Document:

Exhibit
4.2

 

THIS
NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED
TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY (AS DEFINED IN THE INDENTURE)
OR A NOMINEE THEREOF.  THIS GLOBAL NOTE
IS EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE
DEPOSITORY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE AND, UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES
IN DEFINITIVE FORM, THIS GLOBAL NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE
BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY, OR BY A NOMINEE OF THE
DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY, OR BY THE
DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH
SUCCESSOR DEPOSITORY.

 

UNLESS
THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY, A NEW YORK CORPORATION (“DTC”), TO THE COMPANY (AS DEFINED BELOW) OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

 

	
  REGISTERED

  	
   

  	
  REGISTERED

  
	
   

  	
   

  	
   

  
	
  No. R-1

  	
   

  	
   

  
	
   

  	
   

  	
  $200,000,000

  
	
  CUSIP No.
  04621W AA 8

  	
   

  	
   

  

 

ASSURED
GUARANTY US HOLDINGS INC.

 

7.00% Senior Notes due 2034

 

Assured
Guaranty US Holdings Inc., a Delaware corporation (hereinafter called the
“Company,” which term includes any successor corporation under the Indenture
referred to below), for value received, hereby promises to pay to Cede &
Co., or registered assigns, the principal sum of TWO HUNDRED MILLION Dollars
($200,000,000) on June 1, 2034 and to pay interest thereon from May 18, 2004 or
from the most recent interest payment date to which interest has been paid or
duly provided for, payable semiannually on June 1 and December 1 in each year
(each, an “Interest Payment Date”), commencing December 1, 2004, at the rate of
7.00% per annum, until the principal hereof is paid or duly made available for
payment.  Interest on this Note shall be
computed on the basis of a 360-day year of twelve 30-day months.  If any Interest Payment Date or the maturity
date falls on a day that is not a Business Day, the required payment shall be
made on the next Business Day as if it were made on the date such payment

 

1

 

was due and no interest shall
accrue on the amount so payable for the period from and after such Interest
Payment Date or the maturity date, as the case may be, to such next Business
Day.  The interest so payable and
punctually paid or duly provided for on any Interest Payment Date will, as
provided in such Indenture, be paid to the Person in whose name this Note (or
one or more Predecessor Notes) is registered at the close of business on the
regular record date for such interest, which shall be May 15 or November 15
(whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date.  Any such
interest which is payable, but is not punctually paid or duly provided for, on
any Interest Payment Date shall forthwith cease to be payable to the registered
Holder hereof on the relevant regular record date by virtue of having been such
Holder, and may be paid to the Person in whose name this Note (or one or more Predecessor
Notes) is registered at the close of business on a subsequent special record
date (which shall be at least 10 days before the payment date) for the payment
of such defaulted interest to be fixed by the Company, notice whereof shall be
given to the Holders of Notes of this series not less than 10 days prior to
such Special Record Date, or may be paid at any time in any other lawful manner
not inconsistent with the requirements of any securities exchange on which the
Notes may be listed, and upon such notice as may be required by such exchange,
all as more fully provided in such Indenture.

 

Payment of the
principal of, any premium, and the interest and any Additional Amounts on this
Note will be made at the office or agency of the Company and the Guarantor (as
defined below) maintained for that purpose in The Borough of Manhattan, The
City of New York, in such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public and private debts;
provided, however, that, at the option of the Company or the Guarantor,
interest may be paid by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register; provided,
further, that payment to DTC or any successor Depository may be made by wire
transfer to the account designated by DTC or such successor depository in
writing.

 

REFERENCE IS
HEREBY MADE TO THE FURTHER PROVISIONS OF THIS NOTE SET FORTH ON THE REVERSE
HEREOF, WHICH FURTHER PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS
IF SET FORTH AT THIS PLACE.

 

Unless the
certificate of authentication hereon has been executed by the Trustee referred
to on the reverse hereof by manual signature, this Note shall not be entitled
to any benefit under the Indenture or be valid or obligatory for any purpose.

 

[Signatures appear on next page]

 

2

 

IN WITNESS WHEREOF, the Company has caused
this instrument to be duly executed under its corporate seal.

 

	
  ATTEST:

  	
  ASSURED GUARANTY
  US HOLDINGS INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
  Name:

  
	
   

  	
  Title:

  	
   

  	
  Title:

  
						

 

 

CERTIFICATE OF AUTHENTICATION

 

This is one of the Notes of the series
designated therein referred to in the within-mentioned Indenture.

 

	
  Dated:  May 18, 2004

  	
  THE BANK OF
  NEW YORK, as Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
    Authorized
  Signatory

  

 

3

 

REVERSE
SIDE OF NOTE

 

Section
1.  Indenture; Ranking

 

This Note is
one of a duly authorized issue of securities of the Company (herein called the
“Notes”), fully and unconditionally guaranteed (the “Guarantee”) as to payment
of principal, premium, if any, interest and any Additional Amounts (as defined
in Section 3 hereof) by Assured Guaranty Ltd., a Bermuda company (the
“Guarantor”), issued and to be issued in one or more series under an Indenture,
dated as of May 1, 2004 (herein called, together with all indentures
supplemental thereto, the “Indenture”), among the Company, the Guarantor and
The Bank of New York, as Trustee (herein called the “Trustee,” which term
includes any successor trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties and immunities thereunder of the
Company, the Guarantor, the Trustee and the Holders, and of the terms upon
which the Notes are, and are to be, authenticated and delivered.

 

The Notes are
senior unsecured obligations of the Company initially limited to $200,000,000
aggregate principal amount at any one time outstanding; provided, however, that
the aggregate principal amount of the Notes may be increased in the future,
without the consent of the Holders, on the same terms and with the same CUSIP
numbers as the Notes.  This Note is one
of a series designated as 7.00% Senior Notes due 2034 of the Company.  The Notes will rank equally with all other
unsecured senior indebtedness of the Company from time to time outstanding.  The Notes will be structurally subordinated
to all obligations of the Company’s subsidiaries from time to time outstanding,
including claims with respect to trade payables

 

No reference
herein to the Indenture and no provision of this Note or of the Indenture shall
alter or impair the obligations of the Company and the Guarantor, which are
absolute and unconditional, to pay the principal of, any premium, interest and
any Additional Amounts on this Note, at the times, place and rate, and in the
coin or currency, herein prescribed.

 

Section 2.  Optional
Redemption

 

The Notes may
be redeemed in whole at any time or in part from time to time, at the Company’s
option, at a redemption price equal to the greater of:

 

(1) 100% of
the principal amount of the Notes to be redeemed and

 

(2) the sum of
the present values of the remaining scheduled payments of principal and
interest (excluding interest accrued to the redemption date) on the Notes to be
redeemed discounted to the date of redemption on a semi-annual basis (assuming
a 360-day year consisting of twelve 30-day months) at the applicable Treasury
Rate plus 30 basis points,

 

plus, in each case, accrued and
unpaid interest on the principal amount being redeemed to the redemption date.

 

“Treasury
Rate” means, with respect to any redemption date, (1) the yield, under the
heading which represents the average for the immediately preceding week,
appearing in the most

 

4

 

recently published statistical
release designated “H.15(519)” or any successor publication which is published
weekly by the Board of Governors of the Federal Reserve System and which
establishes yields on actively traded United States Treasury securities
adjusted to constant maturity under the caption “Treasury Constant Maturities,”
for the maturity corresponding to the Comparable Treasury Issue (if no maturity
is within three months before or after the Remaining Life, yields for the two
published maturities most closely corresponding to the Comparable Treasury
Issue will be determined and the Treasury Rate will be interpolated or
extrapolated from such yields on a straight line basis, rounding to the nearest
month) or (2) if such release (or any successor release) is not published
during the week preceding the calculation date or does not contain such yields,
the rate per year equal to the semi-annual equivalent yield-to-maturity of the
Comparable Treasury Issue, calculated using a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount) equal to the
Comparable Treasury Price for such redemption date. The Treasury Rate will be
calculated on the third Business Day preceding the redemption date.

 

“Business Day”
means any calendar day that is not a Saturday, Sunday or legal holiday in New
York, New York and on which commercial banks are open for business in New York,
New York.

 

“Comparable
Treasury Issue” means the United States Treasury security selected by an
Independent Investment Banker as having a maturity comparable to the remaining
term  “Remaining Life”) of the Notes to
be redeemed.

 

“Comparable
Treasury Price” means (1) the average of five Reference Treasury Dealer
Quotations for such redemption date, after excluding the highest and lowest
Reference Treasury Dealer Quotations, or (2) if the Independent Investment
Banker obtains fewer than five such Reference Treasury Dealer Quotations, the
average of all such quotations.

 

“Independent
Investment Banker” means either Banc of America Securities LLC or J.P. Morgan
Securities Inc., and their respective successors, or, if both firms are
unwilling or unable to select the Comparable Treasury Issue, an independent
investment banking institution of national standing appointed by the Trustee
after consultation with the Company.

 

“Reference
Treasury Dealer” means (1) each of Banc of America Securities LLC and J.P.
Morgan Securities Inc., or their respective successors; provided, however, that
if any of the foregoing shall cease to be a primary U.S. Government securities
dealer in New York City (a “Primary Treasury Dealer”), the issuer will
substitute another Primary Treasury Dealer and (2) any three other Primary
Treasury Dealers selected by the Independent Investment Banker after
consultation with the Company.

 

“Reference
Treasury Dealer Quotations” means, with respect to each Reference Treasury
Dealer and any redemption date, the average, as determined by the Independent
Investment Banker, of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) quoted
in writing to the Independent Investment Banker at 5:00 p.m., New York City
time, on the third Business Day preceding such redemption date.

 

5

 

Holders of
Notes to be redeemed will be sent notice thereof by first-class mail at least
30 and not more than 60 days before the date fixed for redemption. If fewer
than all of the Notes are to be redeemed, the Trustee will select, not more
than 60 days and not less than 30 days before the redemption date, the
particular Notes or portions thereof for redemption from the outstanding Notes
not previously called by such method as the Trustee deems fair and appropriate.
Unless the Company defaults in payment of the redemption price, on and after
the redemption date, interest will cease to accrue on the Notes called for
redemption.

 

Section 3.         Additional
Amounts.

 

The Company
and the Guarantor will make all payments under or with respect to the Notes and
the Guarantee free and clear of and without withholding or deduction for or on
account of any present or future tax, duty, levy, impost, assessment or other
governmental charge (hereinafter “Taxes”) imposed or levied by or on behalf of
the United States of America or Bermuda, or any political subdivision or any
authority or agency therein or thereof having power to tax (a “Taxing
Jurisdiction”), unless the Company or the Guarantor is required to withhold or
deduct Taxes by law or by the interpretation or administration thereof.  As used in this Note, the term ‘‘Taxes’’
shall not include (i) any estate, inheritance, gift, sale, transfer, personal
property or similar tax, assessment, or governmental charge; (ii) any Tax
payable otherwise than by withholding from payments in respect of the Notes or
the guarantees; and (iii) any Tax imposed by reason of payments on the Notes
being treated as ‘‘contingent interest’’ within the meaning of Section
871(h)(4) of the Internal Revenue Code of 1986, as amended (the “Code”)

 

If the Company
or the Guarantor is required to withhold or deduct any amount for or on account
of Taxes imposed by a Taxing Jurisdiction from any payment made under or with
respect to the Notes or the Guarantee, the Company or the Guarantor shall pay
such additional amounts (“Additional
Amounts”) as may be necessary so that the net amount received by Holders of the
Notes after such withholding or deduction (including any withholding or
deduction attributable to Additional Amounts payable hereunder) will not be
less than the amount such Holders would have received if such Taxes had not
been withheld or deducted; provided,
however, that the foregoing obligation to pay Additional Amounts
does not apply to any Taxes to the extent such Taxes would not have been so
imposed:

 

(1)           but for the relevant
Holder (or the beneficial owner of such Notes) (i) having any present or former
connection with the Taxing Jurisdiction, including, without limitation, being
or having been a citizen or resident thereof, or having been present, having
been incorporated in, having engaged in a trade or business or having (or
having had) a permanent establishment or principal office therein, (ii) being a
controlled foreign corporation within the meaning of Section 957(a) of the Code
related within the meaning of Section 864(d)(4) of the Code to the Company or
the Guarantor, (iii) being an actual or constructive owner of 10 percent or
more of the total combined voting power of all classes of stock of the Company
or the Guarantor entitled to vote, (iv) being a bank for United States federal
income tax purposes whose receipt of interest on the Note is described in
Section 881(c)(3)(A) of the Code or (v) being subject to backup withholding as
of the date of the purchase by the Holder of the Note;

 

6

 

(2)           but for the failure
of the relevant Holder (or the beneficial owner of such Notes) to use its
reasonable best efforts, to the extent such Holder (or beneficial owner) is
legally entitled to do so, to comply upon written notice by the Company or the
Guarantor delivered 60 days prior to any payment date with a request to satisfy
any certification, identification or other reporting requirements, which shall
include any applicable forms or instructions, whether imposed by statute,
treaty, regulation, or administrative practice, concerning the nationality or
residence of such Holder or the connection of such Holder with the Taxing
Jurisdiction;

 

(3)           but for an election
by the Holder of such Notes, the effect of which is to make one or more
payments in respect of such Notes subject to United States federal income tax
or withholding tax provisions;

 

(4)           if the payment could
have been made without such deduction or withholding if the relevant Holder had
presented such Note for payment within 30 days after the date on which such
payment became due and payable or the date on which payment thereof is duly
provided for, whichever is later (except to the extent that the Holder would
have been entitled to Additional Amounts had such Note been presented on the
last day of such 30-day period),

 

(5)           with respect to any
payment of principal of (or premium, if any, on) or interest on such Note to
any Holder who is a fiduciary or partnership or any person other than the sole
beneficial owner of such payment, to the extent that a beneficiary with respect
to such fiduciary, a member of such a partnership or the beneficial owner of
such payment would not have been entitled to the Additional Amounts had such
beneficiary, member or beneficial owner been the actual Holder of such Note
(but only if there is no material cost or expense associated with transferring
such Notes to such beneficiary, partner or beneficial owner and no restriction
on such transfer that is outside the control of such beneficiary, partner or
beneficial owner); and

 

(6)           any combination of
items (1), (2), (3), (4) or (5) above.

 

Section 4.         Redemption
for Changes in Withholding Taxes.

 

The Company will be entitled
to redeem the Notes, at its option, at any time as a whole but not in part,
upon not less than 30 nor more than 60 days’ notice, at 100% of the principal
amount thereof, plus accrued and unpaid interest (if any) to the date of
redemption (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date), in the
event that the Company or the Guarantor has become or would become obligated to
pay, on the next date on which any amount would be payable with respect to the
Notes, any Additional Amounts or indemnification payments as a result of:

 

•        a
change in or an amendment to the laws (including any regulations promulgated
thereunder) of a Taxing Jurisdiction, which change or amendment is announced
after May 13, 2004; or

 

7

 

•        any
change in or amendment to any official position regarding the application or
interpretation of such laws or regulations, which change or amendment is
announced after May 13, 2004,

 

and, in each case, the Company or the Guarantor, as applicable, cannot
avoid such obligation by taking reasonable measures available to it.

 

Before the Company publishes
or mails notice of redemption of the Notes as described above, it will deliver
to the Trustee an Officers’ Certificate to the effect that it cannot avoid its
obligation to pay Additional Amounts by taking reasonable measures available to
it and an opinion of independent legal counsel of recognized standing stating
that the Company or the Guarantor, as applicable, would be obligated to pay
Additional Amounts as a result of a change in tax laws or regulations or the
application or interpretation of such laws or regulations.

 

Section 5.  Sinking Fund

 

The Notes are not subject to any sinking fund.

 

Section 6.  Denominations;
Transfer; Exchange

 

The Notes are
issuable in registered form without coupons in denominations of $1,000 and
whole multiples of $1,000.  A Holder may
transfer or exchange Notes in accordance with the Indenture.  Upon any transfer or exchange, the Registrar
and the Trustee may require a Holder, among other things, to furnish
appropriate endorsements or transfer documents and to pay any taxes required by
law or permitted by the Indenture.  The
Registrar need not register the transfer of or exchange any Notes selected for
redemption or to transfer or exchange any Notes for a period of 15 days prior
to the mailing of a notice of redemption of Notes to be redeemed.

 

A global Note
deposited with the Depository or the Trustee shall be transferred  to the beneficial owner thereof in the form
of certificated Notes only if (i) the depositary for the global Note
notifies the Company that it is unwilling, unable or ineligible to continue as
depositary for the global Note and the Company does not appoint a successor
depositary within 90 days after the Company receives that notice of
unwillingness or ineligibility; (2)  the
Company notifies the Trustee in writing that the Company elects to cause the
issuance of the  Notes in certificated
form; or (3) an Event of Default has occurred and is continuing with respect to
the Notes.  Upon surrender by the
depositary of the global Note, certificated Notes will be issued to each Person
that the depositary identifies as the beneficial owner of the Notes represented
by the global Note.  Upon any such
issuance, the Trustee is required to register the certificated Notes in the
name of the Person or Persons or the nominee of any of these Persons and cause
the same to be delivered to these Persons. 
None of the Company, the
Guarantor or the Trustee shall be liable for any delay by the depositary or any
participant or indirect participant in identifying the owners of beneficial
interests in the global Notes and each of them may conclusively rely on, and
will be protected in relying on, instructions from the depositary for all
purposes, including with respect to the registration and delivery, and the
respective principal amounts, of the certificated Notes to be issued.

 

8

 

Section
7.  Events of Default.

 

If an Event of
Default with respect to the Notes shall occur and be continuing, the principal of
the Notes may be declared due and payable in the manner, with the effect and
subject to the conditions provided in the Indenture.

 

Section
8.  Modification and Waiver.

 

The Indenture
permits, with certain exceptions as therein provided, the amendment thereof and
the modification of the Indenture and the Notes at any time by the Company, the
Guarantor and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time Outstanding.
The Indenture also contains provisions permitting the Holders of at least a
majority in principal amount of the Notes at the time Outstanding, on behalf of
the Holders of all Notes, to waive compliance by the Company with certain
covenants of the Indenture. In addition, the Holders of not less than a
majority in aggregate principal amount of the Notes at the time Outstanding, on
behalf of the Holders of all Notes, may waive certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange hereof or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.

 

Section
9.  Persons Deemed Owners.

 

The registered
Holder may be treated as the owner of it for all purposes.

 

Section
9.  Unclaimed Money.

 

If money for
the payment of principal or interest remains unclaimed for two years, the
Trustee or Paying Agent shall pay the money back to the Company at its written
request unless an abandoned property law designates another Person.  After any such payment, Holders entitled to
the money must look only to the Company and not to the Trustee for payment.

 

Section
11  Discharge and Defeasance.

 

Subject to
certain conditions, the Company and the Guarantor at any time may terminate
some of or all of their obligations under the Notes, the Guarantee and the
Indenture if the Company or the Guarantor deposits with the Trustee money or
U.S. Government Obligations for the payment of principal and interest on the
Notes to redemption or maturity, as the case may be.

 

Section
12  Trustee Dealings with the Company.

 

Subject to
certain limitations imposed by the Trust Indenture Act, the Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Notes and may otherwise deal with and collect obligations owed to it
by the Company or its Affiliates and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee.

 

9

 

Section
13  No Recourse Against Others.

 

A director,
officer, employee or stockholder, as such, of the Company or the Guarantor
shall not have any liability for any obligations of the Company or the
Guarantor, as the case may be, under the Notes, the Guarantee or the Indenture
or for any claim based on, in respect of or by reason of such obligations or
their creation.  By accepting a Note,
each Holder waives and releases all such liability.  The waiver and release are part of the consideration for the
issue of the Notes.

 

Section
14  Authentication.

 

This Note
shall not be valid until an authorized signatory of the Trustee (or an
authenticating agent) manually signs the certificate of authentication on the
other side of this Note.

 

Section
15  Governing Law.

 

THIS NOTE
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF
LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION
WOULD BE REQUIRED THEREBY.

 

Section
16  CUSIP Numbers.

 

Pursuant to a
recommendation promulgated by the Committee on Uniform Security  Identification Procedures, the Company has
caused CUSIP numbers to be printed on the Notes and has directed the Trustee to
use CUSIP numbers in notices of redemption as a convenience to Holders.  No representation is made as to the accuracy
of such numbers either as printed on the Notes or as contained in any notice of
redemption and reliance may be placed only on the other identification numbers
placed thereon.

 

Section
17  Defined Terms.

 

All terms used
in this Note which are defined in the Indenture and not otherwise defined
herein shall have the meanings assigned to them in the Indenture.

 

The Company
will furnish to any Holder upon written request and without charge to the
Holder a copy of the Indenture.

 

10

 

ABBREVIATIONS

 

The following abbreviations, when used in the
inscription on the face of this instrument, shall be construed as though they
were written out in full according to applicable laws or regulations:

 

	
  TEN COM

  	
   

  	
  —

  	
   

  	
  as tenants
  in common

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TEN ENT

  	
   

  	
  —

  	
   

  	
  as tenants
  by the entireties

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  JT TEN

  	
   

  	
  —

  	
   

  	
  as joint
  tenants with right of survivorship and not as tenants in common

  

 

	
  UNIF GIFT
  MIN ACT

  	
  —

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Minor)

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Custodian

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Cust)

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Under
  Uniform Gifts to Minors Act

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (State)

  	
   

  
										

 

Additional abbreviations may
also be used though not in the above list.

 

11

 

FOR VALUE RECEIVED, the
undersigned registered Holder hereby sell(s), assign(s) and transfer(s) unto

 

 

 

[PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE]

 

 

 

 

[PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS
OF ASSIGNEE]

 

 

the within Note and all rights
thereunder, hereby irrevocably constituting and appointing
                                                                                                 
to transfer said Note on the books of the Company with full power of
substitution in the premises.

 

 

	
  Dated:

  	
   

  	
   

  
	
  Signature:

  	
   

  	
   

  
					

 

 

Notice:          The
signature to this assignment must correspond with the name as it appears upon
the face of the within Note in every particular, without alteration or
enlargement or any change whatsoever.

 

 

	
  Signature
  Guaranty:

  	
   

  
	
   

  	
  Signatures must be guaranteed by an “eligible guarantor institution”
  meeting the requirements of the Trustee, which requirements include
  membership or participation in the Security Transfer Agent Medallion Program
  (“STAMP”) or such other “signature guarantee program” as may be determined by
  the Trustee in addition to, or in substitution for, STAMP, all in accordance
  with the Securities Exchange Act of 1934, as amended.

  

 

12BP53409 -- Teda Travel Group, Inc. -- Exhibit 10.2

EXHIBIT 10.2

TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003 AND 2002

TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONTENTS

	PAGE

	1

	INDEPENDENT AUDITORS' REPORT

	             

	                

	                                                                                                                            

	PAGE

	2

	CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 

AND 2002

	 	 	 
	PAGE

	3

	CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 

YEARS ENDED DECEMBER 31, 2003 AND 2002

	 	 	 
	PAGE

	4

	CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY 

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

	 	 	 
	PAGE

	5

	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 

YEARS ENDED DECEMBER 31, 2003 AND 2002

	 	 	 
	PAGES

	6 – 14

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF 

DECEMBER 31, 2003 AND 2002

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of:

Teda Hotels Management Company, Limited

(A Wholly Owned Subsidiary of Teda Travel, Inc.)

We have audited the accompanying consolidated balance sheets of Teda Hotels Management Company, Limited and subsidiary (a wholly owned subsidiary of Teda Travel, Inc.) as of December 31, 2003 and 2002 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly in all material respects, the consolidated financial position of Teda Hotels Management Company, Limited and subsidiary (a wholly owned subsidiary of Teda Travel, Inc.) as of December 31, 2003 and 2002 and the results of their operations and their cash flows for the years ended December 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.

WEBB & COMPANY, P.A.

Boynton Beach, Florida

April 9, 2004

1

TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002

	 	2003

	 	2002

	ASSETS

	 

	 	     

	 	 
	 	 	 	 	 	 
	CURRENT ASSETS

	 	 	 	 	 
	Cash

	$

	98,079

	 	$

	323,283

	Accounts receivable, net

	 	88,509

	 	 	176,455

	Prepaid expenses and other current assets

	 	55,355

	 	 	2,889

	Due from director

	 	—

	 	 	6,659

	Total Current Assets

	 	241,943

	 	 	509,286

	                                                                                                                

	 	 	 	 	 
	PROPERTY AND EQUIPMENT, NET

	 	13,064

	 	 	3,506

	 	 	 	 	 	 
	INVESTMENT IN AFFILIATE

	 	3,661,868

	 	 	3,613,334

	 	 	 	 	 	 
	TOTAL ASSETS

	$

	3,916,875

	 	$

	4,126,126

	 	 	 	 	 	 
	LIABILITIES AND STOCKHOLDERS’ EQUITY

	 	 	 	 	 
	 	 	 	 	 	 
	CURRENT LIABILITIES

	 	 	 	 	 
	Accounts payable and accrued expenses

	$

	47,334

	 	$

	87,356

	Due to related parties

	 	3,263,724

	 	 	3,392,299

	 	 	 	 	 	 
	TOTAL LIABILITIES

	 	3,311,058

	 	 	3,479,655

	 	 	 	 	 	 
	STOCKHOLDERS’ EQUITY

	 	 	 	 	 
	Common stock, $1.00 par value, 50,000 shares authorized, 

100 shares issued and outstanding

	 	

100

	 	 	

100

	Retained earnings

	 	605,717

	 	 	646,326

	Total Stockholders’ Equity

	 	605,817

	 	 	646,471

	 	 	 	 	 	 
	TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

	$

	3,916,875

	 	$

	4,126,126

2

TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

	 	2003

	 	2002

	 
	                                                                                                                    

	 	 	     

	 	 	 
	REVENUE, NET

	$

	396,794

	 	$

	515,546

	 
	 	 	 	 	 	 	 
	EXPENSES

	 	 	 	 	 	 
	Management fees

	 	31,400

	 	 	24,645

	 
	Payroll

	 	117,784

	 	 	139,306

	 
	Other selling, general and administrative

	 	313,046

	 	 	268,050

	 
	Total Expenses

	 	462,230

	 	 	432,001

	 
	 	 	 	 	 	 	 
	INCOME (LOSS) FROM OPERATIONS

	 	(65,436

	)

	 	83,545

	 
	 	 	 	 	 	 	 
	OTHER INCOME (EXPENSE)

	 	 	 	 	 	 
	Equity in earnings of affiliate

	 	51,409

	 	 	223,909

	 
	Loss on disposal of property and equipment

	 	(3,202

	)

	 	—

	 
	Other income

	 	370

	 	 	591

	 
	Total Other Income (Expense)

	 	48,577

	 	 	224,500

	 
	 	 	 	 	 	 	 
	INCOME (LOSS) BEFORE INCOME TAXES

	 	(16,859

	)

	 	308,045

	 
	 	 	 	 	 	 	 
	Income taxes

	 	23,795

	 	 	23,977

	 
	 	 	 	 	 	 	 
	NET INCOME (LOSS)

	$

	(40,654

	)

	$

	284,068

	 
	 	 	 	 	 	 	 
	NET INCOME (LOSS) PER COMMON SHARE – 

BASIC AND DILUTED

	

$

	

(406.54

	

)

	

$

	

2,840.68

	 
	 	 	 	 	 	 	 
	WEIGHTED AVERAGE SHARES OUTSTANDING – 

BASIC AND DILUTED

	 	

100

	 	 	

100

	 

3

TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

	 	 	Common Stock

	 	Retained

Earnings

	 	Total

	 
	Shares

	 	Amount

	                                                                                        

	 	 	     

	 	 	     

	 	 	     

	 	 	 
	Balance, December 31, 2001

	 	100

	 	$

	100

	 	$

	362,303

	 	$

	362,403

	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net income, 2002

	 	—

	 	 	—

	 	 	284,068

	 	 	284,068

	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Balance, December 31, 2002

	 	100

	 	 	100

	 	 	646,371

	 	 	646,471

	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net loss, 2003

	 	—

	 	 	—

	 	 	(40,654

	)

	 	(40,654

	)

	 	 	 	 	 	 	 	 	 	 	 	 	 
	BALANCE, DECEMBER 31, 2003

	 	100

	 	$

	100

	 	$

	605,717

	 	$

	605,817

	 

4

TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY

(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

	 	2003

	 	2002

	 
	CASH FLOWS FROM OPERATING ACTIVITIES:

	 	 	     

	 	 	 
	Net income (loss)

	$

	(40,654

	)

	$

	284,068

	 
	Adjustments to reconcile net income (loss) to net cash 

provided by (used in) operating activities:

	 	 	 	 	 	 
	Depreciation and amortization

	 	5,890

	 	 	2,538

	 
	Loss on disposal of property and equipment

	 	3,202

	 	 	—

	 
	Provision for bad debts

	 	21,556

	 	 	—

	 
	Earnings in affiliate

	 	(48,534

	)

	 	(223,909

	)

	(Increase) decrease in:

	 	 	 	 	 	 
	Prepaid expenses

	 	(52,466

	)

	 	(2,086

	)

	Accounts receivable

	 	66,390

	 	 	23,235

	 
	Increase (decrease) in:

	 	 	 	 	 	 
	Accounts payable and accrued expenses

	 	(40,022

	)

	 	61,470

	 
	Net Cash Provided By (Used In) Operating Activities

	 	(84,638

	)

	 	145,316

	 
	                                                                                                                  

	 	 	 	 	 	 
	CASH FLOWS FROM INVESTING ACTIVITIES:

	 	 	 	 	 	 
	Purchase of property and equipment

	 	(18,650

	)

	 	(1,371

	)

	Due from directors

	 	6,659

	 	 	128

	 
	Due from stockholders

	 	2,489

	 	 	2,129

	 
	Net Cash Provided By (Used In) Investing Activities

	 	(9,502

	)

	 	886

	 
	 	 	 	 	 	 	 
	CASH FLOWS FROM FINANCING ACTIVITIES:

	 	 	 	 	 	 
	Payments on notes payable

	 	(131,064

	)

	 	—

	 
	Net Cash (Used In) Financing Activities

	 	(131,064

	)

	 	—

	 
	 	 	 	 	 	 	 
	INCREASE (DECREASE) IN CASH AND 

CASH EQUIVALENTS

	 	

(225,204

	

)

	 	

146,202

	 
	 	 	 	 	 	 	 
	CASH AND CASH EQUIVALENTS - BEGINNING 

OF YEAR

	 	

323,283

	 	 	

177,081

	 
	 	 	 	 	 	 	 
	CASH AND CASH EQUIVALENTS - END OF YEAR

	$

	98,079

	 	$

	323,283

	 
	 	 	 	 	 	 	 
	SUPPLEMENTAL DISCLOSURE OF CASH FLOW 

INFORMATION:

	 	 	 	 	 	 
	 	 	 	 	 	 	 
	Cash paid for income taxes

	$

	26,037

	 	$

	15,716

	 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

During 2002, the Company recorded an investment in affiliate and due to related party of $3,389,425.

5

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND 

ORGANIZATION

(A) Nature of Operations and Organization and Basis of Presentation

Teda Hotels Management Company, Limited was incorporated in the British Virgin Islands on June 23, 2001.

Teda Hotels Management, Limited was incorporated in Hong Kong on July 28, 2000.

Teda Hotels Management Company, Limited is a wholly owned subsidiary of Teda Travel, Inc. (the “Parent”). Teda Hotels Management Company, Limited is hereafter referred to as (the “Company”) (See Note 11).

The Company provides management services for hotels and resorts located in China and invests in real estate through its joint venture in China.

(B) Principles of Consolidation

The accompanying consolidated financial statements for 2003 and 2002 include the accounts of Teda Hotels Management Company, Limited and its wholly owned subsidiary Teda Hotels Management Limited. The Company accounts for its 35% investment in a joint venture on the equity method (See Note 4).

All significant intercompany transactions and balances have been eliminated in the combination.

(C) Use of Estimates

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

(D) Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of the assets from three to thirty nine years. Repairs and maintenance on property and equipment are expensed as incurred.

(E) Revenue Recognition

The Company recognizes hotel and resort management service fees in the period when the services are rendered and earned.

6

(F) Earnings (Loss) Per Common Share

Basic earnings (loss) per common share are computed by dividing the net income (loss) applicable to common stock stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares including the dilutive effect of common share equivalents then outstanding. There are no dilutive securities outstanding as of December 31, 2003 and 2002.

(G) Foreign Currency Translation

The Company’s assets and liabilities that are denominated in foreign currencies are translated into the currency of U.S. dollars using the exchange rates at the balance sheet date. For revenues and expenses, the average exchange rate during the year was used to translate Hong Kong dollars and Chinese Renminbi into United States dollars. The translation gains and losses resulting form changes in the exchange rate are charged or credited directly to the shareholders’ equity section of the balance sheet when material. All realized and unrealized transaction gains and losses are included in the determination of income in the period in which they occur. Translation and transaction gains and losses are not included in the statement of operations because they are not material as of December 31, 2003 and 2002.

(H) Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including accounts payable and accrued interest, approximate fair value due to the relatively short period to maturity for these instruments.

(I) Income Taxes

The Company accounts for income taxes under the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (“Statement 109”). Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(J) Long-Lived Assets

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

7

(K) Concentration of Credit Risk

The Company maintains its cash in foreign bank deposit accounts, which at times may exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk for cash.

(L) Business Segments

The Company's operating segments are organized internally primarily by the type of services performed. The Company’s two operating segments include property management and real estate investments.

(M) Recent Accounting Pronouncements

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, and Interpretation of ARB 51". FIN No. 46 provides guidance on the identification of entities of which control is achieved through means other than voting rights (“variable interest entities” or “VIE’s”) and how to determine when and which business enterprise should consolidate the VIE (the “Primary Beneficiary”). In addition, FIN No. 46 required that both the Primary Beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The transitional disclosure requirements of FIN No. 46 are required in all financial statements initially issued after January 31, 2003, if certain conditions are met.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This statement is effective for contracts entered into or modified after June 30, 2003 and all of its provisions should be applied prospectively.

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS No. 150 requires that those instruments be classified as liabilities in the balance sheet.

SFAS No. 150 affects the issuer’s accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options and forward purchase contracts, which involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this Statement is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such 

8

as a market index, or varies inversely with the value of the issuer’s shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety.

Most of the provisions of SFAS No. 150 are consistent with the existing definition of liabilities of FASB Concepts Statement No. 6, “Elements of Financial Statements”. The remaining provisions of this statement are consistent with the FASB’s proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own shares. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003.

The adoption of these pronouncements will not have a material effect on the Company’s financial position or results of operations.

NOTE 2

ACCOUNTS RECEIVABLE

Accounts receivable were as follows at December 31, 2003 and 2002:

	 	2003

	 	2002

	                                                                                                                  

	 	             

	     

	 	             

	Accounts receivable

	$

	110,065

	 	$

	176,455

	Less Allowance for doubtful accounts

	 	21,556

	 	 	—

	 	 	 	 	 	 
	 	$

	88,509

	 	$

	176,455

For the years ended December 31, 2003 and 2002, the Company recorded a provision for doubtful accounts of $21,556 and $0, respectively.

NOTE 3

PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 2003 and 2002 consisted of the following:

	 	2003

	 	2002

	                                                                                                                  

	 	             

	     

	 	             

	Computer equipment

	$

	15,104

	 	$

	8,380

	Office furniture

	 	7,657

	 	 	—

	Less accumulated depreciation

	 	9,697

	 	 	4,874

	 	 	 	 	 	 
	 	$

	13,064

	 	$

	3,506

Depreciation expense for the years ended December 31, 2003 and 2002 was $5,890 and $2,538, respectively. During 2003, the Company closed its Beijing office and recognized a loss on leasehold improvements of $3,202.

9

NOTE 4

INVESTMENT IN AFFILIATE

On January 6, 2002, the Company acquired a 35% interest in a real estate joint venture located in China. The joint venture was formed to develop and manage a mixed-use complex of apartments, restaurants, a hotel and a private clubhouse. The joint venture was formed with a maximum life of 50 years.

The Company’s 35% interest in the joint venture is accounted for using the equity method of accounting and is stated at cost plus equity in undistributed earnings since acquisition. The Company’s share of the earnings for 2003 and 2002 was $51,408 and $223,909.

A summary of the audited financial statements of the affiliate as of December 31, 2003 and 2002 is as follows:

	 	 	2003

	 	2002

	        

	                                                                                              

	 	                  

	     

	 	                  

	 	Current assets

	$

	15,573,083

	 	$

	10,379,641

	 	Non-current assets

	 	32,624,627

	 	 	26,904,049

	 	 	 	 	 	 	 
	 	Total Assets

	$

	48,197,710

	 	$

	37,283,690

	 	 	 	 	 	 	 
	 	Current liabilities

	$

	32,977,282

	 	$

	25,191,768

	 	Non-current liabilities

	 	4,837,929

	 	 	4,837,930

	 	Stockholders’ equity

	 	10,382,499

	 	 	7,253,992

	 	 	 	 	 	 	 
	 	Total Liabilities and Stockholders’ Equity

	$

	48,197,710

	 	$

	37,283,690

	 	 	 	 	 	 	 
	 	Revenues

	 	9,910,030

	 	 	22,469,595

	 	 	 	 	 	 	 
	 	Operating Income

	 	2,720,928

	 	 	1,052,595

	 	 	 	 	 	 	 
	 	Net Income

	$

	1,026,918

	 	$

	964,681

The Company’s share of the earnings for 2003 after accounting for differences between Hong Kong GAAP and U.S. GAAP:

	 	 	2003

	 	2002

	        

	                                                                                              

	 	                  

	     

	 	                  

	 	Company share at 35%

	$

	359,421

	 	$

	337,638

	 	Less U.S. GAAP adjustment for depreciation

	 	308,013

	 	 	113,729

	 	 	 	 	 	 	 
	 	Equity in earnings of affiliate

	$

	51,408

	 	$

	223,909

10

NOTE 5

DUE TO RELATED PARTIES

Due to related parties at December 31, 2003 and 2002 consists of the following:

	 	 	2003

	 	2002

	        

	                                                                                              

	 	                  

	     

	 	                  

	 	Due to Parent

	$

	3,258,361

	 	$

	3,389,425

	 	Due to company owned by a stockholder and director

	 	5,363

	 	 	2,874

	 	 	 	 	 	 	 
	 	 	$

	3,263,724

	 	$

	3,392,299

NOTE 6

COMMITMENTS AND CONTINGENCIES

(A) Operating Lease Agreements

The Company leases corporate office space and office equipment under operating leases. The leases expire at various dates through November 2005. Future minimum lease payments for the operating leases are as follows:

	 	Year

	 	Amount

	                                        

	 	                                              

	 	 
	 	2004

	 	$

	35,500

	 	2005

	 	 	25,100

	 	 	 	 	 
	 	 	 	$

	60,600

Rent expense under operating leases for the years ended December 31, 2003 and 2002 aggregated $31,401 and $24,115, respectively.

NOTE 7

EQUITY

The Company is a wholly owned subsidiary of Teda Travel, Inc. (See Note 11).

NOTE 8

CONCENTRATION OF CREDIT RISK

The Company received 100% of its revenues from three hotels in 2003 and four hotels in 2002 that it provides management services for located in China. Three of the hotels constituted 52%, 31% and 15% of the revenue recorded for the year ended December 31, 2003 and 45%, 33% and 12% for December 31, 2002.

11

NOTE 9

BUSINESS SEGMENTS

The Company has two operating segments. They are organized internally primarily by the type of services performed. The Company’s two operating segments include property management and real estate investments. The real estate investment segment invests in real estate development projects. The accounting policies of the segments are the same as described in the summary of significant accounting policies. There are no inter-segment sales.

	 	 	Property 

Management

	 	Real Estate 

Investments

	 	Total

	 
	        

	2003

	 	                

	     

	 	                

	     

	 	                

	 
	 	Revenue

	$

	396,794

	 	$

	—

	 	$

	396,794

	 
	 	Net income (loss)

	 	(92,063

	)

	 	51,409

	 	 	(40,654

	)

	 	Depreciation

	 	3,202

	 	 	—

	 	 	3,202

	 
	 	Assets

	 	255,007

	 	 	3,661,868

	 	 	3,916,875

	 
	 	Capital expenditures

	 	18,650

	 	 	—

	 	 	18,650

	 
	 	                                                                          

	 	 	 	 	 	 	 	 	 
	 	2002

	 	 	 	 	 	 	 	 	 
	 	Revenue

	$

	515,546

	 	$

	—

	 	$

	515,546

	 
	 	Net income

	 	60,159

	 	 	223,909

	 	 	284,068

	 
	 	Depreciation

	 	2,538

	 	 	—

	 	 	2,538

	 
	 	Assets

	 	512,792

	 	 	3,613,334

	 	 	4,126,126

	 
	 	Capital expenditures

	 	1,371

	 	 	—

	 	 	1,371

	 

NOTE 10

INCOME TAXES

Income tax expense for the years ended December 31, 2003 and 2002 is summarized as follows:

	 	 	Current

	 	Deferred

	 	Total

	        

	2003

	 	                

	     

	 	                

	     

	 	                

	 	United States

	$

	—

	 	$

	—

	 	$

	—

	 	Foreign

	 	23,795

	 	 	—

	 	 	23,795

	 	                                                                          

	 	 	 	 	 	 	 	 
	 	 	$

	23,795

	 	$

	—

	 	$

	23,795

	 	2002

	 	 	 	 	 	 	 	 
	 	United States

	$

	—

	 	$

	—

	 	$

	—

	 	Foreign

	 	23,977

	 	 	—

	 	 	23,977

	 	 	 	 	 	 	 	 	 	 
	 	 	$

	23,977

	 	$

	—

	 	$

	23,977

12

Income tax expense for the years ended December 31, 2003 and 2002 differed from amounts computed by applying the statutory U.S. federal corporate income tax rate of 34% to income before income tax benefit as a result of the following:

	 	 	2003

	 	2002

	 
	        

	                                                                                                        

	 	            

	     

	 	            

	 
	 	Expected income tax expense (benefit)

	$

	(13,822

	)

	$

	96,583

	 
	 	 	 	 	 	 	 	 
	 	Tax effect on foreign income which is not subject to the

United States statutory rate

	 	

37,617

	 	 	

(72,606

	

)

	 	 	 	 	 	 	 	 
	 	 	$

	23,795

	 	$

	23,977

	 

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2003 and 2002 are as follows:

	 	 	2003

	 	2002

	 
	 	Deferred tax assets:

	 	 	 	 	 	 
	 	Net operating loss carryforward

	$

	—

	 	$

	—

	 
	 	Total deferred tax assets

	 	—

	 	 	—

	 
	 	Less valuation allowance

	 	—

	 	 	—

	 
	        

	                                                                                                        

	 	            

	     

	 	            

	 
	 	Net deferred tax assets

	$

	—

	 	$

	—

	 

At December 31, 2003, the Company had approximately $605,700 of undistributed earnings of the Company’s foreign subsidiaries. These earnings are considered to be indefinitely invested, and accordingly, no United States income tax has been provided for these earnings.

NOTE 11

SUBSEQUENT EVENTS

On March 10, 2004, the Company’s Parent approved the 100% spin-off of the Company to Acola Corp. As part of the transaction, the Parent set up a share redemption plan to distribute the shares of Acola Corp. to the common stockholders of the Parent. As of March 10, 2004, the Company became a wholly owned subsidiary of Acola Corp.

On March 18, 2004, $3,350,000 of the balance due to Parent was extinguished through a conversion of the debt towards a Convertible Promissory Note holder to equity in the Parent.

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