rate for the period. The resulting translation adjustments are reported
      under other comprehensive income in accordance with SFAS No. 130, Reporting
      Comprehensive Income as a component of shareholders equity. Transaction gains
      and losses are reflected in the income statement.

    

    
      
        
        

      

      
        F-8

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    

    Use
      of
      Estimates 

    

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

    

    Risks
      and Uncertainties

    

    The
      Company is subject to substantial risks from, among other things, intense
      competition associated with the industry in general, other risks associated
      with
      financing, liquidity requirements, rapidly changing customer requirements,
      limited operating history, foreign currency exchange rates and the volatility
      of
      public markets.

    

    Contingencies

    

    Certain
      conditions may exist as of the date the financial statements are issued, which
      may result in a loss to the Company but which will only be resolved when one
      or
      more future events occur or fail to occur. The Company’s management and legal
      counsel assess such contingent liabilities, and such assessment inherently
      involves an exercise of judgment. In assessing loss contingencies related to
      legal proceedings that are pending against the Company or unasserted claims
      that
      may result in such proceedings, the Company’s legal counsel evaluates the
      perceived merits of any legal proceedings or unasserted claims as well as the
      perceived merits of the amount of relief sought or expected to be
      sought.

    

    If
      the
      assessment of a contingency indicates that it is probable that a material loss
      has been incurred and the amount of the liability can be estimated, then the
      estimated liability would be accrued in the Company’s financial statements. If
      the assessment indicates that a potential material loss contingency is not
      probable but is reasonably possible, or is probable but cannot be estimated,
      then the nature of the contingent liability, together with an estimate of the
      range of possible loss if determinable and material would be disclosed.

    

    Loss
      contingencies considered to be remote by management are generally not disclosed
      unless they involve guarantees, in which case the guarantee would be
      disclosed.

    

    
      
        
        

      

      
        F-9

        
          

        

      

      
        
        

      

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    

    Cash
      and Cash Equivalents 

    

    Cash
      and
      cash equivalents include cash in hand and cash in time deposits, certificates
      of
      deposit and all highly liquid debt instruments with original maturities of
      three
      months or less. 

    

    Accounts
      Receivable 

    

    The
      Company maintains reserves for potential credit losses on accounts receivable.
      Management reviews the composition of accounts receivable and analyzes
      historical bad debts, customer concentrations, customer credit worthiness,
      current economic trends and changes in customer payment patterns to evaluate
      the
      adequacy of these reserves. Terms of the sales vary. Reserves are recorded
      primarily on a specific identification basis. Allowance for doubtful debts
      amounted to $3,890 and $1,141 as at December 31, 2005 and 2004 respectively.
      

     

    Inventories
      

    

    Inventories
      are valued at the lower of cost (determined on a weighted average basis) or
      market. The Management compares the cost of inventories with the market value
      and allowance is made for writing down their inventories to market value, if
      lower. As of December 31, 2005 and 2004 inventory consisted of finished goods
      valued at $334,240 and $286,870 respectively.

     

    Property,
      Plant & Equipment 

     

    Property
      and equipment are stated at cost. Expenditures for maintenance and repairs
      are
      charged to earnings as incurred; additions, renewals and betterments are
      capitalized. When property and equipment are retired or otherwise disposed
      of,
      the related cost and accumulated depreciation are removed from the respective
      accounts, and any gain or loss is included in operations. Depreciation of
      property and equipment is provided using the straight-line method for
      substantially all assets with estimated lives of:

    

    
      	
              Computers
                & office Equipment

            	
              5
                years

            

    

     

    As
      of
      December 31, 2005 and 2004 Property, Plant & Equipment consist of the
      following:

     

    
      
        	 	 	 	
                 2005

              	 	 	
                 2004

              	 
	 	 	 	 	 	 	 	 
	
                Computers
                  and Office equipment

              	 	
                $

              	
                5,258
                  

              	 	 	
                4,777
                  

              	 
	
                 

              	 	 	
                5,258

              	 	 	
                4,777
                  

              	 
	
                Accumulated
                  depreciation

              	 	 	
                (2,345

              	
                )

              	 	
                (644

              	
                )

              
	
                 

              	 	
                $

              	
                2,913

              	 	 	
                4,133

              	 

      

    

     

    
      
        
        

      

      
        F-10

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

     

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     

    Long-Lived
      Assets 

     

    Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
      144”), which addresses financial accounting and reporting for the impairment or
      disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”
and the accounting and reporting provisions of APB Opinion No. 30, “Reporting
      the Results of Operations for a Disposal of a Segment of a Business.” The
      Company periodically evaluates the carrying value of long-lived assets to be
      held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
      to be recorded on long-lived assets used in operations when indicators of
      impairment are present and the undiscounted cash flows estimated to be generated
      by those assets are less than the assets carrying amounts. In that event, a
      loss
      is recognized based on the amount by which the carrying amount exceeds the
      fair
      market value of the long-lived assets. Loss on long-lived assets to be disposed
      of is determined in a similar manner, except that fair market values are reduced
      for the cost of disposal. Based on its review, the Company believes that, as
      of
      December 31, 2005 there were no significant impairments of its long-lived
      assets. 

     

    Fair
      Value of Financial Instruments 

     

    Statement
      of financial accounting standard No. 107, Disclosures about fair value of
      financial instruments, requires that the Company disclose estimated fair values
      of financial instruments. The carrying amounts reported in the statements of
      financial position for current assets and current liabilities qualifying as
      financial instruments are a reasonable estimate of fair value. 

     

    Revenue
      Recognition 

    

    The
      Company’s revenue recognition policies are in compliance with Staff accounting
      bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
      customers when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectibility is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as unearned
      revenue. 

     

    Stock-Based
      Compensation 

     

    In
      October 1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based
      Compensation.” SFAS No. 123 prescribes accounting and reporting standards for
      all stock-based compensation plans, including employee stock options, restricted
      stock, employee stock purchase plans and stock appreciation rights. SFAS No.
      123
      requires compensation expense to be recorded (i) using the new fair value method
      or (ii) using the existing accounting rules prescribed by Accounting Principles
      Board Opinion No. 25, “Accounting for stock issued to employees” (“APB 25”) and
      related interpretations with proforma disclosure of what net income and earnings
      per share would have been had the Company adopted the new fair value method.
      The
      Company uses the intrinsic value method prescribed by APB 25 and has opted
      for
      the disclosure provisions of SFAS No.123.

     

    
      
        
        

      

      
        F-11

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

     

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    

    Advertising

    

    Advertising
      expenses consist primarily of costs of promotion for corporate image and product
      marketing and costs of direct advertising. The Company expenses all advertising
      costs as incurred. 

     

    Income
      Taxes

     

    The
      Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized. 

     

    Basic
      and Diluted Earnings Per Share 

     

    Earnings
      per share is calculated in accordance with the Statement of financial accounting
      standards No. 128 (“SFAS No. 128”), Earnings per share. SFAS No. 128 superseded
      Accounting Principles Board Opinion No.15 (“APB 15”). Net loss per share for all
      periods presented has been restated to reflect the adoption of SFAS No. 128.
      Basic net loss per share is based upon the weighted average number of common
      shares outstanding. Diluted net loss per share is based on the assumption that
      all dilutive convertible shares and stock options were converted or exercised.
      Dilution is computed by applying the treasury stock method. Under this method,
      options and warrants are assumed to be exercised at the beginning of the period
      (or at the time of issuance, if later), and as if funds obtained thereby were
      used to purchase common stock at the average market price during the period.
      

     

    Statement
      of Cash Flows

     

    In
      accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
      Company’s operations are based upon the local currencies. As a result, amounts
      related to assets and liabilities reported on the statement of cash flows will
      not necessarily agree with changes in the corresponding balances on the balance
      sheet.

     

    
      
        
        

      

      
        F-12

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     

    Concentration
      of Credit Risk

     

    Financial
      instruments that potentially subject the Company to concentrations of credit
      risk are cash, accounts receivable and other receivables arising from its normal
      business activities. The Company places its cash in what it believes to be
      credit-worthy financial institutions. The Company has a diversified customer
      base, most of which are in China. The Company controls credit risk related
      to
      accounts receivable through credit approvals, credit limits and monitoring
      procedures. The Company routinely assesses the financial strength of its
      customers and, based upon factors surrounding the credit risk, establishes
      an
      allowance, if required, for uncollectible accounts and, as a consequence,
      believes that its accounts receivable credit risk exposure beyond such allowance
      is limited.

     

    Segment
      Reporting 

    

    Statement
      of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure about
      Segments of an Enterprise and Related Information” requires use of the
“management approach model” for segment reporting. The management approach model
      is based on the way a company’s management organizes segments within the company
      for making operating decisions and assessing performance. Reportable segments
      are based on products and services, geography, legal structure, management
      structure, or any other manner in which management disaggregates a company.
      

    

    Recent
      accounting pronouncements 

    

    In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement applies to all voluntary changes in accounting principle and
      requires retrospective application to prior periods’ financial statements of
      changes in accounting principle, unless this would be impracticable. This
      statement also makes a distinction between “retrospective application” of an
      accounting principle and the “restatement” of financial statements to reflect
      the correction of an error. This statement is effective for accounting changes
      and corrections of errors made in fiscal years beginning after December 15,
      2005. 

    

    In
      December 2004, the FASB issued FASB Statement No. 123R, “Share-Based Payment, an
      Amendment of FASB Statement No. 123” (“FAS No. 123R”). FAS No. 123R requires
      companies to recognize in the statement of operations the grant- date fair
      value
      of stock options and other equity-based compensation issued to employees. FAS
      No. 123R is effective beginning in the Company’s first quarter of fiscal 2006.

    

    
      
        
        

      

      
        F-13

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    

    

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    

    In
      June
      2005, the EITF reached consensus on Issue No. 05-6, “Determining the
      Amortization Period for Leasehold Improvements” (“EITF 05-6.”). EITF 05-6
      provides guidance on determining the amortization period for leasehold
      improvements acquired in a business combination or acquired subsequent to lease
      inception. The guidance in EITF 05-6 will be applied prospectively and is
      effective for periods beginning after June 29, 2005. EITF 05-6 is not expected
      to have a material effect on its consolidated financial position or results
      of
      operations.

    

    In
      June
      2005, the FASB Staff issued FASB Staff Position 150-5 (“FSP 150-5”),
“Issuers Accounting under FASB Statement No. 150 for Freestanding Warrants
      and Other Similar Instruments on Shares that are Redeemable.” FSP 150-5
      addresses whether freestanding warrants and other similar instruments on shares
      that are redeemable, either puttable or mandatorily redeemable, would be subject
      to the requirements of FASB Statement No. 150, “Accounting for Certain
      Financial Instruments with Characteristics of Both Liabilities and Equity,”
regardless of the timing or the redemption feature or the redemption price.
      The
      FSP is effective after June 30, 2005. 

    

    On
      February 16, 2006 the Financial Accounting Standards Board (“FASB) issued
      SFAS 155, “Accounting for Certain Hybrid Instruments,” which amends SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities,” and SFAS 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities.” SFAS 155 allows financial instruments that have embedded
      derivatives to be accounted for as a whole (eliminating the need to bifurcate
      the derivative from its host) if the holder elects to account for the whole
      instrument on a fair value basis. SFAS 155 also clarifies and amends certain
      other provisions of SFAS 133 and SFAS 140. This statement is effective for
      all
      financial instruments acquired or issued in fiscal years beginning after
      September 15, 2006. The Company does not expect its adoption of this new
      standard to have a material impact on its financial position, results of
      operations or cash flows. 

    

    In
      March
      2006, the FASB issued FASB Statement No. 156, “Accounting for Servicing of
      Financial Assets - an amendment to FASB Statement No. 140.” Statement 156
      requires that an entity recognize a servicing asset or servicing liability
      each
      time it undertakes an obligation to service a financial asset by entering into
      a
      service contract under certain situations. The new standard is effective for
      fiscal years beginning after September 15, 2006. The Company does not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.

    

    The
      Company believes that the adoption of these standards will have no material
      impact on its financial statements.

    

    
      
        
        

      

      
        F-14

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004 

    

    Note
      3 - SHARE EXCHANGE
      AGREEMENT

    

    On
      November 28, 2006 Shanghai Joy & Harmony Electronics Company Limited, a
      Corporation in China (“Company”), and the shareholders of the Company (the
“Shareholders”) entered into a Share Exchange Agreement (the “Agreement”) with
      China 3C Group, a Nevada corporation (“CHCG”), Capital Future Development
      Limited, a BVI corporation (“CFDL”). The Shareholders own all of the outstanding
      equity of the Company (the “Shares”). 

     

    CFDL
      is a
      wholly owned subsidiary of CHCG. CFDL purchase from the Shareholders, and the
      Shareholders desire to sell to CFDL the Shares in exchange for shares of CHCG
      Common Stock, all on the terms and subject to the conditions set forth in this
      Agreement (the “Exchange”). As a result of the Exchange, the Company will merge
      with and into CFDL with the Company being the surviving entity.

     

    As
      full
      consideration for the sale, assignment, transfer and delivery of the Shares
      by
      the Shareholders to CFDL, CHCG shall issue to the Shareholders an aggregate
      of
      2,723,110 shares of newly issued shares of CHCG Common Stock (the “Acquisition
      Shares”)
      at
      $4.039 per share (“Average CHCG Stock Price”) and pay cash (the “Cash
      Component”)
      of
      $7,500,000 to the Shareholders. The Cash Component is payable by CHCG as
      follows: $3,000,000 within 10 business days after the Closing and $4,500,000
      is
      payable six months after the Closing as evidenced by a promissory note. The
      parties understand and acknowledge that such exchange is based upon an
      approximate valuation of the Company at US $18,500,000.

    

    Note
      4 - COMPENSATED
      ABSENCES

     

    Regulation
      45 of local labor law entitles employees to annual vacation leave after one
      year
      of service. In general all leave must be utilized annually, with proper
      notification. Any unutilized leave is cancelled. 

    

    Note
      5 - INCOME
      TAXES

    

    The
      Company is governed by the Income Tax Laws of the PRC. Pursuant to the PRC
      Income Tax Laws, the Enterprise Income Tax (EIT) is at a statutory rate of
      33%,
      which is comprises of 30% national income tax and 3% local income tax. The
      Company received a notice of exemption from income taxes for 2004.

    

    
      	
              The
                following is a reconciliation of income tax expense:

            	
               

            
	
              12/31/2005

            	
               

            

    

    
       

      
        
          	
                  Current

                	 	
                  $

                	
                  447,487

                	 
	
                  Deferred

                	 	 	 	 
	
                  Total

                	 	
                  $

                	
                  447,487

                	 
	
                  12/31/2004

                	 	 	 	 
	
                  Current

                	 	
                  $

                	
                  -0

                	 
	
                  Deferred

                	 	 	 	 
	
                  Total

                	 	
                  $

                	
                  -0

                	 
	
                  PRC
                    income tax

                	% 	 	
                  33

                	 
	
                  Effective
                    rate

                	% 	 	
                  33

                	 

        

      

       

      
        
          
          

        

        
          F-15

          
            

          

        

        
          
          

        

      

    

     

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    

    

    Note
      6 - COMMITTMENTS

     

    The
      Company leases office and warehouse facilities under operating leases that
      terminate through 2005 and 2006. Rental expense under these agreements consisted
      of $22,135 and $14,122 for 2005 and 2004 respectively. The Company has the
      following future minimum obligations as of:

     

    
      	 	 	 	 12/31/2005	 	 	 12/31/2004	 
	 	 	 	 	 	 	 	 
	2005 	 	$	-	 	$	14,122	 
	2006 	 	 	22,135	 	 	-	 
	 	 	 	 	 	 	 	 
	Total 	 	$	22,135	 	$	14,122	 

    

     

    Note
      7 - STATUTORY
      RESERVE

    

    In
      accordance with the laws and regulations of the PRC, a wholly-owned Foreign
      Invested Enterprises’ income, after the payment of the PRC income taxes, shall
      be allocated to the statutory surplus reserves and statutory public affair
      fund.
      Prior to January 1, 2006 the proportion of allocation for reserve was ten
      percent (10%) of the profit after tax to the surplus reserve fund and additional
      five to ten percent to the public affair fund. The public affair fund reserve
      was limited to fifty percent (50%) of the registered capital. Effective January
      1, 2006 there is now only one fund requirement. The reserve is ten percent
      (10%)
      of income after tax, not to exceed fifty percent (50%) of registered
      capital.

    

    Statutory
      Reserve funds are restricted for set off against losses, expansion of production
      and operation or increase in register capital of the respective company.
      Statutory public welfare funds are restricted to the capital expenditures for
      the collective welfare of employees. These reserves are not transferable to
      the
      Company in the form of cash dividends, loans or advances. These reserves are
      therefore not available for distribution except in liquidation. As of
      December 31, 2005 and 2004, the Company had allocated $238,047 and $101,767
      respectively to these non-distributable reserve funds. 

    

    Note
      8 - OTHER
      COMPREHENSIVE INCOME

    

    Balances
      of related after-tax components comprising accumulated other comprehensive
      income (loss), included in stockholders equity at December 31, 2005 and December
      31, 2004 are as follows:

    

      
        	 	 	 	
                 Foreign
                  Currency Translation Adjustment

              	 	 	
                 Accumulated
                  Other Comprehensive Income

              	 
	 	 	 	 	 	 	 	 
	
                Balance
                  at January 1, 2004

              	 	
                $

              	
                -0-

              	 	
                $

              	
                -0-

              	 
	
                Change
                  for 2004

              	 	 	
                326

              	 	 	
                326

              	 
	
                Balance
                  at December 31, 2004

              	 	
                $

              	
                326

              	 	
                $

              	
                326

              	 
	
                Change
                  for 2005

              	 	 	
                38,653

              	 	 	
                38,653

              	 
	
                Balance
                  at December 31, 2005

              	 	
                $

              	
                38,979

              	 	
                $

              	
                38,979

              	 

      

    

     

    
      
        
        

      

      
        F-16

        
          

        

      

      
        
        

      

    

     

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    

    

    Note
      9 -
      CURRENT
      VULNERABILITY DUE TO CERTAIN RISK FACTORS

    

    The
      Company’s operations are carried out in the PRC. Accordingly, the Company’s
      business, financial condition and results of operations may be influenced by
      the
      political, economic and legal environments in the PRC, by the general state
      of
      the PRC’s economy. The Company’s business may be influenced by changes in
      governmental policies with respect to laws and regulations, anti-inflationary
      measures, currency conversion and remittance abroad, and rates and methods
      of
      taxation, among other things. 

    

    Note
      10 - MAJOR
      CUSTOMERS AND CREDIT RISK

    

    The
      Company had no customers who accounted for more than ten percent (10%) of
      revenues during the years ended 2005 or 2004. No customers accounted for more
      than ten percent (10%) of the company’s accounts receivable at December 31, 2005
      or 2004. The Company purchased approximately sixty three percent (63%) and
      sixty
      nine percent (69%) of its inventory form three vendors during 2005 and 2004
      respectively

    

    
      
        
        

      

      
        F-17

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    

    FINANCIAL
      STATEMENTS

    

    SEPTEMBER
      30, 2006

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    TABLE
      OF CONTENTS

     

    
      	
              Report
                of Independent Registered Public Accounting Firm

            	 	 	
              F-3

            	 
	
               

            	 	 	
              
              

            	 
	
              Balance
                Sheet

            	 	 	
              F-4

            	 
	
               

            	 	 	
              
              

            	 
	
              Statement
                of Income

            	 	 	
              F-5

            	 
	
               

            	 	 	
              
              

            	 
	
              Statement
                of Cash Flows

            	 	 	
              F-6

            	 
	
               

            	 	 	
              
              

            	 
	
              Statement
                of Stockholders Equity

            	 	 	
              F-7

            	 
	
               

            	 	 	
              
              

            	 
	
              Notes
                to Financial Statements

            	 	 	
              F-8
                - F-17

            	 

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    MORGENSTERN,
      SVOBODA, & BAER, CPA’s, P.C.

     

    CERTIFIED
      PUBLIC ACCOUNTANTS

    40
      Exchange Place, Suite 1820

    New
      York,
      NY 10005 

    TEL:
      (212)
      925-9490 

    FAX:
      (212)
      226-9134 

    E-MAIL:
      MSBCPAS@gmail.Com 

    

    

    Board
      of
      Directors and Stockholders of

    Shanghai
      Joy & Harmony Electronics Company Limited

    

    

    We
      have
      reviewed the accompanying balance sheets of Shanghai Joy & Harmony
      Electronics Company Limited as of September 30, 2006 and the condensed
      statements of income for the nine-months ended September 30, 2006 and statements
      of cash flows for the nine-month then ended. These financial statements are
      the
      responsibility of the Company’s management. 

    

    We
      conducted our review in accordance with standards of the Public Company
      Accounting Oversight Board (United States). A review of interim financial
      information consists principally of applying analytical procedures and making
      inquiries of persons responsible for financial and accounting matters. It is
      substantially less in scope than an audit conducted in accordance with standards
      of the Public Company Accounting Oversight Board (United States), the objective
      of which is the expression of an opinion regarding the financial statements
      taken as a whole. Accordingly, we do not express such an opinion.

    

    Based
      on
      our reviews, we are not aware of any material modifications that should be
      made
      to the accompanying interim financial statements referred to above for them
      to
      be in conformity with accounting principles generally accepted in the United
      States of America.

    

    

    

    Morgenstern,
      Svoboda & Baer, CPAs, P.C.

    Certified
      Public Accountants

    

    New
      York,
      NY 

    December
      17, 2006

    

    
      
        
        

      

      
        F-3

        
          

        

      

      
        
        

      

    

    

    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              BALANCE
                SHEET

            
	
              SEPTEMBER
                30, 2006

            

    

    

    
      	
              ASSETS

            	 	 	
               

            
	
              Current
                Assets

            	 	
               

            	
               

            
	
              Cash
                and cash equivalents

            	 	
              $

            	
              214,561

            	 
	
              Accounts
                receivable, net

            	
               

            	
               

            	
              3,599,680

            	 
	
              Inventory

            	
               

            	
               

            	
              1,021,435

            	
               

            
	
              Other
                Receivable & Trade deposits

            	 	 	
              300,304

            	 
	
              Prepaid
                expenses

            	
               

            	
               

            	
              4,387

            	
               

            
	
              Total
                Current Assets

            	
               

            	
               

            	
              5,140,367
                

            	
               

            
	
               

            	
               

            	
               

            	
               

            	 
	
              Property
                & equipment, net

            	 	
               

            	
              11,342

            	 
	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Total
                Assets

            	
               

            	
              $

            	
              5,151,709

            	 
	
               

            	
               

            	
               

            	
               

            	
               

            
	
               LIABILITIES
                AND STOCKHOLDERS’ EQUITY 

            	
               

            	
               

            	
               

            	
               

            
	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Current
                Liabilities

            	
               

            	
               

            	
               

            	
               

            
	
              Accounts
                payable and accrued expenses

            	
               

            	
              $

            	
              103,162

            	
               

            
	
              Income
                tax payable

            	
               

            	
               

            	
              664,115

            	
               

            
	 	
               

            	
               

            	
               

            	
               

            
	
              Total
                Current Liabilities 

            	
               

            	
               

            	
              767,277

            	
               

            
	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Stockholders’
                Equity

            	
               

            	
               

            	
               

            	
               

            
	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Common
                stock, $nil par value

            	
               

            	
               

            	 	
               

            
	
              shares
                authorized, 500,000 and 500,000 issued and outstanding

            	
               

            	
               

            	
              606,722

            	
               

            
	
              Statutory
                reserve

            	
               

            	
               

            	
              238,047
                

            	
               

            
	
              Other
                Comprehensive Income

            	 	 	
              140,567

            	 
	
              Retained
                earnings

            	
               

            	
               

            	
              3,399,096

            	
               

            
	
              Total
                Stockholders’ Equity

            	
               

            	
               

            	
              4,384,432

            	
               

            
	
              Total
                Liabilities and Stockholders’ Equity

            	
               

            	
              $

            	
              5,151,709

            	
               

            

    

    

    

    The
      accompanying notes are an integral part of these financial statements

    

    
      
        
        

      

      
        F-4

        
          

        

      

      
        
        

      

    

    

    
      	
               

              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENT
                OF INCOME

            
	
              FOR
                THE NINE MONTHS ENDING SEPTEMBER 30, 2006
                

            

    

     

    
      	
               

            	
               

            	 	 	
               

            
	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Sales,
                net

            	
               

            	
               

            	
              $

            	
              26,526,830

            	
               

            
	
              Cost
                of sales

            	
               

            	
               

            	
               

            	
              21,504,061

            	
               

            
	
              Gross
                profit

            	
               

            	
               

            	
               

            	
              5,022,769

            	 
	 	 	 	 	 	
               

            
	
               Selling
                & Distribution

            	
               

            	
               

            	
               

            	
              77,722

            	
               

            
	
              General
                and Administrative Expenses

            	
               

            	
               

            	
               

            	
              925,908

            	 
	
              Total
                Operating Expenses

            	
               

            	
               

            	
               

            	
              1,003,630

            	
               

            
	
               Income
                from Operations

            	
               

            	
               

            	
               

            	
              4,019,139

            	
               

            
	
              Other
                (Income) Expense

            	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Interest
                income

            	
               

            	 	
               

            	
              (5,337

            	
              )

            
	
              Other
                expense

            	
               

            	
               

            	
               

            	
              7,959

            	
               

            
	
              Total
                Other (Income) Expense

            	
               

            	
               

            	
               

            	
              2,622

            	
               

            
	
              Income
                before income taxes

            	
               

            	
               

            	
               

            	
              4,016,517

            	 
	
              Provision
                for income taxes

            	
               

            	
               

            	
               

            	
              1,330,798

            	
               

            
	
              Income
                from Continuing Operations

            	 	 	 	
              2,685,719

            	
               

            
	
              Net
                income 

            	
               

            	
               

            	
              $

            	
              2,685,719

            	
               

            

    

    

    

    The
      accompanying notes are an integral part of these financial
      statements. 

    

    
      
        
        

      

      
        F-5

        
          

        

      

      
        
        

      

    

     

    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENT
                OF CASH FLOWS

            
	
              FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2006
                

            

    

     

    
      	
              CASH
                FLOWS FROM OPERATING ACTIVITIES

            	 	
               

            	 
	
              Net
                Income

            	 	
              $

            	
              2,685,717

            	 
	
              Adjustments
                to reconcile net income to net cash

            	 	 	 	 
	
              provided
                by operating activities:

            	 	 	
              
              

            	 
	
              Depreciation
                

            	 	 	
              1,805
                

            	 
	
              (Increase)
                / decrease in assets:

            	 	 	
              
              

            	 
	
              Accounts
                receivables

            	 	 	
              (2,826,057

            	
              )

            
	
              Inventory

            	 	 	
              (478,056

            	
              )

            
	
              Prepaid
                expense

            	 	 	
              297,006

            	 
	
              Increase
                / (decrease) in current liabilities:

            	 	 	 	 
	
              Accounts
                payable and accrued expenses

            	 	 	
              12,503

            	 
	
              Value-added
                Tax Liability

            	 	 	
              101,716

            	 
	
              Income
                tax payable

            	 	 	
              314,781

            	 
	
               

            	 	 	
              
              

            	 
	
              Net
                cash provided by operating activities

            	 	 	
              109,415

            	 
	
               

            	 	 	
              
              

            	 
	
              CASH
                FLOWS FROM INVESTING ACTIVITIES

            	 	 	 	 
	
              Acquisitions
                of Property, Plant & Equipment

            	 	 	
              (10,234

            	
              )

            
	
              Net
                cash used by investing activities

            	 	 	
              (10,234

            	
              )

            
	 	 	 	 	 
	
              FINANCING
                REVENUES

            	 	 	 	 
	
              Dividend
                Paid

            	 	 	
              (629,105

            	
              )

            
	
              Net
                Cash Provided By (used in) Financing Activities

            	 	 	
              (629,105

            	
              )

            
	
              Effect
                of exchange rate changes on cash and cash equivalents

            	 	 	
              101,588
                

            	 
	
               

            	 	 	
              
              

            	 
	
              Net
                change in cash and cash equivalents

            	 	 	
              (428,336
                

            	
              )

            
	
              Cash
                and cash equivalents, beginning balance

            	 	 	
              642,897

            	 
	
              Cash
                and cash equivalents, ending balance

            	 	
              $

            	
              214,561

            	 
	
              SUPPLEMENTAL
                DISCLOSURES:

            	 	 	
              
              

            	 
	
              Cash
                paid during the year for:

            	 	 	
              
              

            	 
	
              Income
                tax payments

            	 	
              $

            	
              833,986

            	 
	
              Interest
                payments

            	 	
              $

            	
              -0-

            	 

    

    

    

    The
      accompanying notes are an integral part of these financial
      statements.

    

    
      
        
        

      

      
        F-6

        
          

        

      

      
        
        

      

    

     

    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENT
                OF STOCKHOLDERS’ EQUITY

            
	
              FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2006
                

            

    

     

    
      	 	 	 	 	 	 	
               Other

            	 	 	 	 	 	 	 	 	
               Total

            	 
	 	 	 	
               Common
                Stock

            	 	 	
               Comprehensive

            	 	 	
               Retained
                

            	 	 	
               Statutory

            	 	 	
               Shareholders

            	 
	 	 	 	
               Shares

            	 	 	
               Amount

            	 	 	
               Income

            	 	 	
               Earnings

            	 	 	
               Reserve

            	 	 	
               Equity

            	 
	Balance
              January 1, 2006 	 	 	500,000	 	 	
              606,722

            	 	 	
              38,979

            	 	 	1,342,484	 	 	
              238,047

            	 	 	2,226,232	 
	
              Cash
                Dividend 

            	 	 	 	 	 	 	 	 	 	 	 	
              (629,105

            	) 	 	 	 	 	
              (629,105

            	
              )

            
	
              Foreign
                currency translation adjustments 

            	 	 	 	 	 	 	 	 	 101,588	 	 	 	 	 	 	 	 	 101,588	 
	
              Net
                income for the nine months
                ended September 30, 2006 

            	 	 	 	 	 	 	 	 	 	 	 	 
2,685,717	 	 	 	 	 	 
2,685,717	 
	Balance
              September 30, 2006 	 	 	 500,000	 	
              $ 

            	 606,722	 	
              $ 

            	 140,567	 	
              $ 

            	 3,402,096	 	 	 238,047	 	 	 4,384,432	 

    

     

    

    The
      accompanying notes are an integral part of these financial
      statements.

    

    
      
        
        

      

      
        F-7

        
          

        

      

      
        
        

      

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTE
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006 

    

    Note
      1 - ORGANIZATION

    

    Shanghai
      Joy & Harmony Economic Development Co., Ltd. (the “Company”) was
      incorporated on August 20, 2003 under the laws of the People’s Republic of China
      (PRC). The Company is engaged in the business of distributing MP3 and MP4
      players, iPod, electronic dictionaries, CD players, radios, Walkman, and audio
      systems and speakers at company maintained shops at various retail
      establishments.

    

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES

    

    Basis
      of Presentation

    

    The
      accompanying financial statements have been prepared in conformity with
      accounting principles generally accepted in the United States of America. The
      Company’s functional currency is the Chinese Renminbi; however the accompanying
      consolidated financial statements have been translated and presented in United
      States Dollars.

    

    Translation
      Adjustment

    

    As
      of
      September 30, 2006, the accounts of Shanghai Joy & Harmony Electronics
      Company Limited were maintained, and its financial statements were expressed,
      in
      Chinese Yuan Renminbi (“CNY”). Such financial statements were translated into
      U.S. Dollars (“USD”) in accordance with Statement of Financial Accounts
      Standards (“SFAS”) No. 52, “Foreign Currency Translation,” with the CNY as the
      functional currency. According to the Statement, all assets and liabilities
      were
      translated at the current exchange rate, stockholders equity are translated
      at
      the historical rates and income statement items are translated at the average
      exchange rate for the period. The resulting translation adjustments are reported
      under other comprehensive income in accordance with SFAS No. 130, Reporting
      Comprehensive Income as a component of shareholders equity. Transaction gains
      and losses are reflected in the income statement.

    

    
      
        
        

      

      
        F-8

        
          

        

      

      
        
        

      

    

     

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

    

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    

    Use
      of
      Estimates 

    

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

    

    Risks
      and Uncertainties

    

    The
      Company is subject to substantial risks from, among other things, intense
      competition associated with the industry in general, other risks associated
      with
      financing, liquidity requirements, rapidly changing customer requirements,
      limited operating history, foreign currency exchange rates and the volatility
      of
      public markets.

    

    Contingencies

    

    Certain
      conditions may exist as of the date the financial statements are issued, which
      may result in a loss to the Company but which will only be resolved when one
      or
      more future events occur or fail to occur. The Company’s management and legal
      counsel assess such contingent liabilities, and such assessment inherently
      involves an exercise of judgment. In assessing loss contingencies related to
      legal proceedings that are pending against the Company or unasserted claims
      that
      may result in such proceedings, the Company’s legal counsel evaluates the
      perceived merits of any legal proceedings or unasserted claims as well as the
      perceived merits of the amount of relief sought or expected to be
      sought.

    

    If
      the
      assessment of a contingency indicates that it is probable that a material loss
      has been incurred and the amount of the liability can be estimated, then the
      estimated liability would be accrued in the Company’s financial statements. If
      the assessment indicates that a potential material loss contingency is not
      probable but is reasonably possible, or is probable but cannot be estimated,
      then the nature of the contingent liability, together with an estimate of the
      range of possible loss if determinable and material would be disclosed.

    

    Loss
      contingencies considered to be remote by management are generally not disclosed
      unless they involve guarantees, in which case the guarantee would be
      disclosed.

    

    
      
        
        

      

      
        F-9

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

    

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    

    Cash
      and Cash Equivalents 

    

    Cash
      and
      cash equivalents include cash in hand and cash in time deposits, certificates
      of
      deposit and all highly liquid debt instruments with original maturities of
      three
      months or less. 

    

    Accounts
      Receivable 

    

    The
      Company maintains reserves for potential credit losses on accounts receivable.
      Management reviews the composition of accounts receivable and analyzes
      historical bad debts, customer concentrations, customer credit worthiness,
      current economic trends and changes in customer payment patterns to evaluate
      the
      adequacy of these reserves. Terms of the sales vary. Reserves are recorded
      primarily on a specific identification basis. Allowance for doubtful debts
      amounted to $3,890 as at September 30, 2006. 

     

    Inventories
      

    

    Inventories
      are valued at the lower of cost (determined on a weighted average basis) or
      market. The Management compares the cost of inventories with the market value
      and allowance is made for writing down their inventories to market value, if
      lower. As of September 30, 2006 inventory consisted of finished goods valued
      at
      $1,021,435.

     

    Property,
      Plant & Equipment 

     

    Property
      and equipment are stated at cost. Expenditures for maintenance and repairs
      are
      charged to earnings as incurred; additions, renewals and betterments are
      capitalized. When property and equipment are retired or otherwise disposed
      of,
      the related cost and accumulated depreciation are removed from the respective
      accounts, and any gain or loss is included in operations. Depreciation of
      property and equipment is provided using the straight-line method for
      substantially all assets with estimated lives of:

    

    
      	
              Computers
                & Office Equipment

            	
              5
                years

            

    

     

    As
      of
      September 30, 2006 Property, Plant & Equipment consist of the
      following:

    

    
      	
              Computers
                & Office equipment

            	
               

            	
               

            	
              15,442
                

            	
               

            
	
               

            	
               

            	
               

            	
              15,442
                

            	
               

            
	
              Accumulated
                depreciation

            	
               

            	
               

            	
              (4,150

            	
              )

            
	
               

            	
               

            	
              $

            	
              11,342

            	
               

            

    

     

    
      
        
        

      

      
        F-10

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

     

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     

    Long-Lived
      Assets 

     

    Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
      144”), which addresses financial accounting and reporting for the impairment or
      disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”
and the accounting and reporting provisions of APB Opinion No. 30, “Reporting
      the Results of Operations for a Disposal of a Segment of a Business.” The
      Company periodically evaluates the carrying value of long-lived assets to be
      held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
      to be recorded on long-lived assets used in operations when indicators of
      impairment are present and the undiscounted cash flows estimated to be generated
      by those assets are less than the assets carrying amounts. In that event, a
      loss
      is recognized based on the amount by which the carrying amount exceeds the
      fair
      market value of the long-lived assets. Loss on long-lived assets to be disposed
      of is determined in a similar manner, except that fair market values are reduced
      for the cost of disposal. Based on its review, the Company believes that, as
      of
      December 31, 2005 there were no significant impairments of its long-lived
      assets. 

     

    Fair
      Value of Financial Instruments 

     

    Statement
      of financial accounting standard No. 107, Disclosures about fair value of
      financial instruments, requires that the Company disclose estimated fair values
      of financial instruments. The carrying amounts reported in the statements of
      financial position for current assets and current liabilities qualifying as
      financial instruments are a reasonable estimate of fair value. 

     

    Revenue
      Recognition 

    

    The
      Company’s revenue recognition policies are in compliance with Staff accounting
      bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
      customers when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectability is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as unearned
      revenue. 

     

    Stock-Based
      Compensation 

     

    In
      October 1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based
      Compensation.” SFAS No. 123 prescribes accounting and reporting standards for
      all stock-based compensation plans, including employee stock options, restricted
      stock, employee stock purchase plans and stock appreciation rights. SFAS No.
      123
      requires compensation expense to be recorded (i) using the new fair value
      method, or (ii) using the existing accounting rules prescribed by Accounting
      Principles Board Opinion No. 25, Accounting for stock issued to employees (“APB
      25”) and related interpretations with proforma disclosure of what net income and
      earnings per share would have been had the Company adopted the new fair value
      method. The Company uses the intrinsic value method prescribed by APB 25 and
      has
      opted for the disclosure provisions of SFAS No.123.

     

    
      
        
        

      

      
        F-11

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

     

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    

    Advertising

    

    Advertising
      expenses consist primarily of costs of promotion for corporate image and product
      marketing and costs of direct advertising. The Company expenses all advertising
      costs as incurred. 

     

    Income
      Taxes

     

    The
      Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized. 

     

    Basic
      and Diluted Earnings Per Share 

     

    Earnings
      per share is calculated in accordance with the Statement of financial accounting
      standards No. 128 (“SFAS No. 128”), “Earnings per share.” SFAS No. 128
      superseded Accounting Principles Board Opinion No.15 (“APB 15”). Net loss per
      share for all periods presented has been restated to reflect the adoption of
      SFAS No. 128. Basic net loss per share is based upon the weighted average number
      of common shares outstanding. Diluted net loss per share is based on the
      assumption that all dilutive convertible shares and stock options were converted
      or exercised. Dilution is computed by applying the treasury stock method. Under
      this method, options and warrants are assumed to be exercised at the beginning
      of the period (or at the time of issuance, if later), and as if funds obtained
      thereby were used to purchase common stock at the average market price during
      the period. 

     

    Statement
      of Cash Flows

     

    In
      accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
      Company’s operations is based upon the local currencies. As a result, amounts
      related to assets and liabilities reported on the statement of cash flows will
      not necessarily agree with changes in the corresponding balances on the balance
      sheet.

     

    
      
        
        

      

      
        F-12

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

    

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     

    Concentration
      of Credit Risk

     

    Financial
      instruments that potentially subject the Company to concentrations of credit
      risk are cash, accounts receivable and other receivables arising from its normal
      business activities. The Company places its cash in what it believes to be
      credit-worthy financial institutions. The Company has a diversified customer
      base, most of which are in China. The Company controls credit risk related
      to
      accounts receivable through credit approvals, credit limits and monitoring
      procedures. The Company routinely assesses the financial strength of its
      customers and, based upon factors surrounding the credit risk, establishes
      an
      allowance, if required, for uncollectible accounts and, as a consequence,
      believes that its accounts receivable credit risk exposure beyond such allowance
      is limited.

     

    Segment
      Reporting 

    

    Statement
      of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure about
      Segments of an Enterprise and Related Information” requires use of the
“management approach model” for segment reporting. The management approach model
      is based on the way a company’s management organizes segments within the company
      for making operating decisions and assessing performance. Reportable segments
      are based on products and services, geography, legal structure, management
      structure, or any other manner in which management disaggregates a company.
      

    

    Recent
      accounting pronouncements 

    

    In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement applies to all voluntary changes in accounting principle and
      requires retrospective application to prior periods’ financial statements of
      changes in accounting principle, unless this would be impracticable. This
      statement also makes a distinction between “retrospective application” of an
      accounting principle and the “restatement” of financial statements to reflect
      the correction of an error. This statement is effective for accounting changes
      and corrections of errors made in fiscal years beginning after December 15,
      2005. 

    

    In
      December 2004, the FASB issued FASB Statement No. 123R, “Share-Based Payment, an
      Amendment of FASB Statement No. 123” (“FAS No. 123R”). FAS No. 123R requires
      companies to recognize in the statement of operations the grant- date fair
      value
      of stock options and other equity-based compensation issued to employees. FAS
      No. 123R is effective beginning in the Company’s first quarter of fiscal 2006.

    

    
      
        
        

      

      
        F-13

        
          

        

      

      
        
        

      

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    

    

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    

    

    In
      June
      2005, the EITF reached consensus on Issue No. 05-6, “Determining the
      Amortization Period for Leasehold Improvements” (“EITF 05-6.”) EITF 05-6
      provides guidance on determining the amortization period for leasehold
      improvements acquired in a business combination or acquired subsequent to lease
      inception. The guidance in EITF 05-6 will be applied prospectively and is
      effective for periods beginning after June 29, 2005. EITF 05-6 is not expected
      to have a material effect on its consolidated financial position or results
      of
      operations.

    

    In
      June
      2005, the FASB Staff issued FASB Staff Position 150-5 (“FSP 150-5”),
“Issuers Accounting under FASB Statement No. 150 for Freestanding Warrants
      and Other Similar Instruments on Shares that are Redeemable.” FSP 150-5
      addresses whether freestanding warrants and other similar instruments on shares
      that are redeemable, either puttable or mandatorily redeemable, would be subject
      to the requirements of FASB Statement No. 150, “Accounting for Certain
      Financial Instruments with Characteristics of Both Liabilities and Equity,”
regardless of the timing or the redemption feature or the redemption price.
      The
      FSP is effective after June 30, 2005. 

    

    On
      February 16, 2006 the Financial Accounting Standards Board (“FASB”) issued
      SFAS 155, “Accounting for Certain Hybrid Instruments,” which amends SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities,” and SFAS 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
      of Liabilities.” SFAS 155 allows financial instruments that have embedded
      derivatives to be accounted for as a whole (eliminating the need to bifurcate
      the derivative from its host) if the holder elects to account for the whole
      instrument on a fair value basis. SFAS 155 also clarifies and amends certain
      other provisions of SFAS 133 and SFAS 140. This statement is effective for
      all
      financial instruments acquired or issued in fiscal years beginning after
      September 15, 2006. The Company does not expect its adoption of this new
      standard to have a material impact on its financial position, results of
      operations or cash flows. 

    

    In
      March
      2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
      Financial Assets - an amendment to FASB Statement No. 140. Statement 156
      requires that an entity recognize a servicing asset or servicing liability
      each
      time it undertakes an obligation to service a financial asset by entering into
      a
      service contract under certain situations. The new standard is effective for
      fiscal years beginning after September 15, 2006. The Company does not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.

    

    The
      Company believes that the adoption of these standards will have no material
      impact on its financial statements.

     

    
      
        
        

      

      
        F-14

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006 

    

     

     Note
      3 - SHARE EXCHANGE
      AGREEMENT

    

    On
      November 28, 2006 Shanghai Joy & Harmony Electronics Company Limited, a
      Corporation in China (“Company”), and the shareholders of the Company (the
“Shareholders”) entered into a Share Exchange Agreement (the “Agreement”) with
      China 3C Group, a Nevada corporation (“CHCG”), Capital Future Development
      Limited, a BVI corporation (“CFDL”). The Shareholders own all of the outstanding
      equity of the Company (the “Shares”). 

     

    CFDL
      is a
      wholly owned subsidiary of CHCG. CFDL purchase from the Shareholders, and the
      Shareholders desire to sell to CFDL the Shares in exchange for shares of CHCG
      Common Stock, all on the terms and subject to the conditions set forth in this
      Agreement (the “Exchange”). As a result of the Exchange, the Company will merge
      with and into CFDL with the Company being the surviving entity.

     

    As
      full
      consideration for the sale, assignment, transfer and delivery of the Shares
      by
      the Shareholders to CFDL, CHCG shall issue to the Shareholders an aggregate
      of
      2,723,110 shares of newly issued shares of CHCG Common Stock (the “Acquisition
      Shares”)
      at
      $4.039 per share (“Average CHCG Stock Price”) and pay cash (the “Cash
      Component”)
      of
      $7,500,000 to the Shareholders. The Cash Component is payable by CHCG as
      follows: $3,000,000 within 10 business days after the Closing and $4,500,000
      is
      payable six months after the Closing as evidenced by a promissory note. The
      parties understand and acknowledge that such exchange is based upon an
      approximate valuation of the Company at US $18,500,000.

    

    Note
      4 - COMPENSATED
      ABSENCES

     

    Regulation
      45 of local labor law entitles employees to annual vacation leave after one
      year
      of service. In general all leave must be utilized annually, with proper
      notification. Any unutilized leave is cancelled. 

    

    Note
      5 - INCOME
      TAXES

    

    The
      Company is governed by the Income Tax Laws of the PRC. Pursuant to the PRC
      Income Tax Laws, the Enterprise Income Tax (EIT) is at a statutory rate of
      33%,
      which is comprises of 30% national income tax and 3% local income
      tax.

    

    
      	
              The
                following is a reconciliation of income tax expense:

            
	
              9/30/2006

            

    

     

    
      	
              Current

            	
               

            	
              $

            	
              1,330,798

            	
               

            
	
              Deferred

            	
               

            	
               

            	 	
               

            
	
              Total

            	
               

            	
              $

            	
              1,330,798

            	
               

            
	
              PRC
                income tax

            	
              %

            	
               

            	
              33 

            	
               

            
	
              Effective
                rate

            	
              %

            	
               

            	
              33 

            	
               

            

    

    

    
      
        
        

      

      
        F-15

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

    

    

     Note
      6 - COMMITTMENTS

     

    The
      Company leases office and warehouse facilities under operating leases that
      terminate through 2007. Rental expense under these agreements consisted of
      $18,676 for the nine months ended September 30, 2006. The Company has the
      following future minimum obligations as of September 30, 2006:

     

    
      	2007	
              19,385    

            

    

    

    Note
      7 - STATUTORY
      RESERVE

    

    In
      accordance with the laws and regulations of the PRC, a wholly-owned Foreign
      Invested Enterprises’ income, after the payment of the PRC income taxes, shall
      be allocated to the statutory surplus reserves and statutory public affair
      fund.
      Prior to January 1, 2006 the proportion of allocation for reserve was ten
      percent (10%) of the profit after tax to the surplus reserve fund and additional
      five to ten percent to the public affair fund. The public affair fund reserve
      was limited to fifty percent (50%) of the registered capital. Effective January
      1, 2006 there is now only one fund requirement. The reserve is ten percent
      (10%)
      of income after tax, not to exceed fifty percent (50%) of registered
      capital.

    

    Statutory
      Reserve funds are restricted for set off against losses, expansion of production
      and operation or increase in register capital of the respective company.
      Statutory public welfare fund is restricted to the capital expenditures for
      the
      collective welfare of employees. These reserves are not transferable to the
      Company in the form of cash dividends, loans or advances. These reserves are
      therefore not available for distribution except in liquidation. As of
      September 30, 2006, the Company had allocated $238,047 to these
      non-distributable reserve funds. 

    

    Note
      8 - OTHER
      COMPREHENSIVE INCOME

    

    Balances
      of related after-tax components comprising accumulated other comprehensive
      income (loss), included in stockholders equity at September 30, 2006 are as
      follows:

    

    
      	
               

            	 	
              Foreign
                Currency Translation Adjustment

            	 	
              Accumulated
                Other Comprehensive Income

            	 
	
              Balance
                at December 31, 2005

            	 	
              $

            	
              38,979

            	 	
              $

            	
              38979

            	 
	
              Change
                for 2005

            	 	 	
              101,588

            	 	 	
              101,588

            	 
	
              Balance
                at September 31, 2005

            	 	
              $

            	
              140,567

            	 	
              $

            	
              140,567

            	 

    

    

    
      
        
        

      

      
        F-16

        
          

        

      

      
        
        

      

    

    

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

    

    

    Note
      9 -
      CURRENT
      VULNERABILITY DUE TO CERTAIN RISK FACTORS

    

    The
      Company’s operations are carried out in the PRC. Accordingly, the Company’s
      business, financial condition and results of operations may be influenced by
      the
      political, economic and legal environments in the PRC, by the general state
      of
      the PRC’s economy. The Company’s business may be influenced by changes in
      governmental policies with respect to laws and regulations, anti-inflationary
      measures, currency conversion and remittance abroad, and rates and methods
      of
      taxation, among other things. 

    

    Note
      10 - MAJOR
      CUSTOMERS AND CREDIT RISK

    

    During
      2006 the Company had no customers accounting for more than ten percent (10%)
      of
      sales and no customers accounted for more than ten percent (10%) of the
      Company’s accounts receivable at September 30, 2006. The Company purchased
      approximately 75.6% of their inventory from four vendors during 2006.

    

    
      
        
        

      

      
        F-17

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