Friday, April 07, 2006
China Expert Technology (CXTI) Shishi City Contract
CXTI filed an 8-K with the SEC with the Shishi City E-Government Planning, Design, and Construction contract.
The two signing parties are Shishi City Information Management Co. Ltd. (which was appointed by government) and CXTI. Signed on March 30, 2006.
Shishi was assisted by a consultant, Fujian International Consultants Ltd.
CXTI is doing the entire planning, feasibility analysis, system design, and construction.
Project Planning, Feasibility Analysis, Training for e-government. There are 13 construction items:
Project starts Oct 2006 (actually when Shishi issues the certificate for commencement) and lasts for 3 years. CXTI must follow Shishi's construction schedule without delay. The construction period includes
If CXTI is unable to complete the project as scheduled for the current month without Shishi's doing their part, then CXTI will "take effective measures to ensure that the remaining works are finished with those works of next month, otherwise, [CXTI] shall assume full liability for breach of this Contract, compensate [Shishi] for the resulting economic loss, and pay the penalty for breach of this Contract."
Shishi can adjust the schedule for any design alterations, acts of God, other cases. CXTI needs to inform Shishi within 3 days of any of these events. If Shishi doesn't respond, it's accepted.
If Shishi causes a delay, it's Shishi's responsibility.
Shishi can delay the start of the project, giving CXTI notice in writing. If CXTI is unable to start on time, it must submit written notice 3 days beforehand and assume responsibilities. A Shishi representative can request suspending construction if needed and provide further details of handling the project within 48 hours. CXTI must safeguard the project while suspended.
If CXTI suspends the project (including due to subcontractors or suppliers), then it's CXTI's responsibility. If someone else causes a delay, it's their responsibility.
CXTI must confirm that it understands all the conditions and circumstances of the construction site. Shishi must approve the construction implementation plan, construction implementation, design plans, construction schedule. CXTI is responsible for organization, construction, management, coordination, etc.
CXTI must designate a site manager. CXTI does self-inspection of cable layout covering work. CXTI must keep records. CXTI must manage construction safety according to regulations. Accidents must be handled actively and reported in writing to Shishi.
CXTI submits monthly construction schedules and progress reports. CXTI monitors and inspects Shishi's on-site management personnel. Daily inspection.
When project is done and acceptance check is passed, the warranty period starts. CXTI must repair/replace/return goods and handle the expenses.
Shishi can request technical information about the project during construction.
CXTI will clean up the construction site of trash, temporary facilities, and move stuff out of the way to somewhere designated by Shishi. CXTI will do any needed paperwork. CXTI is responsible for quality issues, delay, damage to people and property, etc. CXTI will safeguard the technical confidentiality of the project. CXTI will provide the entire set of documentation. CXTI will perform training related to the project.
Shishi can modify the contents of the project with 5 days notice and CXTI will do it. If CXTI finds a need to modify the project, they will notify Shishi. Shishi and the supervisor from CXTI will make a decision within 5 days.
CXTI will do safety education and provide safety equipment. CXTI will take active and effective action to prevent further loss (and is liable for additional loss). "When serious fatal accidents and injuries take place...." Shouldn't that be fatal accidents and serious injuries? Anyway, CXTI reports them in writing to Shishi and appropriate authorities.
If Shishi finds inadequate safety, it can demand CXTI amend it within a time limit. If CXTI doesn't, Shishi can suspend the project with CXTI bearing the loss.
CXTI will not damage Shishi's premises, fixtures, etc. bearing all losses. CXTI needs approval to pile up or process equipment on the site.
All equipment will be new and up to date, conform to "national inspection standards". Legal import papers required. All equipment has guarantees of repair, replacement, compensation from vendors. Documentation. Spare parts. Will conform to the specifications. OEM only. CXTI will notify Shishi 24 hours in advance of delivery to allow for quality inspection.
System implementation plans for all individual items. Installation and development can only start after Shishi approval:
Arrival of HW and acceptance check (Shishi and CXTI open packages together within 5 business days). Verify all parts, models, etc. Both sides sign off.
Install, test, acceptance check, trial run of the hardware system. CXTI will propose an installation plan 10 days before HW system install. Shishi and Supervisor sign off. After install/test of each sub-system, CXTI submits acceptance check application to Shishi and Supervisor. Acceptance check starts within 5 business days. Delays from Shishi or Supervisor will cause project to be extended. Shishi will compensate CXTI for costs after negotiation. If CXTI causes delay, we know the rest.
After install, test, integration, CXTI conducts self-inspection and submits it to the Supervisor. Afterward, the system enters the trial run period. After 10 business days, Shishi, CXTI, and Supervisor conduct internal inspection on the hardware system within 5 days.
At Page 13, Item 3
At this point, I'm going to skim through the rest, picking up the things I consider to be important.
Development, testing, acceptance, trial run of application software systems: 40 day trial run, then modification suggestions by Shishi, then 30 days to implement.
Trial run of the whole system: stable operation for 30 days. Then CXTI can apply for a project completion acceptance check, which Shishi and the Supervisor do.
Transfer of the project and documentation.
Technical support, warranty, and free maintenance lasts for 1 year after the whole project completion acceptance check. CXTI must send staff to repair problems within 4 hours of being notified. For the initial 30 days, CXTI will have qualified people on-site.
If the system remains broken for 48 hours, CXTI will provide back up equipment to maintain normal operation. Post-warranty period maintenance would be in a separate contract.
Deliberate destructive acts of Shishi's personnel, Shishi's attempts at maintenance are not covered by warranty. CXTI can charge Shishi for materials (but apparently not labor).
Note that deliberate acts by random people are not excluded!
$41 million dollars
5% is reserved and settled after project completion
5% is reserved as a deposit for warranty, after-sales service, training, technical support, etc.
CXTI provides capital to start the construction work (yeah, we know).
Preliminary Stage
Planning: $250K
Feasibility Report: $187K
E-Government Training: $250K
Hardware Platform (purchasing): $2.2 million
Hardware Platform (system integration): $327K
Phase 1 (90% paid 10 days after completion of Phase 1)
Security Platform: $1.5 million
Application Platform: $931K
Unified Admin Approval System: $1.6 million
Portal Website: $312K
Coordinated Office System: $1.0 million
Geography Information System: $3.0 million
Emergency Commending System: $2.3 million
Phase 2 (20% paid within 5 days of commencement, 50% paid within 10 days after requirements analysis report, 20% paid within 10 days of acceptance)
Auxiliary Decision System: $2.2 million
Social Medical Security Info System: $5.7 million
One Card Communication System: $4.4 million
Phase 3 (same payment schedule as phase 2)
Information Resource Library: $761K
E-Commerce System: $14 million
5% paid within one month of completion of the total project.
5% paid within 10 days of the end of the warranty period.
Acts of God (Forces Majeure) are borne by Shishi, with CXTI taking measures to minimize loss, reporting on the loss and cost of repair. If the project is delayed, both parties consult to decide whether to continue. If terminated, each party returns interests already acquired to the other.
If the project can't be completed due to CXTI's default, then CXTI owes 0.5% of the total project price ($200K) for each business day of delay, with a maximum of 20% ($8 million). A delay of more than 150 days renders CXTI unable to fulfill the contract and everything is returned and CXTI owes 20% ($8 million) to Shishi.
If CXTI can't deliver any part of the project, it's the same as being unable to deliver the whole thing. CXTI owes 10% ($4 million) to Shishi.
If CXTI can't fulfil after-sales service (any part of it), then CXTI owes 5% ($2 million) to Shishi.
If the types, models, specs, quality, quantity do not conform to the requirements, Shishi has the right to refuse acceptance, CXTI is in default.
If CXTI is unable to meet technical requirements of functions specified in the appraisal of experts, then if CXTI is not able to rectify the problem, CXTI owes 20%.
If Shishi defaults, it will bear the costs. If construction is delayed due to Shishi, then the period will be extended.
If Shishi demands returning of goods due to its own default, it owes CXTI 20% of the value of the returned goods.
If the project can't be completed as scheduled due to Shishi or Supervisor default, leading to CXTI's loss, the defaulting party will pay CXTI 0.5% of the total ($200K) for each business day of delay, not to exceed 10% ($4 million).
If Shishi demands replacement or upgrades, Shishi will pay "appropriate compensations" to CXTI.
If Shishi is late in paying CXTI causing a material loss, Shishi will compensate CXTI according to the loss.
Whoever terminates the contract without proper justifications owes the other for all economic losses incurred. If either party is in breach of contract, the other can terminate the contract and demand it to bear the default liabilities.
Shishi has the right to examine the qualifications of all sub-contractors and suppliers.
My Opinion
While the contract seems a bit one sided in favor of Shishi, it's not all that much worse than contracts I've been involved with personally. I wanted to go back and look for previous contracts that CXTI has entered, but I couldn't find any. The reason I wanted to check is that this contract doesn't seem to be all that terribly capital intensive. CXTI gets fairly substantial payments during the cycle. Hopefully this is a change from previous contracts.
In terms of completeness and quality of contract, it seems reasonably good to me. But the contracts I've personally seen were for significantly less money.
The two signing parties are Shishi City Information Management Co. Ltd. (which was appointed by government) and CXTI. Signed on March 30, 2006.
Shishi was assisted by a consultant, Fujian International Consultants Ltd.
Specifications
CXTI is doing the entire planning, feasibility analysis, system design, and construction.
Project Planning, Feasibility Analysis, Training for e-government. There are 13 construction items:
- Hardware Platform
- Security Platform
- Application Platform
- E-Government Portal Website
- Unified Administration Approval System
- Coordinated Office System
- Information Resource Library
- Geography Information System
- Decision Support System
- Emergency Commanding System
- Social Medical Security Information System
- One Card Communication System
- E-Commerce System
Time for Completion, Progress Mgmt, Time Adjustment
Project starts Oct 2006 (actually when Shishi issues the certificate for commencement) and lasts for 3 years. CXTI must follow Shishi's construction schedule without delay. The construction period includes
- probe
- planning
- feasibility analysis
- training
- construction preparation
- selection of suppliers
- system installation
- development and testing
- acceptance check
If CXTI is unable to complete the project as scheduled for the current month without Shishi's doing their part, then CXTI will "take effective measures to ensure that the remaining works are finished with those works of next month, otherwise, [CXTI] shall assume full liability for breach of this Contract, compensate [Shishi] for the resulting economic loss, and pay the penalty for breach of this Contract."
Shishi can adjust the schedule for any design alterations, acts of God, other cases. CXTI needs to inform Shishi within 3 days of any of these events. If Shishi doesn't respond, it's accepted.
If Shishi causes a delay, it's Shishi's responsibility.
Delayed Sart and Construction
Shishi can delay the start of the project, giving CXTI notice in writing. If CXTI is unable to start on time, it must submit written notice 3 days beforehand and assume responsibilities. A Shishi representative can request suspending construction if needed and provide further details of handling the project within 48 hours. CXTI must safeguard the project while suspended.
If CXTI suspends the project (including due to subcontractors or suppliers), then it's CXTI's responsibility. If someone else causes a delay, it's their responsibility.
Rights and Obligations
CXTI must confirm that it understands all the conditions and circumstances of the construction site. Shishi must approve the construction implementation plan, construction implementation, design plans, construction schedule. CXTI is responsible for organization, construction, management, coordination, etc.
CXTI must designate a site manager. CXTI does self-inspection of cable layout covering work. CXTI must keep records. CXTI must manage construction safety according to regulations. Accidents must be handled actively and reported in writing to Shishi.
CXTI submits monthly construction schedules and progress reports. CXTI monitors and inspects Shishi's on-site management personnel. Daily inspection.
When project is done and acceptance check is passed, the warranty period starts. CXTI must repair/replace/return goods and handle the expenses.
Shishi can request technical information about the project during construction.
CXTI will clean up the construction site of trash, temporary facilities, and move stuff out of the way to somewhere designated by Shishi. CXTI will do any needed paperwork. CXTI is responsible for quality issues, delay, damage to people and property, etc. CXTI will safeguard the technical confidentiality of the project. CXTI will provide the entire set of documentation. CXTI will perform training related to the project.
Project Modifications
Shishi can modify the contents of the project with 5 days notice and CXTI will do it. If CXTI finds a need to modify the project, they will notify Shishi. Shishi and the supervisor from CXTI will make a decision within 5 days.
Safety
CXTI will do safety education and provide safety equipment. CXTI will take active and effective action to prevent further loss (and is liable for additional loss). "When serious fatal accidents and injuries take place...." Shouldn't that be fatal accidents and serious injuries? Anyway, CXTI reports them in writing to Shishi and appropriate authorities.
If Shishi finds inadequate safety, it can demand CXTI amend it within a time limit. If CXTI doesn't, Shishi can suspend the project with CXTI bearing the loss.
CXTI will not damage Shishi's premises, fixtures, etc. bearing all losses. CXTI needs approval to pile up or process equipment on the site.
Delivery of Materials, Equipment
All equipment will be new and up to date, conform to "national inspection standards". Legal import papers required. All equipment has guarantees of repair, replacement, compensation from vendors. Documentation. Spare parts. Will conform to the specifications. OEM only. CXTI will notify Shishi 24 hours in advance of delivery to allow for quality inspection.
Installation, Development, Testing, Trial Runs, Acceptance
System implementation plans for all individual items. Installation and development can only start after Shishi approval:
Arrival of HW and acceptance check (Shishi and CXTI open packages together within 5 business days). Verify all parts, models, etc. Both sides sign off.
Install, test, acceptance check, trial run of the hardware system. CXTI will propose an installation plan 10 days before HW system install. Shishi and Supervisor sign off. After install/test of each sub-system, CXTI submits acceptance check application to Shishi and Supervisor. Acceptance check starts within 5 business days. Delays from Shishi or Supervisor will cause project to be extended. Shishi will compensate CXTI for costs after negotiation. If CXTI causes delay, we know the rest.
After install, test, integration, CXTI conducts self-inspection and submits it to the Supervisor. Afterward, the system enters the trial run period. After 10 business days, Shishi, CXTI, and Supervisor conduct internal inspection on the hardware system within 5 days.
At Page 13, Item 3
At this point, I'm going to skim through the rest, picking up the things I consider to be important.
Development, testing, acceptance, trial run of application software systems: 40 day trial run, then modification suggestions by Shishi, then 30 days to implement.
Trial run of the whole system: stable operation for 30 days. Then CXTI can apply for a project completion acceptance check, which Shishi and the Supervisor do.
Transfer of the project and documentation.
Technical support, warranty, and free maintenance lasts for 1 year after the whole project completion acceptance check. CXTI must send staff to repair problems within 4 hours of being notified. For the initial 30 days, CXTI will have qualified people on-site.
If the system remains broken for 48 hours, CXTI will provide back up equipment to maintain normal operation. Post-warranty period maintenance would be in a separate contract.
Deliberate destructive acts of Shishi's personnel, Shishi's attempts at maintenance are not covered by warranty. CXTI can charge Shishi for materials (but apparently not labor).
Note that deliberate acts by random people are not excluded!
Price, Contracting Method
$41 million dollars
5% is reserved and settled after project completion
5% is reserved as a deposit for warranty, after-sales service, training, technical support, etc.
CXTI provides capital to start the construction work (yeah, we know).
Preliminary Stage
Planning: $250K
Feasibility Report: $187K
E-Government Training: $250K
Hardware Platform (purchasing): $2.2 million
Hardware Platform (system integration): $327K
Phase 1 (90% paid 10 days after completion of Phase 1)
Security Platform: $1.5 million
Application Platform: $931K
Unified Admin Approval System: $1.6 million
Portal Website: $312K
Coordinated Office System: $1.0 million
Geography Information System: $3.0 million
Emergency Commending System: $2.3 million
Phase 2 (20% paid within 5 days of commencement, 50% paid within 10 days after requirements analysis report, 20% paid within 10 days of acceptance)
Auxiliary Decision System: $2.2 million
Social Medical Security Info System: $5.7 million
One Card Communication System: $4.4 million
Phase 3 (same payment schedule as phase 2)
Information Resource Library: $761K
E-Commerce System: $14 million
5% paid within one month of completion of the total project.
5% paid within 10 days of the end of the warranty period.
Acts of God (Forces Majeure) are borne by Shishi, with CXTI taking measures to minimize loss, reporting on the loss and cost of repair. If the project is delayed, both parties consult to decide whether to continue. If terminated, each party returns interests already acquired to the other.
If the project can't be completed due to CXTI's default, then CXTI owes 0.5% of the total project price ($200K) for each business day of delay, with a maximum of 20% ($8 million). A delay of more than 150 days renders CXTI unable to fulfill the contract and everything is returned and CXTI owes 20% ($8 million) to Shishi.
If CXTI can't deliver any part of the project, it's the same as being unable to deliver the whole thing. CXTI owes 10% ($4 million) to Shishi.
If CXTI can't fulfil after-sales service (any part of it), then CXTI owes 5% ($2 million) to Shishi.
If the types, models, specs, quality, quantity do not conform to the requirements, Shishi has the right to refuse acceptance, CXTI is in default.
If CXTI is unable to meet technical requirements of functions specified in the appraisal of experts, then if CXTI is not able to rectify the problem, CXTI owes 20%.
If Shishi defaults, it will bear the costs. If construction is delayed due to Shishi, then the period will be extended.
If Shishi demands returning of goods due to its own default, it owes CXTI 20% of the value of the returned goods.
If the project can't be completed as scheduled due to Shishi or Supervisor default, leading to CXTI's loss, the defaulting party will pay CXTI 0.5% of the total ($200K) for each business day of delay, not to exceed 10% ($4 million).
If Shishi demands replacement or upgrades, Shishi will pay "appropriate compensations" to CXTI.
If Shishi is late in paying CXTI causing a material loss, Shishi will compensate CXTI according to the loss.
Whoever terminates the contract without proper justifications owes the other for all economic losses incurred. If either party is in breach of contract, the other can terminate the contract and demand it to bear the default liabilities.
Shishi has the right to examine the qualifications of all sub-contractors and suppliers.
My Opinion
While the contract seems a bit one sided in favor of Shishi, it's not all that much worse than contracts I've been involved with personally. I wanted to go back and look for previous contracts that CXTI has entered, but I couldn't find any. The reason I wanted to check is that this contract doesn't seem to be all that terribly capital intensive. CXTI gets fairly substantial payments during the cycle. Hopefully this is a change from previous contracts.
In terms of completeness and quality of contract, it seems reasonably good to me. But the contracts I've personally seen were for significantly less money.
// posted by Bruce @ 10:24 AM 
Comments:
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The detail is terrific.
Bruce, can you show me how CXTI determines the value of its derivatives?
For example, on December 31, 2005, when the stock price closed at $1.81, the company valued the Short Term warrants (exercise @ 1.53) at $0.76 and the Long Term warrants (exercise @ 3.05) at $1.05.
On October 31, 2005, when the stock price closed at $0.835, the conversion feature of the 6,000,000 in debentures was valued at $3,792,000.
On November 7, 2005, when $1,601,561 of debentures were converted into 2,309,296 shares at a 25 percent discount to the trailing 5-day average price of 0.9265, how was CXTI's net income affected? How was the balance sheet affected?
Considering that CXTI received only 5,507,818.94 from the debentures, why do you think it give away $5,737,000 in warrants and conversion value at the time of the conversion (worth a lot more now), in addition to having to pay back the $6,000,000 loan balance and 7% interest? Why did CXTI have to pay such a high price for this money?
Thanks for all your hard work.
Bruce, can you show me how CXTI determines the value of its derivatives?
For example, on December 31, 2005, when the stock price closed at $1.81, the company valued the Short Term warrants (exercise @ 1.53) at $0.76 and the Long Term warrants (exercise @ 3.05) at $1.05.
On October 31, 2005, when the stock price closed at $0.835, the conversion feature of the 6,000,000 in debentures was valued at $3,792,000.
On November 7, 2005, when $1,601,561 of debentures were converted into 2,309,296 shares at a 25 percent discount to the trailing 5-day average price of 0.9265, how was CXTI's net income affected? How was the balance sheet affected?
Considering that CXTI received only 5,507,818.94 from the debentures, why do you think it give away $5,737,000 in warrants and conversion value at the time of the conversion (worth a lot more now), in addition to having to pay back the $6,000,000 loan balance and 7% interest? Why did CXTI have to pay such a high price for this money?
Thanks for all your hard work.
# posted by 
: 7:33 PM, April 07, 2006
: 7:33 PM, April 07, 2006
I answered the question about why CXTI got a bad deal in an update to the CXTI Convertables post.
I don't know how CXTI values its derivatives. It's not a high priority since I have my own valuation for dilution. I intend to buy stocks for a lot less than they're worth. So when a company trades its shares for something, I view it as a harsh deal. When I do a valuation, I assume all warrants and options will be converted to shares at a strike price of zero.
I don't know how CXTI values its derivatives. It's not a high priority since I have my own valuation for dilution. I intend to buy stocks for a lot less than they're worth. So when a company trades its shares for something, I view it as a harsh deal. When I do a valuation, I assume all warrants and options will be converted to shares at a strike price of zero.
I assume they must be using Black-Scholes or something. I will have to take another look at FASB 133. Using your analysis, CXTI would be worthless, as the debentures would convert into an infinite number of shares. As it is, we are facing another large derivative loss in Q1.
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# posted by : 11:11 AM, April 08, 2006
: 11:11 AM, April 08, 2006 << Home
