ITEM 1. BUSINESS
Corporate History and
Structure
China United Insurance Service,
Inc. (“China United,” “CUIS,” or the “Company”) is a Delaware corporation organized on June
4, 2010 by Mao Yi Hsiao, a Taiwanese citizen, and is quoted on the Over the Counter Bulletin Board (“OTCBB”). The Company’s
operating companies are in Taiwan and China. Unless context indicates otherwise, reference to the “Company” throughout
this annual report refers to China United and its subsidiaries. Reference to Action Holdings Financial Limited (“AHFL”),
refers to the combined operations of AHFL and its Taiwan Subsidiaries. Reference to Henan Anhou refers to the combined operations
of Henan Anhou and its subsidiaries.
ZLI Holdings Limited (“CU
Hong Kong”), a wholly owned Hong Kong-based subsidiary of China United, was originally founded by China United, on July 12,
2010 under Hong Kong laws. On October 20, 2010, CU Hong Kong founded a wholly foreign owned enterprise, Zhengzhou Zhonglian Hengfu
Consulting Co., Ltd. (“CU WFOE”) in Henan province of the PRC.
Henan Law Anhou Insurance
Agency Co., Ltd. (“Henan Anhou”, formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd.) was founded in Henan
province of the PRC on October 9, 2003. Henan Anhou provides insurance agency services in the PRC.
Henan Anhou’s wholly
owned subsidiary Sichuan Kangzhuang Insurance Agency Co., Ltd. (“Sichuan Kangzhuang”) was founded on September 4, 2006
in Sichuan province of the PRC, and it provides insurance agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang’s
general meeting of shareholders, its shareholders voted for transferring all of their equity interests in Sichuan Kangzhuang to
Henan Anhou for RMB532,622 ($83,444). On September 6, 2010, the equity transfer agreements were signed between Henan Anhou and
each shareholder of Sichuan Kangzhuang. Henan Anhou has complied with all of the applicable laws and regulations with respect to
its holding 100% equity interests in Sichuan Kangzhuang.
Jiangsu Law Insurance Brokers
Co., Ltd. (“Jiangsu Law” collectively with Henan Anhou, Sichuan Kangzhuang, the “Consolidated Affiliated Entities”,
each a “Consolidated Affiliated Entity”) was founded on September 19, 2005 in Jiangsu province of the PRC. Jiangsu
Law is allowed to provide insurance brokerage services. On August 12, 2010, at Jiangsu Law’s general meeting of shareholders,
its shareholders voted for transferring all of their shareholdings to Henan Anhou for RMB518,000 ($81,153). On September 28, 2010,
the equity transfer agreements were signed between Henan Anhou and each individual shareholder of Jiangsu Law. Pursuant to Provisions
on the Supervision and Administration of Insurance Brokerage Institutions, effective on October 1, 2009, if an insurance brokerage
entity fails to bring its registered capital to no less than RMB10,000,000 ($1,566,661) on or prior to October 1, 2012, the China
Insurance Regulatory Commission (“CIRC”) or its local counterpart, as applicable, may determine not to extend the insurance
brokerage license. To meet such minimum registered capital requirement, on February 11, 2011, Henan Anhou invested RMB4.82 million
($755,131) in Jiangsu Law to increase the registered capital to RMB10 million ($1,566,661). Henan Anhou has complied with all of
the applicable laws and regulations with respect to its holding 100% equity interests in Jiangsu Law.
On January 16, 2011, China
United issued 20,000,000 shares of common stock, $0.00001 par value per share, to several non-US persons for their investment of
$300,000 in cash in the Company’s subsidiaries. The issuance was made pursuant to an exemption from registration contained
in Regulation S under the Securities Act of 1933, as amended. The consideration was paid to the account of CU Hong Kong by May
6, 2011. All $300,000 was contributed into the bank account of CU WFOE as registered capital.
Due to PRC legal restrictions
on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as
well as capital requirement of the investors, we operate our PRC business primarily through our Consolidated Affiliated Entities
in China. We do not hold equity interests in our Consolidated Affiliated Entities. However, through the VIE Agreements (as described
in more details below) with Henan Anhou and its shareholders, we effectively control, and are able to derive substantially all
of the economic benefits from, these Consolidated Affiliated Entities.
Our Consolidated Affiliated
Entities in China are variable interest entities through which all of our insurance services are operated. It is through the VIE
Agreements that we have effective control of the Consolidated Affiliated Entities, which allows us to consolidate the financial
results of the Consolidated Affiliated Entities in our financial statements. If Henan Anhou and its shareholders fail to perform
their obligations under the VIE Agreements, we could be limited in our ability to enforce the VIE Agreements that give us effective
control. Furthermore, if we are unable to maintain effective control of our Consolidated Affiliated Entities, we would not be able
to continue to consolidate the Consolidated Affiliated Entities’ financial results with our financial results. During each
of the fiscal years ended June 30, 2011 and 2012, 100% of our revenues in our consolidated financial statements were derived from
our Consolidated Affiliated Entities. As of June 30, 2013, the first fiscal year after the acquisition of AHFL together with its
Taiwan Subsidiaries, 92.66% and 7.34% of our revenues in our consolidated financial statements were derived from our Taiwan Subsidiaries
and Consolidated Affiliated Entities, respectively.
On January 17, 2010, CU WFOE
and Henan Anhou and its shareholders entered into a series of agreements known as variable interest agreements (the “VIE
Agreements”) pursuant to which CU WFOE has executed effective control over Henan Anhou through these contractual arrangements.
The VIE Agreements included:
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(1)
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An Exclusive Business Cooperation Agreement through which CU WFOE is appointed the exclusive services
provider to provide Henan Anhou with complete technical support, business support and related consulting services (as described
in the agreement) in exchange for 90% of the net profits (as defined in the agreement) of Henan Anhou. The agreement does not provide
that CU WFOE is responsible for the debts of the Consolidated Affiliated Entities. The term of the Exclusive Business Cooperation
Agreement began on January 17, 2011 and lasts ten years, unless earlier terminated as provide in the agreement. The term of the
agreement may be extended at CU WFOE’s discretion prior to the expiration thereof. CU WFOE may terminate the agreement at
any time with 30 days’ written notice but Henan Anhou may only terminate the agreement if CU WFOE commits gross negligence
or a fraudulent act against Henan Anhou;
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(2)
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a Power of Attorney under which the shareholders of Henan Anhou have vested their collective voting
control over Henan Anhou to CU WFOE;
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(3)
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an Option Agreement under which the shareholders of Henan Anhou granted to CU WFOE the irrevocable
right and option to acquire all of their equity interests in Henan Anhou, subject to applicable PRC laws and regulations. The Option
Agreement began on January 17, 2011 and lasts ten years, but may be renewed at CU WFOE’s election; and
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(4)
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a Share Pledge Agreement under which the shareholders of Henan Anhou have pledged all of their
equity interests in Henan Anhou to CU WFOE to guarantee Henan Anhou’s performance of its obligations under the Exclusive
Business Cooperation Agreement.
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As a holding company with
no business other than holding equity interest of our operating subsidiary, CU WFOE in China and Law Broker in Taiwan, we rely
principally on dividends to be paid by CU WFOE in China and Law Broker in Taiwan. CU WFOE, being the exclusive service provider
to Henan Anhou, relies on the service fees to which it is entitled from Henan Anhou. Pursuant to the Exclusive Cooperation Agreement
between CU WFOE and Henan Anhou, CU WFOE has the right to collect 90% of the net profits of Henan Anhou. As Henan Anhou is still
operating at a loss, Henan Anhou has not paid any service fees to CU WFOE yet and CU WFOE has not paid any dividend to us to date.
We expect Henan Anhou to make a profit beginning in the fiscal year ending June 30, 2014, when it should start to pay service fees
to CU WFOE, although there can be no assurance that Henan Anhou will become profitable by that time or ever. Our capability to
receive dividends from CU WFOE, convert them into USD and make the repatriation out of China is subject to the applicable PRC restrictions
on the payment of dividends by PRC companies, laws and regulations on foreign exchange and restrictions on foreign investment.
Law Broker, being the only operating entity for our Taiwan business, is primarily focused on life and property insurance brokerage
and agency business. Through years of operation, Law Broker has become one of the leading insurance brokerage firms in Taiwan and
has expanded its business across Taiwan, with 23 sales and service outlets (including the headquarters) and 1,972 employees and
insurance sales professionals.
Henan Anhou owns 100% equity
interest in both Sichuan Kangzhuang and Jiangsu Law. The shareholders of Henan Anhou are Zhu Shuqin, Chen Yanxia, Fang Qunlei and
Wei Qun. All of these shareholders are PRC citizens and do not hold any shares in the Company. Pursuant to the VIE Agreements,
CU WFOE becomes the primary beneficiary of Henan Anhou and only leaves Henan Anhou shareholders nominal value therein.
On January 28, 2011, the
Company increased the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common stock
and 10,000,000 shares of preferred stock. On July 2, 2012, the Board of Directors and stockholders of the Company approved, in
connection with a reclassification of 1,000,000 issued and outstanding shares of common stock (the “Reclassified Shares”),
par value $0.00001 per share held by Mao Yi Hsiao (“Mr. Mao”) into 1,000,000 shares of Series A Convertible Preferred
Stock, par value $0.00001 per share (the “Series A Preferred Stock”) on a share-for-share basis (the “Reclassification”),
the issuance of 1,000,000 shares of Series A Preferred Stock to Mr. Mao and cancellation of 1,000,000 common stock held and submitted
by Mr. Mao pursuant to the Reclassification. All of the 1,000,000 shares of Series A Preferred Stock are reclassified from the
1,000,000 common stock held by Mr. Mao and no additional consideration has been paid by Mr. Mao in connection with the Reclassification.
Each holder of common stock shall be entitled to one vote for each share of common stock held of record by such holder as of the
applicable record date on any matter that is submitted to a vote of the stockholders of the Company; while each holder of Series
A Preferred Stock shall be entitled to ten votes for each share of Series A Preferred Stock held of record by such holder as of
the applicable record date on any matter that is submitted to a vote of the stockholders of the Company.
On August 24,
2012, the Company acquired all of the issued and outstanding shares of AHFL, a limited liability company (“LLC”)
incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent
to the acquisition, AHFL becomes a 100% subsidiary of the Company. On August 5, 2013, AHFL, Taiwan Branch (“AHFLTW”) was established with registered capital of NT$100,000.
AHFL holds 65.95% of the
issued and outstanding shares of Law Enterprise Co., Ltd. (“Law Enterprise”), a company limited by shares incorporated
under the laws of Taiwan on January 30, 1996. Law Enterprise holds (i) 100% Law Insurance Broker Co., Ltd. (“Law Broker”),
a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co.,
Ltd. (“Law Management”), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law
Insurance Agent Co., Ltd. (“Law Agent” collectively with “Law Enterprise”, “Law Broker” and
“Law Agent”, the “Taiwan Subsidiaries”, each a “Taiwan Subsidiary”), a LLC incorporated in
Taiwan on June 3, 2000.
Law Enterprise acts as a
holding company of its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency
service business across Taiwan, while Law Management and Law Agent are not in active operation. We operate our Taiwan business
primarily through Law Broker.
Please refer to the chart
below for detailed information of the Company’s shareholders who serve as a director or officer of the Company, the Company’s
subsidiaries, or the Consolidated Affiliated Entities.
Name
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Position in the
Company
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Position
in
AHFL
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Position in
Law
Enterprise
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Position in
Law
Broker
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Position in
Law Agent
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Position in Law
Management
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Position in
CU Hong
Kong
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Position in CU
WFOE
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Position in
Henan Anhou
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Position in
Jiangsu Law
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Mao Yi Hsiao
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Director
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Director
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Director
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Director
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Director
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General Manager and Chairman
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General Manager and Chairman
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Supervisor
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Li Chwan Hau
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Director
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Li Fu Chang
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Director
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Hsu Tzu En
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Director
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Lo Chung Mei
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Chief Executive Officer
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General Manager
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Chuang Yung Chi
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Chief Financial Officer
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Manager of Financial Department
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Hsieh Tung Chi
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Chief Operating Officer
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Division
Chief of Management
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Chiang Te Yun
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Chief Technology Officer
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Manager
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Chao Hui Hsien
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Director
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General Manager
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Director
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Vice-General Manager
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Lee Shu Fen
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General Manager
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Director
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Tu Wen Ti
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Assistant General Manager
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Shen Wen Che
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Assistant General Manager
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See “Related Party Transactions” for
further information on our contractual arrangements with these parties.
The following flow chart illustrates our Company’s
organizational structure:
Products and Services
Law Broker and Henan Anhou
market and sell to customers two broad categories of insurance products: life insurance products and property and casualty insurance
products, both focused on meeting the particular insurance needs of individuals. The insurance products that Law Broker and Henan
Anhou sell are underwritten by some of the leading insurance companies in Taiwan and China, respectively.
Through Henan Anhou’s
wholly-owned insurance brokerage firm Jiangsu Law, it also closely interacts with insurance companies and actively locates and
introduces the right customers in Henan Anhou’s database matching the insurance products offered by such insurance companies
to them.
Life Insurance Products
The life insurance products
Law Broker distributes can be broadly classified into the categories set forth below. Due to constant product innovation by insurance
companies, some of the insurance products Law Broker distributes combine features of one or more of the categories listed below.
Total net revenues from life insurance products distributed by Law Broker accounted for 95.8% of Law Broker’s total net revenues
in the fiscal year ended June 30, 2013.Total net revenues from life insurance products distributed by Law Broker accounted for
94.9% of CUIS’ total net revenues of life insurance products in the fiscal year ended June 30, 2013.
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Individual Whole Life Insurance.
The individual whole life insurance products Law Broker
distributes provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums
over a pre-determined period, generally ranging from six to 20 years, or until the insured reaches a certain age. The face amount
of the policy or, for some policies, the face amount plus accumulated interests is paid upon the death of the insured.
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Individual Term Life Insurance.
The individual term life insurance products Law Broker
distributes provide insurance for the insured for a specified time period or until the attainment of a certain age, in return for
the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years. Term life insurance
policies generally expire without value if the insured survives the coverage period.
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Individual Health Insurance.
The individual health insurance products Law Broker distributes
pay the insured amount of reasonable hospitalization cost, or certain death benefit in case of the death of the insured, due to
sickness, accident or childbirth. Individual health insurance policies expire when the premium is not paid or a certain age is
attained.
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Casualty Insurance.
Accidental Injury Insurance is the kind of life insurance that insurance
benefit is given when the insured is dead or disabled because of accidental injury, which is unforeseen by the injured or against
his will. Casualty insurance policies expire when the premium is not paid or a certain age is attained.
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Investment-oriented Insurance.
Investment-oriented insurance products are the market linked
insurance plan which also provide life coverage. The premium amount (after deduction of certain charges) is invested into different
funds. The performance of the fund will depend on the market. A growing upward trend in market will increase the fund value. Every
investment-oriented insurance policy has market risk exposure depending on the fund invested and such investment risk is solely
borne by the policyholder. Depending on the death benefit, Investment-oriented insurance policies are categorized into two broad
categories: (1) The death benefit is equal to the higher of insured amount or fund value. (2) The death benefit is equal to the
insured amount plus fund value.
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Foreign Currency Policy Commodity.
It is a life insurance policy in which a policy benefit
shall all be paid in foreign currencies. The foreign currency policy provides insurance for the insured person’s life in
exchange for the periodic payment of fixed premiums over a pre-determined period, generally ranging from six to 20 years, or until
the insured reaches a certain age. The face amount of the policy or, for some policies, the face amount plus accumulated interests,
is paid upon the death of the insured.
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Travel Accident Insurance
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provides monetary compensation in case the insured dies or loses a limb in an accident while he or she is traveling. The premium
is based on the days of traveling and the insured amount.
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The life insurance products
Law Broker distributed in the fiscal year ending June 30, 2013 were primarily underwritten by Farglory Life Insurance Co, Ltd.,
Fubon Life Insurance Co, Ltd., Kuo Hua Life Insurance Company, TransGlobe Life Insurance Company and China Life Insurance Company.
The life insurance products
Henan Anhou distributes can be broadly classified into the categories set forth below. Due to constant product innovation by insurance
companies, some of the insurance products Henan Anhou distributes combine features of one or more of the categories listed below.
Total net revenues from life insurance products accounted for 73.2% of Henan Anhou’s total net revenues in the fiscal year
ended June 30, 2013.
Total net revenues from
life insurance products distributed by Henan Anhou accounted for approximately 5.1% of CUIS’ total net revenues of life insurance
products in the fiscal year ended June 30, 2013.
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Individual Whole Life Insurance.
The individual whole life insurance products Henan Anhou
distributes provide insurance for the insured person’s entire life in exchange for the periodic payment of fixed premiums
over a pre-determined period, generally ranging from five to 20 years, or until the insured reaches a certain age. The face amount
of the policy or, for some policies, the face amount plus accumulated interests is paid upon the death of the insured.
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Individual Term Life Insurance.
The individual term life insurance products Henan Anhou
distributes provide insurance for the insured for a specified time period or until the attainment of a certain age, in return for
the periodic payment of fixed premiums over a pre-determined period, generally ranging from five to 20 years. Term life insurance
policies generally expire without value if the insured survives the coverage period.
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Individual Endowment Life Insurance.
The individual endowment products Henan Anhou distributes
generally provide maturity benefits if the insured reaches a specified age, and provide to a beneficiary designated by the insured
guaranteed benefits upon the death of the insured within the coverage period. In return, the insured makes periodic payment of
premiums over a pre-determined period, generally ranging from five to 25 years.
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Individual Education Annuity.
The individual annuity products Henan Anhou distributes are
primarily education related products. They provide annual benefit payments after the insured attains a certain age, e.g., 18, for
a fixed time period, or e.g., four years, and a lump payment at the end of the coverage period. In addition, the beneficiary designated
in the annuity contract will receive guaranteed benefits upon the death of the insured during the coverage period. In return, the
purchaser of the annuity products makes periodic payment of premiums during a pre-determined accumulation period.
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Individual Health Insurance.
The individual health insurance products
Henan Anhou distributes primarily consist of dread disease insurance products, which provide guaranteed benefits for specified
dread diseases during the coverage period. In return, the insured makes periodic payment of premiums over a pre-determined period.
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The life insurance products
Henan Anhou distributed in the fiscal year ended June 30, 2013 were primarily underwritten by Sunshine Insurance Group Corporation
Limited, Taiping Life Insurance Co. Ltd., Taikang Life Insurance Company and Sino Life Insurance Co., Ltd.
In addition to the periodic
premium payment schedules described above, most of the individual life insurance products we distribute also allow the insured
to choose to make a single, lump-sum premium payment at the beginning of the policy term. If a periodic payment schedule is adopted
by the insured, a life insurance policy can generate periodic payment of fixed premiums to the insurance company for a specified
period of time. This means that once Henan Anhou or Law Broker sells a life insurance policy with a periodic premium payment schedule,
they will be able to derive commission and fee income from that policy for an extended period of time, sometimes up to 25 years.
Because of this feature and the expected sustained growth of life insurance sales in China and Taiwan, we have focused significant
resources ever since the incorporation of Henan Anhou and Law Broker on developing our capability to distribute individual life
insurance products with periodic payment schedules. We expect that sales of life insurance products will continuously be our primary
source of revenue in the next several years.
Property and Casualty
Insurance Products
Law Broker’s main property
and casualty insurance products are automobile insurance, casualty insurance and liability insurance. Law Broker commenced sale
of automobile insurance, casualty insurance and liability insurance business in August 2003. Total net revenues from property and
casualty insurance products accounted for 4.2% of Law Broker’s total net revenues in the fiscal year ended June 30, 2013.
Total net revenues from
property and casualty insurance products distributed by Law Broker accounted for 72.7% of CUIS’ total net revenues of property
and casualty insurance products in the fiscal year ended June 30, 2013.
The property and casualty
insurance products Law Broker distributes can be further classified into the following categories:
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Automobile Insurance.
Law Broker distributes both standard automobile insurance policies and supplemental policies,
which we refer to as riders. The standard automobile insurance policies Law Broker sells generally have a term of one year and
cover damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion
and natural disasters. Law Broker also sells standard third party liability insurance policies, which cover bodily injury and property
damage caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders Law Broker distributes
cover additional losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle
body scratches.
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Casualty Insurance
. Casualty insurance is made to insure any loss or damage to property. This is designed to cover loss
that is made by direct accident. The policy period is usually one year. The premium is based on the insured amount.
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Liability Insurance.
When the insured is legally obligated to indemnify a third party and subject to a claim in connection
therewith, the liability insurer is liable to provide such indemnification on behalf of the insured. The policy period is usually
one year. The premium is based on the insured amount.
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The property and casualty
insurance products Law Broker distributed in the fiscal year ended June 30, 2013 were primarily underwritten by Fubon Insurance
Co, Ltd., Taian Insurance Co., Ltd., Zurich Insurance Company, ACE Insurance Company, and Union Insurance Company.
Henan Anhou’s main
property and casualty insurance products are automobile insurance and commercial property insurance. Henan Anhou commenced its
sale of commercial property insurance in 2009 and had developed its automobile insurance business since 2010. Total net revenues
from property and casualty insurance products distributed by Henan Anhou accounted for 26.8% of Henan Anhou’s total net revenues
in the fiscal year ended June 30, 2013.
Total net revenues from
property and casualty insurance products distributed by Henan Anhou accounted for 27.3% of CUIS’ total net revenues of property
and casualty insurance products in the fiscal year ended June 30, 2013.
The property and casualty insurance
products Henan Anhou distributes can be further classified into the following categories:
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Automobile Insurance.
Automobile insurance is the largest segment of property and casualty insurance in the PRC in terms
of gross written premiums.Henan Anhou distributes both standard automobile insurance policies and supplemental policies, which
we refer to as riders. The standard automobile insurance policies Henan Anhou sells generally have a term of one year and cover
damages caused to the insured vehicle by collision and other traffic accidents, falling or flying objects, fire, explosion and
natural disasters. Henan Anhou also sells standard third party liability insurance policies, which cover bodily injury and property
damage caused by an accident involving an insured vehicle to a person not in the insured vehicle. The riders Henan Anhou distributes
cover additional losses, such as liability to passengers, losses arising from vehicle theft and robbery, broken glass and vehicle
body scratches.
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Commercial Property Insurance.
The commercial property insurance products Henan Anhou distributes include basic, comprehensive
and all risk policies. Basic commercial property insurance policies generally cover damage to the insured property caused by fire,
explosion and thunder and lightning. Comprehensive commercial property insurance policies generally cover damage to the insured
property caused by fire, explosion and certain natural disasters. All risk commercial property insurance policies cover all causes
of damage to the insured property not specifically excluded from the policies.
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The property and casualty
insurance products Henan Anhou distributed in the fiscal year ended June 30, 2013 were primarily underwritten by Cathay Insurance
Co., Ltd., Tianan Insurance Co., Ltd., China Pacific Insurance(Group) Co., Ltd., PICC Property and Casualty Co., Ltd., and SUMSUNG
Property and Casualty Insurance Company (China), Ltd.
Strategic Alliance with
AIATW
On June 10, 2013,
AHFL
entered into a Strategic Alliance Agreement (the “Alliance Agreement”) with AIA International Limited Taiwan Branch
(“AIATW”). The purpose of the
Alliance
Agreement is to promote life insurance products
provided by AIATW within the territory of Taiwan by insurance agency companies or insurance brokerage companies affiliated with
AHFL or CUIS.
The term of the Alliance Agreement is from June 1, 2013 to May 31, 2018. Pursuant to the terms of the Alliance
Agreement, AIATW shall pay AHFL an Execution Fee of $8,367,947 (NT$ 250,000,000). The fee will be recorded as revenue upon fulfilling
sales target over the next five years. As of September 23, 2013, AHFL has received $8,367,947 (NT$250,000,000) from AIATW under
the Alliance Agreement. Pursuant to the Alliance Agreement, AHFL is entitled to the payment of the execution fee, subject to certain
terms and conditions therein, including the satisfaction of the performance targets and the threshold 13-month persistency ratio.
The Execution Fee may be required to be recalculated if certain performance targets are not met by AHFL.
Unified Operating Platform
Law Broker has its own self-developed
Unified Operating Platform. Since June 1991, Law Broker has successfully implemented the following components of its operating
platform across its branch offices in Taiwan through a hub center located in Taipei:
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·
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A centralized clients and insurance policy management and analysis system, which encompasses our
life insurance unit and property and casualty insurance unit, that will better support business operations and facilitate risk
control;
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·
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An integrated administrative and information system, that increases the management efficiency
among the subsidiaries, branches and sales departments;
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·
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A centralized and computerized accounting and financial management system, that increases the
commission distribution and enforcement;
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A human resources management and analysis system; and
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An e-learning system to provide online training to sales professionals.
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Through years of operation, the Unified Operating
Platform has proved to be an efficient and streamlined operating system which contributes to the successful expansion and growth
of Law Broker into one of the leading companies in Taiwan, with 23 sales and service outlets (including the headquarter) across
Taiwan and 1,972 employees and insurance sales professionals.
In accordance with our growth
strategy in China, Henan Anhou has made significant effort to adapt the Unified Operating Platform utilized by Law Broker to better
meet the operational need in China. Since September 2010, Henan Anhou has successfully implemented the tailored operating platform
across the PRC subsidiaries through a hub center located in Nantong, Jiangsu province. We expect that this tailored operating platform
will make selling easier for sales agents in China, facilitate standardized business and financial management, enhance risk control
and increase operational efficiency for the PRC subsidiaries.
Henan Anhou has tailored
and refined the platform on the basis of Law Broker’s well-developed operating platform in Taiwan and believes that it is
difficult for our competitors in China, particularly new market entrants, to reproduce a similar platform without substantial financial
resources, time and operating experience.
Because the various systems,
policies and procedures under both of operating platforms utilized by Law Broker and Henan Anhou can be rolled out quickly as we
enter new regions or make acquisitions, we believe we can expand our distribution network rapidly and efficiently while maintaining
the quality of our services.
Distribution and Service
Network and Marketing
Since Law Broker’s
establishment in 1992, it has devoted substantial resources in building up its distribution and service network. Law Broker currently
has 23 sales and service outlets spread across Taiwan (including the headquarter), among which, 6 located in northern region, 10
located in central region, 5 located in southern region and 2 located in eastern region. As of June 30, 2013, Law Broker had 1,455
full-time sales professionals, 449 part-time sales professionals and 151 administrative staff.
The following table sets
forth some additional information of Law Broker’s distribution and service network as of June 30, 2013, broken down by the
four regions:
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|
|
|
|
Number of Full-time
|
|
|
Number
of Part-time
|
|
Province
|
|
Number
of Sales and Service Outlets
|
|
|
Sales
Professionals
|
|
|
Sales
Professionals
|
|
Northern region
|
|
|
6
|
|
|
|
377
|
|
|
|
117
|
|
Southern region
|
|
|
5
|
|
|
|
326
|
|
|
|
94
|
|
Central region
|
|
|
10
|
|
|
|
702
|
|
|
|
222
|
|
Eastern
region
|
|
|
2
|
|
|
|
50
|
|
|
|
16
|
|
Total
|
|
|
23
|
|
|
|
1,455
|
|
|
|
449
|
|
Law Broker markets and sells
life insurance products, property and casualty insurance products directly to the targeted customers through the sales professionals,
who are not its employees.
Since Henan Anhou’s
establishment in 2003, it has devoted substantial resources in building up its distribution and service network. Henan Anhou has
targeted its distribution and service network in provinces with most population in China, such as Henan, Jiangsu and Sichuan
.
As of June 30, 2013, Henan Anhou has two insurance agencies and one insurance brokerage firm, with 888 full time sales professionals
and 37 part-time sales professionals and 67 administrative staffs operating across 37 cities within these three provinces.
The following table sets
forth some additional information of Henan Anhou’s distribution and service network as of June 30, 2013, broken down by provinces:
|
|
|
|
|
Number of Full-time
|
|
|
Number
of Part-time
|
|
Province
|
|
Number
of Sales and Service Outlets
|
|
|
Sales
Agents
|
|
|
Sales
Agents
|
|
Henan
|
|
|
32
|
|
|
|
735
|
|
|
|
-
|
|
Sichuan
|
|
|
4
|
|
|
|
138
|
|
|
|
-
|
|
Jiangsu
|
|
|
1
|
|
|
|
15
|
|
|
|
37
|
|
Total
|
|
|
37
|
|
|
|
888
|
|
|
|
37
|
|
Henan Anhou markets and
sells life insurance products, property and casualty insurance products directly to the targeted customers through the sales agents,
who are not its employees.
Customers
During the fiscal year ended
June 30, 2013, Law Broker had approximately 500,000 customers, among which approximately 98% purchased life insurance products
and approximately 2% purchased property and casualty insurance products from Law Broker.
Due to its extensive line
of insurance products underwritten by the insurance companies in Taiwan, Law Broker managed to offer a variety of insurance products
to customers of different ages or professions. However, as aging population in Taiwan has gradually become a more recognized social
issue, despite of a relatively healthy government-sponsored retirement and medial programs, more and more Taiwanese, especially
those with stable financial means and aiming for high-end retirement and medical treatment, has been focusing on endowment and
medical type of commercial insurance products, while the investment type of insurance products have been playing a less significant
role since the economic downturn. In particular, 19.9% of the revenues of Law Broker are generated from sale of endowment insurance
and 46.2% of the revenues of Law Broker are generated from the sale of medical insurance.
In addition, from time to
time, Law Broker has been, either voluntarily or upon request of insurance companies, advising insurance companies or providing
feedback on particular type of insurance products before they are put on the market. This interaction with insurance companies
has not only enhanced the close cooperation between Law Broker and the insurance companies, but also gives it an edge in understanding
the in-depth feature of such insurance products for marketing and distribution purposes.
Law Broker sells automobile
insurance and casualty insurance primarily to individual customers. Law Broker sells liability insurance to institutional customers.
During the fiscal year ended
June 30, 2013, Henan Anhou had 33,943 customers, among which 33,198 purchased life insurance products and 745 purchased property
and casualty insurance products from Henan Anhou.
Henan Anhou sells automobile
insurance and individual accident insurance primarily to individual customers. Henan Anhou sells commercial property insurance
to institutional customers.
Henan Anhou targeted middle
class individuals and family members under 50 years age to be its priority clients, which represent 95% of its client base. The
revenues of Henan Anhou are primarily generated from the sale of life insurance products and we expect the continuous growth in
this regard, as more and more customers in China realized the insufficiency of the mandatory social insurance coverage and the
necessity to supplement it with commercial insurance. In particular, approximately 32% of the revenues of Henan Anhou are generated
from sale of endowment insurance and approximately 29% of the revenues of Henan Anhou are generated from the sale of medical insurance.
With the implementation of the national one-child policy in China, in fact, approximately 37% of the insurance policies distributed
by Henan Anhou have designated children under 14 years age as the beneficiary of such policies, Henan Anhou expects the continuous
growth of insurance market of these factors in the near future.
For the year ended June 30,
2013, no single customer accounted for more than 3% of the net revenues of CUIS, Law Broker or Henan Anhou.
Insurance Company Partners
We are selective in terms
of choosing insurance company as our partners. We takes into consideration of a variety of factors, such as the reputation and
integrity of the insurance company, the quality and competitiveness of insurance products offered, the prudence and health of the
financial standing of the insurance company as well as the complexity and efficiency of claim adjustment and settlement. During
years of operation, both Law Broker and Henan Anhou have formed strategic relationships with numerous insurance companies in Taiwan
and China, respectively, as of June 30, 2013, Law Broker had established business relationships with 19 insurance companies in
Taiwan and Henan Anhou had established business relationships with 29 insurance companies in China.
On June 10,
2013,
AHFL entered into an Alliance Agreement with AIATW. The purpose of the Alliance Agreement is
to promote life insurance products provided by AIATW within the territory of Taiwan by insurance agency companies or
insurance brokerage companies affiliated with AHFL or CUIS.
The term of the Alliance Agreement is from June 1, 2013 to
May 31, 2018. Pursuant to the terms of the Alliance Agreement, AIATW shall pay AHFL an Execution Fee of $8,367,947
(NT$
250,000,000). The fee will be recorded as revenue upon fulfilling sales target over the next five years. As the date of
September 23, 2013, AHFL has received $8,367,947 (NT$250,000,000) from AIATW. Pursuant to the Alliance Agreement, AHFL is
entitled to the payment of the execution fee, subject to certain terms and conditions therein, including the satisfaction of
the performance targets and the threshold 13-month persistency ratio. The Execution Fee may be required to be recalculated if
certain performance targets are not met by AHFL.
For the year ended June 30,
2013, Law Broker’s top five insurance company partners, after aggregating the business conducted between Law Broker and the
various local branches of the insurance companies were Farglory Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd., China
Life Insurance Company, Kuo Hua Life Insurance Co., Ltd. and TransGlobe Life Insurance Company. Among them, Farglory Life Insurance
Co., Ltd. accounted for 34.2% of Law Broker’s total net revenues from commissions and fees in the fiscal year ended June
30, 2013.
Henan Anhou’s top
five insurance company partners, after aggregating the business conducted between Henan Anhou and the various local branches of
the insurance companies were Sunshine Insurance Group Corporation Limited, Taikang Life Insurance Co., Ltd., Cathay Property Insurance
Co., Ltd., Sino Life Insurance Co., Ltd., and China Pacific Property Insurance Co., Ltd. Among them, Sunshine Insurance Group Corporation
Limited accounted for 32.13% of Henan Anhou’stotal net revenues from commissions and fees in the fiscal year ended June 30,
2013.
Competition
A number of industry players
are involved in the distribution of insurance products in Taiwan and PRC. We compete for customers on the basis of product offerings,
customer services and reputation. Because we primarily distribute individual insurance products, our principal competitors include:
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Professional insurance intermediaries.
Life insurance is our core business and has a strong
regional feature. Through years of business development, we believe that we can compete effectively with other insurance intermediary
companies as we have a longer operational history and over the years have assembled a strong and stable team of managers and sales
professionals. With the implementation of our unified operating platform, we believe that we could strengthen our lead in our developed
local regions and expand our operation to our newly selected areas. However, with increasing consolidation expected in the insurance
intermediary sector in the coming years, we expect competition within this sector to intensify.
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Insurance companies.
The distribution of individual life insurance products in Taiwan and
China historically has been dominated by insurance companies, which usually use both in-house sales force and exclusive sales agents
to distribute their own products. We believe that we can compete effectively with insurance companies because we focus only on
distribution and offer our customers a broad range of insurance products underwritten by multiple insurance companies.
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Other business entities.
In recent years, business entities that distribute insurance products
as an ancillary business, primarily commercial banks and postal offices have been playing an increasingly important role in the
distribution of insurance products, especially life insurance products. However, the insurance products distributed by these entities
are usually confined to those related to their main lines of business, such as investment-related life insurance products. We believe
that we can compete effectively with these business entities because we offer our customers a broader variety of products.
|
Law Broker is one of the
leading insurance brokerage firms in Taiwan. During the past two decades, Law Broker has expanded its business across Taiwan, with
23 sales and service outlets (including the headquarter) and 1,455 full time sales professionals and 449 part-time sales professionals
and 151 administrative staffs spread over the four regions of Taiwan. Other than insurance companies and commercial banks, Law
Broker’s primary competitors are Taiwan insurance brokerage companies of relatively large size, in particular, Everpro Insurance
Brokers Co., Ltd. and Genius Insurance Brokers Co., Ltd. Through years of operation, Law Broker has won numerous awards from various
Taiwan government authorities for its excellence in the insurance brokerage industry. Among which, from year 2005 to year 2008,
Law Broker has won the “Taiwan Insurance Excellence Award - Talent Training” for four consecutive years, the “Taiwan
Insurance Excellence Award - E-commerce” in 2009, the "Taiwan Insurance Excellence Award - Customer Service and Personal
Training” in 2011,the“Taiwan Insurance Excellence Award - Golden Medal for Information Application, Silver Medal for
Personnel Training and Silver Medal for Customer Service” in 2013 as well as the “Insurance Dragon and Phoenix Award”
in 2012 and 2013. The “Taiwan Insurance Excellence Award" is one of most prestigious as well as well-participated insurance
events in Taiwan, co-sponsored by the Taiwan Insurance Institute, Taiwan Financial Supervisory Committee and Taiwan Consumer Protection
Committee, to encourage the insurance industry participants to actively enhance insurance service quality as well as to improve
customer services.
During the past 10 years,
Henan Anhou has expanded its business across 37 cities within Henan, Sichuan and Jiangsu provinces with 888 full time sales professionals
and 37 part-time sales professionals and 67 administrative staffs. Based on the insurance products Henan Anhou is offering and
the geographic areas of its branch offices, [Henan Anhou’s primary competitors are small-sized and middle-sized insurance
agency companies. Henan Anhou is relatively larger in terms of the number of salesmen as well as the sales revenue comparing to
those competing insurance agency companies. On April 20, 2012, Henan Anhou obtained the nationwide license from CIRC, pursuant
to which Henan Anhou may set up its branch office across the PRC, to carry out the insurance agency business, with no further approval
requirement from CIRC other than filing with the local CIRC at the provincial level.
On March 26, 2012, CIRC
issued the Notice on Suspension of Market Entry Approval of Regional Insurance Agencies and Certain Part-time Insurance Agencies
(“2012 Notice”). Pursuant to the 2012 Notice, CIRC and its local counterparts will suspend granting any new license
to full-time insurance agencies operating on a regional basis (“Regional Insurance Agencies”) as well as to branch
offices of existing Regional Insurance Agencies. In addition, no new license for part-time insurance agency businesses will be
granted unless such applicant is a financial institution or a China Post office. However, CIRC emphasized in the 2012 Notice that
its local counterparts shall continue to support the establishment of insurance intermediary groups and full-time insurance agencies
operating on a nationwide basis, as well as continue to support their respective branch offices.
As indicated in the 2012
Notice, it appears that CIRC is aiming to increase the entry thresholds of Regional Insurance Agencies and part-time insurance
agencies with a view to reducing the number, as well as, enhancing the quality of insurance agencies in the market. CIRC has also
indicated in the 2012 Notice that it intends to further amend related rules and regulations to improve the market entry and exit
mechanism for insurance agencies, and promote the professionalism as well as enhance the quality of insurance agencies in the market.
On April 27, 2013, CIRC issued
the Decision on Revising the Provisions of the Supervision and Administration of Specialized Insurance Agencies (the “Decision
on Revising the Agency Provisions”), pursuant to which, CIRC has mandated any insurance agency established subsequent to
the Decision on Revising the Agency Provisions to meet a minimum registered capital requirement of RMB50 million ($8.1 million).
On May 16, 2013, CIRC issued
Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”),
pursuant to which, professional insurance agencies established prior to the issuance of the Decision on Revising the Agency Provisions,
with registered capital less than RMB50 million ($8.1 million), can continuously operate their existing business within the provinces
where they have the registered office or branch office, but shall not set up any new branches in any province where they do not
have the registered office or any branch office.
With the promulgation and
implementation of the above-mentioned regulations, we expect a better regulated insurance agency market in China with orderly competition
and pursuit for professional excellence, which will accentuate our competitive advantage due to our continuous commitment to quality
service. Also, as of the date of filing of this annual report on Form 10-K, Henan Anhou is one of 108 insurance agencies with a
PRC nationwide license, we believe that we will be in a better position to obtain the full support expressly provided in the 2012
Notice from the local CIRC on our expansion strategy nationwide provided that we meet the requirements in the 2013 Notice.
Intellectual Property
To protect our intellectual
property, we rely on a combination of trademark, copyright and trade secret laws as well as confidentiality agreements with our
employees, sales agents, contractors and others.
Law Enterprise, Law Broker and Law Agent
jointly own the following registered trademarks in Taiwan:
the Service Mark of Law Insurance Broker Co., Ltd.
, with a 10-year validity from June 16, 2011 to June 15, 2021;
the logo of Blue Magpie, with a 10-year validity
from June 16, 2011 to June 15, 2021;
the logo of Law (定律), with a 10-year
validity from June 16, 2011 to June 15, 2021;
the logo of Bao Xian Tong and INS, with a 10-year
validity from May 16, 2013 to May 15, 2023; and
the logo of Magpie Baby, with a 10-year validity
from May 16, 2012 to May 15, 2022.
Law Broker has the following registered trademarks
in Taiwan:
the logo of Blue Magpie Fleet, with a 10-year validity
from December 1, 2008 to November 30, 2018;
the logo of Law Insurance Broker, with a 10-year
validity from December 1, 2008 to November 30, 2018;
the logo of Law Blue Magpie, with a 10-year validity
from December 1, 2008 to November 30, 2018;
the logo of Symbiosis, Co-cultivation Co-Prosperity
and Law Blue Magpie Picture, with a 10-year validity from July 1, 2008 to June 30, 2018;
the logo of Education Training Blue Magpie,
with a 10-year validity from June 1, 2008 to May 31, 2018;
the logo of Cartoon Blue Magpie, with a
10-year validity from June 1, 2008 to May 31, 2018;
the logo of Little Blue Magpie, with a
10-year validity from June 1, 2008 to May 31, 2018;
the logo of Triumph Blue Magpie, with a
10-year validity from June 1, 2008 to May 31, 2018;
the logo of Blue Magpie Fleet Picture,
with a 10-year validity from May 1, 2008 to April 31, 2018; and
the logo of Fighting Blue Magpie, with
a 10-year validity from June 1, 2008 to May 31, 2018.
Jiangsu Law has one registered trademark
in China, the logo of Jiangsu Law:
Employees
As of June 30, 2013, Law
Broker has a total of 151 full-time employees and Henan Anhou has 67 full-time employees. Our employees are not represented by
any collective bargaining agreement. We believe that we have good relations with our employees and we have never experienced a
work stoppage.
Regulation
Taiwan Regulations
of the Insurance Industry
The insurance industry in
Taiwan is highly regulated. Financial Supervisory Committee of Republic of China, the FSC, is the regulatory authority responsible
for the supervision of the insurance industry in Taiwan. Insurance activities undertaken within Taiwan are primarily governed by
the Insurance Law and the related rules and regulations.
Insurance Law
The current principal regulation
governing insurance in Taiwan is Insurance Law, latest amended on June 6, 2012 by Legislative Yuan, which provided the initial
framework for regulating the insurance industry.
The Insurance Law defines
several subjects of insurance industry, such as insurer, insurance agency, insurance brokerage and insurance adjustor. It established
requirements for form of organization, and qualifications and procedures to establish an insurance organization as well as separation
of property insurance businesses and life insurance businesses. The Insurance Law distinguishes insurance between fire disaster,
marine, land and air, liability, surety , and other casualty and property insurance businesses on the one hand, and life insurance,
health insurance, casualty insurance and annuity businesses on the other. Unless permitted by the FSC, insurance companies are
not allowed to engage in both types of insurance businesses.
The insurers, insurance agencies,
insurance brokerages and insurance adjustors must join the related industry associations, or they are prohibited from conducting
business operation.
FSC
The FSC is in
charge of the financial market and financial service industries, among the insurance industry and has the power to
control the following items:
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1.
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Financial system and supervision policy.
|
|
2.
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The preparation, amendment and abolishment of financial laws and regulations.
|
|
3.
|
Supervision and management of the financial institutions, include its establishment, revocation, abolishment, change, merger, dissolution, and business scope.
|
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4.
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Development, supervision and management of financial market.
|
|
5.
|
Inspection of financial institution.
|
|
6.
|
Inspection on public listing company related to their securities market-related matters.
|
|
7.
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Foreign financial matters.
|
|
8.
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Protection of financial customers.
|
|
9.
|
Dealing and penalizing the violation of related laws and regulations of finance.
|
|
10.
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Collection of and analysis on relevant statistic data related to financial supervision, management and inspection.
|
|
11.
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Other matters related to financial supervision, management and inspection.
|
Regulation of Insurance
Agents and Agencies
The current principal regulation
governing insurance agents and agencies is the Rules on the Administration of Insurance Agent latest amended on December 29, 2011
by Insurance Bureau of FSC (the “Agent Rule”). An insurance agent stipulated under the Insurance Law refers to a person
who is on behalf of the insurer to conduct agency business pursuant to the agency contract or the power of attorney and charges
fees from the insurer. Depending on their focused insurance areas, i.e. property insurance and life insurance, insurance agents
can be divided into property insurance agents and life insurance agents. No matter what insurance industry an insurance agent is
engaged in, it must have one of the following qualifications: (1) having passed the insurance agency examination for professional
and technical staff; (2) having passed the insurance agency qualification test; or (3) having obtained the agency practitioner
certificate and practiced the same business. Those who have agent qualifications required by the Agent Rule may conduct business
after they obtain the practitioner certificates under the name of themselves or the company they work for. An agency company must
hire more than one agent to act as signatory(ies), and registered with the administrative authority, the number of whom can be
adjusted appropriately in accordance with the scale of business. If necessary, the administrative authority may, in its discretion,
require the company to add more signatories. An insurance agent may only work for one insurance agency company as signatory at
one time.
There are special requirements
for agency companies, such as the name of an agent company must contain the words "insurance agency", and when an agency
company applies to operate agency business, the minimum registered capital must be at least NT$3 million ($100,603) fully paid
up in cash.
The Practitioner Certificate
The practitioner certificate
has a duration of five years, and must be renewed before expiration. In case an agent has the qualifications for both of property
and life insurance, unless otherwise approved by the administrative authority, only one kind of insurance agency practitioner certificate
may be obtained upon his selection.
Education and Training
There’re two types
of education and training for an insurance agent, pre-vocational and on-the-job education and training. An insurance agent must
attend in pre- vocational education and training for at least 32 hours during the two years before applying for practicing insurance
agency business and on-the-job education and training for at least 24 hours during the two years before the renewal of the practitioner
certificate.
Management of Insurance Agencies
The rules describing how
to conduct insurance agency business concentrate on the concept that the agencies must take care of customers' matters in good
faith. To ensure this concept is properly carried out, the rules require insurance agency companies must have legal compliance
officers with one of the following qualifications: (1) are qualified to be insurance agents or brokers and have worked as actual
signatories; (2) have five years working experience in the insurance industry, insurance agency or insurance brokerage; or (3)
having graduated from departments related to insurance or law departments of colleges and universities with more than three years
working experience in insurance industry, insurance agency or insurance brokerage.
Regulation of Insurance
Brokers and Brokerage Companies
The current principal regulation
governing insurance brokers and brokerage companies is the Rules on the Administration of Insurance Broker last amended on December
29, 2011 by Insurance Bureau of FSC (the “Broker Rule”). An insurance broker stipulated under the Insurance Law refers
to a person who negotiates to conclude an insurance contract on behalf of the insured and charges fees from the insured. Depending
on their focused insurance areas, i.e. property or life insurance, insurance brokers can be divided into property insurance brokers
and life insurance brokers. No matter what insurance industry an insurance broker is engaged in, it must have one of the following
qualifications: (1) have passed the insurance brokerage examination for professional and technical staff; (2) have passed the insurance
brokerage qualification test; or (3) have obtained the insurance brokerage practitioner certificate and practiced the same business.
Those who have brokerage
qualifications required by the Broker Rule may conduct business after they obtain the practitioner certificates under their own
name or the company they work for. A brokerage company must hire more than one broker to act as signatory(ies), and registered
with the administrative authority, the number of whom can be adjusted appropriately in accordance with the scale of business. If
necessary, the administrative authority may, in its discretion, require the company to add signatories. An insurance agent may
only work for one insurance brokerage company as signatory at one time.
There are special requirements
for brokerage companies, such as the name of an brokerage company must contain the words "insurance broker"; when an
brokerage company applies to operate brokerage business, the minimum registered capital must be at least NT$3 million ($100,603)
fully paid up in cash.
The Practitioner Certificate
The insurance broker practitioner
certificate has a validation duration of five years, and must be renewed before expiration. In case a broker has the qualifications
for both property insurance and life insurance, he may obtain both insurance brokerage practitioner certificates.
Education and Training
There’re two types
of education and training for an insurance broker, pre-vocational and on-the-job education and training. An insurance broker must
attend pre-vocational education and training for at least 32 hours during the two years before applying for practicing insurance
broker business and on-the-job education and training for at least 24 hours during the two years before the renewal of the practitioner
certificate.
Management of Insurance Brokerages
The rules describing how
to conduct brokerage business concentrate on the concept that the brokerages must take care of customers' matters in good faith.
To ensure that this concept is properly carried out, the rules require insurance brokerage companies must have legal compliance
officers who have one of the following qualifications: (1) are qualified to be insurance agents or brokers and have worked as actual
signatories; (2) have five years working experience in the insurance industry, insurance agency or insurance brokerage; or (3)
have graduated from college and university departments related to insurance or law with more than three years working experience
in insurance industry, insurance agency or insurance brokerage.
Regulation of Insurance
Salespersons
The current principal regulation
governing individual insurance salespersons is the Rules on the Administration of Insurance Salespersons latest amended on September
14, 2010 by Insurance Bureau of FSC (the “Salesperson Rule”). An insurance salesperson falling under the Insurance
Law refers to a person who is engaged in attracting insurance business for insurance companies, insurance brokerage companies and
insurance agency companies. A salesperson is not allowed to attract business for the company he belongs unless he has completed
the registration in accordance with the Salesperson Rules and has obtained the registration certificate. In order to obtain the
registration certificate, an insurance salesperson must be at least 20 years old and has at least graduated from a senior high
school or a senior vocational school or have an equivalent educational background. In addition, the salesperson must meet one of
the following requirements: (1) passed the salesperson qualification examination held by relevant associations; or (2) have a valid
the registration certificate. Once the salespersons passed the qualification examination, the relevant association will notify
the company where the salesperson works, then the company will issue a registration certificate for the salesperson and file such
registration certificate with the relevant authorities. The registration certificate is valid for five years and must be renewed
before expiration. The salesperson must present the registration certificate before they start attracting insurance business. Unless
approved by the company, the salesperson may not work for any other insurance company, insurance brokerage company or insurance
agency company. The company supervises the work of the salesperson and is joint and severally liable for any damage caused by its
salesperson.
Education and Training
Salespersons must attend
in education and training held by their companies every year, or the companies shall revoke the registration certificates of those
who fail to attend such education and training.
The Salesperson Rule also
stipulates the proper ways and manners to be followed by the salespersons in conducting their businesses and specifies the penalties
in case of their violation of the Salesperson Rule.
Taiwan Regulations
on Foreign Exchange
Foreign exchange regulation
in Taiwan is primarily governed by the Ordinance of Foreign Exchange Administration, latest amended on April 29, 2009 (the “Foreign
Exchange Ordinance”). Under the Foreign Exchange Ordinance, foreign exchange refers to foreign currency, bills and marketable
securities. The authority managing the administration of foreign exchange is Ministry of Finance of Republic of China, while the
authority managing the practical operation of foreign exchange business is Central Bank of Republic of China. The Foreign Exchange
Ordinance also specifies the allocated power of Ministry of Finance and Central Bank, respectively. To the extent that any foreign
exchange receipts, payments or transactions reaches the threshold of NT$500,000 ($16,767) or equivalent in foreign currency, it
must be reported to the Central Bank or its designated authorities. Upon incurrence of any of the following events, the State Council
of Republic of China may determine and announce that for a period of time, to close the foreign exchange market, suspend or restrict
all or partial foreign exchange payment, order a mandatory sale or deposit of all or partial foreign exchange into a designed bank,
or dispose in any other manner as it deems necessary:
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the disorder in domestic or international economy to the detriment of the stability of Taiwan’s economy; or
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Taiwan suffers serious trade deficit.
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Taiwan Regulation
on Foreign Investment
The current principal regulation
governing foreign investment is Foreign Investment Regulation latest amended on November 19, 1997 (the “Investment Regulation”).
Under the Investment Regulation, investment refers to any activities involving (1) holding share capital of a company incorporated
in Taiwan; (2) establishing branches, wholly-owned or partnership enterprises in Taiwan; or (3) providing more than one-year term
loan to the above-mentioned investee enterprises. The authority in charge of foreign investment is Ministry of Economic Affairs
of Republic of China. The industries in Taiwan are categorized into permitted, restricted and prohibited foreign investment areas.
Investors may apply for settlement of exchange in accordance with the annual yield of their investment or the allocation of surplus.
Eminent Domain
When the investment made
by an investor constitutes less than 45% of the total amount of capital of the investee enterprise, and the investee enterprise
has been expropriated or acquired by the government for the purpose of national defense, reasonable government compensation shall
be paid to the investors. However, if the capital contribution made by the investor constitutes at least 45% of the total amount
of capital of the investee enterprise and continues remaining above 45% for two decades since its establishment, then the government
may not exercise its eminent domain power over such investee enterprise.
Taiwan Regulations
on Tax
The current principal regulations
governing tax in Taiwan include the following:
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Income Tax Law, latest amended on August 8, 2012;
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The Implementation Rules of Income Tax Law, latest amended on September 7, 2011;
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Value-Added and Non-Value-Added Business Tax Law, latest amended on November 23, 2011; and
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The Implementation Rules of Value-Added And Non-Value-Added Business Tax Law, latest amended on March 6, 2012.
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Under the Income Tax Law,
there are two kinds of income tax, comprehensive income tax for individuals and income tax for enterprises operating for profit,
respectively.
Individuals who have income
with a source within Taiwan must pay comprehensive income tax on their income sourced within Taiwan; while non-resident individuals
having income with a source within Taiwan, except otherwise provided in the Income Tax Law, shall pay tax based on the amount attributable
to the sources of their income.
The enterprise with head
office located in Taiwan shall pay profit-seeking income tax on its global income both within and outside Taiwan; while the enterprises
with head office outside Taiwan shall only pay profit-seeking income tax on its business income sourced from within Taiwan.
Rate of Income Tax
The individual comprehensive
income tax exemption threshold is NT$60,000 ($2,012) per person per year. Any income beyond such exemption threshold is subject
to a progressive tax rate ranging from 5% to 40%.
With respect to enterprises
operating for profit, the exemption threshold is NT$120,000 ($4,024). Any income beyond such exemption threshold is subject to
17% tax rate on its taxable income.
Sale of goods or service,
import of goods in Taiwan are subject to a Value-Added or Non-Value-Added Business Tax. The Rate of business tax, except as otherwise
stipulated in the relevant tax law, ranges from 5% to 10% as determined by the State Council of Taiwan.
PRC Regulations of the Insurance Industry
The insurance industry in
the PRC is highly regulated. CIRC is the regulatory authority responsible for the supervision of the Chinese insurance industry.
Insurance activities undertaken within the PRC are primarily governed by the Insurance Law and the related rules and regulations.
Initial Development of Regulatory Framework
The Chinese Insurance Law
was enacted in 1995. This original insurance law, which we refer to as the 1995 Insurance Law, provided the initial framework for
regulating the domestic insurance industry. Among the steps taken under the 1995 Insurance Law were the following:
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(a)
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Licensing of insurance companies and insurance intermediaries, such as agencies and brokerages.
The 1995 Insurance Law established requirements for minimum registered capital levels, form of organization,qualification of senior
management and adequacy of the information systems for insurance companies, insurance agencies and brokerages.
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(b)
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Separation of property and casualty insurance and life insurance businesses. The 1995 Insurance
Law distinguished insurance between property, casualty, liability and credit insurance businesses, on the one hand, and life, accident
and health insurance businesses on the other, and prohibited insurance companies from engaging in both types of businesses.
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(c)
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Regulation of market conduct by participants. The 1995 Insurance Law prohibited fraudulent and
other unlawful conduct by insurance companies, agencies and brokerages.
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(d)
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Substantive regulation of insurance products. The 1995 Insurance Law gave insurance regulators
the authority to approve the policy terms and premium rates for certain insurance products.
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(e)
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Financial condition and performance of insurance companies. The 1995 Insurance Law established
reserve and solvency standards for insurance companies, imposed restrictions on investment powers and established mandatory reinsurance
requirements, and put in place a reporting regime to facilitate monitoring by insurance regulators.
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(f)
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Supervisory and enforcement powers of the principal regulatory authority. The principal regulatory
authority, then the People’s Bank of China, was given broad powers under the 1995 Insurance Law to regulate the insurance
industry.
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Establishment of the CIRC and 2002 Amendments to
the Insurance Law
China’s insurance
regulatory regime was further strengthened with the establishment of the CIRC in 1998. The CIRC was given the mandate to implement
reform in the insurance industry, minimize insolvency risk for Chinese insurers and promote the development of the insurance market.
The 1995 Insurance Law was
amended in 2002 and the amended insurance law, which we refer to as the 2002 Insurance Law, became effective on January 1, 2003.
The major amendments to the 1995 Insurance Law include:
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(a)
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Authorizing the CIRC to be the insurance supervisory and regulatory body nationwide. The 2002
Insurance Law expressly grants the CIRC the authority to supervise and administer the insurance industry nationwide.
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(b)
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Expanding the permitted scope of business of property and casualty insurers. Under the 2002 Insurance
Law, property and casualty insurance companies may engage in the short-term health insurance and accident insurance businesses
upon the CIRC’s approval.
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(c)
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Providing additional guidelines for the relationship between insurance companies and insurance
agents. The 2002 Insurance Law requires an insurance company to enter into an agent agreement with each insurance agent that will
act as an agent for such insurance company. The agent agreement sets forth the rights and obligations of the parties to the agreement
as well as other matters pursuant to law. An insurance company is responsible for the acts of its agents when the acts are within
the scope authorized by the insurance company.
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(d)
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Relaxing restrictions on the use of funds by insurance companies. Under the 2002 Insurance Law,
an insurance company may use its funds to make equity investments in insurance-related enterprises, such as asset management companies.
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(e)
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Allowing greater freedom for insurance companies to develop insurance products. The 2002 Insurance
Law allowed insurance companies to set their own policy terms and premium rates, subject to the approval of, or a filing with,
the CIRC.
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2009 Amendments to the Insurance Law
The 2002 Insurance Law was amended
again in 2009 and the amended insurance law, which we refer to as the 2009 Insurance Law, became effective on October 1, 2009.
The major amendments to the 2009 Insurance Law include:
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(a)
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Strengthening protection of the insured’s interests. The 2009 Insurance Law added a variety
of clauses such as incontestable clause, abstained and estoppel clause, common disaster clause and amending immunity clause, claims-settlement
prescription clause, reasons for claims rejection and contract modification clause.
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(b)
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Strengthening supervision on the qualification of the shareholders of the insurance companies
and setting forth specific qualification requirements for the major shareholders, directors, supervisors and senior managers of
insurance companies.
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(c) Expanding the business scope of insurers and further
relaxing restriction on the use of fund by insurers.
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(d)
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Strengthening supervision on solvency of insurers with stricter measures.
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(e) Tightening regulations governing the administration
of insurance intermediary companies, especially those relating to behaviors of insurance agents.
According to the 2009 Insurance
Law, the minimum registered capital required to establish an insurance agency or insurance brokerage as a company must comply with
the PRC Company Law. The registered capital or the capital contribution of insurance agencies or insurance brokerages must be paid-up
capital in cash. The 2009 Insurance Law also sets forth some specific qualification requirements for insurance agency and brokerage
practitioners. The senior managers of insurance agencies or insurance brokerages must meet specific qualification requirements,
and their appointments are subject to approval of the CIRC. Personnel of an insurance agency or insurance brokerage engaging in
the sales of insurance products must meet the qualification requirements set by the CIRC and obtain a qualification certificate
issued by the CIRC. Under the 2009 Insurance Law, the parties to an insurance transaction may engage insurance adjusting firms
or other independent appraisal firms that are established in accordance with applicable laws, or persons who possess the requisite
professional expertise, to conduct assessment and adjustment of the insured subject matters. Additionally, the 2009 Insurance Law
specifies additional legal obligations for insurance agencies and brokerages.
The CIRC
The CIRC has extensive
authority to supervise insurance companies and insurance intermediaries operating in the PRC, including the power to:
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(a)
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promulgate regulations applicable to the Chinese insurance industry;
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(b)
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investigate insurance companies and insurance intermediaries;
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(c)
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establish investment regulations;
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(d)
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approve policy terms and premium rates for certain insurance products;
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(e)
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set the standards for measuring the financial soundness of insurance companies and insurance intermediaries;
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(f)
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require insurance companies and insurance intermediaries to submit reports concerning their business operations and condition
of assets; order the suspension of all or part of an insurance company or an insurance intermediary’s business;
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(g)
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approve the establishment, change and dissolution of an insurance company, an insurance intermediary or their branches;
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(h)
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review and approve the appointment of senior managers of an insurance company, an insurance intermediary or their branches;
and
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(i)
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punish improper behaviors or misconducts of an insurance company or an insurance intermediary.
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Regulation of Insurance
Agencies
The principal regulation
governing insurance agencies is the Provisions on the Supervision and Administration of Specialized Insurance Agencies (the “Agency
Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced the Provisions
on the Administration of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005. According
to the Agency Provisions, the establishment of an insurance agency is subject to minimum registered capital requirement and other
requirements and the approval of the CIRC. The term “insurance agency” refers to an entity that engages in insurance
agency business within the authorization of, and collects commissions from, insurance companies, including the professional insurance
agency companies and their branches. The insurance agency shall meet the qualification requirements specified by the CIRC, obtain
the license to conduct an insurance agency business with the approval of the CIRC. An insurance agency may take any of the following
forms: (i) a LLC; or (ii) a joint stock limited company. An insurance agency must have a registered capital of at least RMB2 million
($313,332). Where it is established as a nationwide company, its registered capital must be at least RMB10 million ($1,566,661).
The registered capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision on Revising the Agency Provisions,
pursuant to which, CIRC has mandated any insurance agency established subsequent to the Decision on Revising the Agency Provisions
to meet a minimum registered capital requirement of RMB50 million ($8.1 million).
On May 16, 2013, CIRC issued
Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”),
pursuant to which, professional insurance agency established prior to the issuance of the Decision on Revising the Agency Provisions,
with registered capital less than RMB50 million ($8.1 million), can operate their existing business within the provinces where
they have the registered office or branch office, but shall not set up any new branches in any province where they do not have
the registered office or any branch office.
An insurance agency may
engage in the following insurance agency businesses:
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(a)
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selling insurance products on behalf of the insurer principal;
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(b)
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collecting insurance premiums on behalf of the insurer principal; and
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(c)
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conducting loss surveys and handling claims of insurance businesses on behalf of the insurer principal; and other business activities specified by the CIRC.
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The name of an insurance
agency must contain the words “insurance agency” or “insurance sales.” The license of an insurance agency
is valid for a period of three years and may be renewed with due application 30 days prior to its expiration. An insurance agency
must report to the CIRC when it (i) changes its registered name or the name of its branches; (ii) changes its registered address
or the operating address of its branches; (iii) the sponsors or major shareholders change their respective name; (iv) changes its
major shareholders; (v) change its registered capital; (vi) materially change its equity structure; (vii) amends its articles of
association; or (viii) closes its branches. Personnel of an insurance agency, including those of its branches engaging in the sales
of insurance products or relevant loss survey and claim settlement, must pass a qualification examination for insurance agency
practitioners organized by the CIRC and obtain a “Qualification Certificate for Insurance Agency Practitioners.” The
senior managers of an insurance agency including its branches must meet specific qualification requirements set forth in the Agency
Provisions. The appointment of the senior managers of an insurance agency including its branches is subject to review and approval
of the CIRC.
Regulation of Insurance
Brokerages
The principal regulation
governing insurance brokerages is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions (the
“Brokerage Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced
the Provisions on the Administration of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on January 1,
2005. According to this Brokerage Provisions, the establishment of an insurance brokerage is subject to the approval of the CIRC.
The term “insurance brokerage” refers to an entity provides brokerages service on the execution of the insurance contract
between the insured and the insurance company based on the interests of the insured and collects commission as agreed, including
the insurance brokerage companies and their branches, The insurance brokerage shall meet the qualification requirements specified
by the CIRC and obtain the license to operate an insurance brokering business with the approval of the CIRC. Insurance brokering
business includes both direct insurance brokering, which refers to brokering activities on behalf of insurance applicants or the
insured in their dealings with the insurance companies, and reinsurance brokering, which refers to brokering activities on behalf
of insurance companies in their dealings with reinsurance companies. An insurance brokerage may take any of the following forms:
(i) a LLC; or (ii) a joint stock limited company. An insurance brokerage company must have a registered capital or capital contribution
of at least RMB10 million ($1,566,661). The registered capital must be paid up in cash. On April 27, 2013, CIRC issued the Decision
on Revising the Brokerage Provisions (the “Decision on Revising the Brokerage Provisions”), pursuant to which, CIRC
has mandated any insurance brokerage established subsequent to the Decision on Revising the Brokerage Provisions to meet a minimum
registered capital requirement of RMB50 million ($8.1 million).
On May 16, 2013, CIRC issued
Notice for Further Clarification on Related Issues of Access to Professional Insurance Intermediary Market (the “2013 Notice”),
pursuant to which, professional insurance brokerage established prior to the issuance of the Decision on Revising the Brokerage
Provisions, with registered capital less than RMB50 million ($8.1 million), can operate their existing business within the provinces
where they have the registered office or branch office, but shall not set up any new branches in any province where they do not
have the registered office or any branch office.
An insurance brokerage may
conduct the following insurance brokering businesses:
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(a)
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making insurance proposals, selecting insurance companies and handling the insurance application procedures for the insurance applicants;
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(b)
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assisting the insured or the beneficiary to claim compensation;
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(c)
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reinsurance brokering business; and
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(d)
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providing consulting services to clients with respect to disaster and damage prevention, risk assessment and risk management; and other business activities specified by the CIRC.
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The name of an insurance
brokerage must contain the words “insurance brokerage.” The license of an insurance brokerage is valid for three years
and may be renewed with due application 30 days prior to its expiration. An insurance brokerage must report to the CIRC when it
(i) changes its registered name or the name of its branches; (ii) change its registered address or the operating address of its
branches; (iii) the sponsors or the major shareholders change their respective name; (iv) changes its major shareholders; (v) changes
its registered capital; (vi) materially changes its equity structure; (vii) amends its articles of association; or (viii) closes
its branches. Personnel of an insurance brokerage, including those of its branches engaging in any of the insurance brokering businesses
described above, must pass a qualification examination for insurance brokering practitioners organized by the CIRC and obtain a
“Qualification Certificate for Insurance Brokerage Practitioners”. The senior managers of an insurance brokerage including
its branches must meet specific qualification requirements set forth in the Brokerage Provisions. Appointment of the senior managers
of an insurance brokerage including its branches is subject to review and approval by the CIRC.
Regulation of Insurance Salespersons
The principal regulation
governing individual insurance salespersons is the Measures on the Supervision of Insurance Salespersons issued by the CIRC on
January 6, 2013 and effective on July 1, 2013, which replaced the Provisions on the Administration of Insurance Salespersons promulgated
on April 6, 2006 and effective on July 1, 2006. Under this regulation, the term “insurance salesperson” refers to an
individual who sells insurance products for an insurance company, including those who are engaged by insurance companies or by
insurance agencies. To engage in insurance sales activities as an insurance salesperson, a person first must pass the qualification
examination for the insurance agency practitioners organized by the CIRC to obtain a “Qualification Certificate of Insurance
Agency Practitioners”. The person must have a junior high school education or above to be qualified for the examination.
In addition to the qualification certificate, a person must be registered with the CIRC’s Insurance Intermediary Supervision
Information System and obtain a “Practice Certificate of Insurance Salespersons” issued by the insurance company or
insurance agency to which he or she belongs in order to conduct insurance sales activities.
Regulation of Insurance Brokerage Practitioner
and Insurance Adjustment Practitioners
The principal regulation
governing insurance brokerage practitioners and insurance adjustment practitioners is the Measures on the Supervision of Insurance
Brokerage Practitioners and Insurance Adjustment Practitioners issued by the CIRC on January 6, 2013 and effective on July 1, 2013.
To engage in the insurance brokerage activities as an insurance brokerage practitioner, or in the insurance adjustment activities
as an insurance adjustment practitioner, a person first must pass the qualification examination organized by the CIRC for the insurance
brokerage practitioners or for the insurance adjustment practitioners to obtain a “Qualification Certificate of Insurance
Brokerage Practitioners” or a “Qualification Certificate of Insurance Adjustment Practitioners”. The person must
have a tertiary education or above to be qualified for the examination. In addition to the qualification certificate, a person
also must be registered with the CIRC’s Insurance Intermediary Supervision Information System and obtain a “Practice
Certificate of Insurance Brokerage Practitioners” or “Practice Certificate of Insurance Adjustment Practitioners”
issued by the insurance brokerage firm or insurance claims adjusting company to which he or she belongs in order to conduct insurance
brokerage or claims adjustment activities. An insurance brokerage practitioner is not allowed to conduct insurance brokerage activities
on behalf of himself or herself.
Content Related to Insurance
Industry in the Legal Documents of China’s Accession to the WTO
According to the Circular
of the CIRC on Distributing the Content Related to Insurance Industry in the Legal Documents of China’s Accession to the
WTO, for the life insurance sector, within three years of China’s accession to the WTO on December 11, 2001, geographical
restrictions were to be lifted, equity joint venture companies allowed to provide health insurance, group insurance, and pension/annuity
services to Chinese citizens and foreign citizens, and no other restrictions allowed except those on the proportion of foreign
investment (no more than 50%) and establishment conditions. For the non-life insurance sector, within three years of China’s
accession, the geographical restrictions were to be lifted and no restrictions allowed other than establishment conditions. For
the insurance brokerage sector, within five years of China’s accession, the establishment of wholly foreign-funded subsidiary
companies was to be allowed, and no restrictions allowed other than establishment conditions and restrictions on business scope.
PRC Regulations
on Foreign Exchange
Foreign Currency Exchange
Foreign exchange regulation
in China is primarily governed by the following rules:
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Foreign Currency Administration Rules (1996), as amended, or the Exchange
Rules; and
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Administration Rules of the Settlement, Sale and Payment of Foreign Exchange
(1996), or the Administration Rules.
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Under the Exchange Rules,
the RMB is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related
foreign exchange transactions. Conversion of RMB for capital account items, such as direct investment, loan, security investment
and repatriation of investment, however, is still subject to the approval of the SAFE.
Under the Administration
Rules, foreign-invested enterprises may only buy, sell or remit foreign currencies at those banks authorized to conduct foreign
exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval
from the SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include
approvals by the Ministry of Commerce, the SAFE and the State Development and Reform Commission.
PRC Regulations
on Dividend Distribution
The principal regulations
governing dividend distributions of wholly foreign-owned companies include:
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Wholly Foreign-Owned Enterprise Law (1986), as amended; and
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Wholly Foreign-Owned Enterprise Law Implementing Rules (1990), as amended.
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Under these regulations,
wholly foreign-owned companies in the PRC may pay dividends only out of their accumulated profits as determined in accordance with
PRC accounting standards. In addition, these wholly foreign-owned companies are required to set aside at least 10% of their respective
accumulated profits each year, if any, to fund certain reserve funds, until the accumulative amount of such fund reaches 50% of
its registered capital. These reserve funds are not distributable as cash dividends.
PRC Regulations
on Tax
PRC Enterprise Income
Tax
The PRC EIT is calculated
base on the taxable income determined under the PRC accounting standards and regulations, as well as the EIT law. On March 16,
2007, the National People’s Congress of China enacted the EIT Law, a new EIT law which became effective on January 1, 2008.
On December 6, 2007, the State Council promulgated the Implementation Rules which also became effective on January 1, 2008. On
December 26, 2007, the State Council issued the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy
under the EIT Law, or the Transition Preferential Policy Circular, which became effective simultaneously with the EIT Law. The
EIT Law imposes a uniform EIT rate of 25% on all domestic enterprises and foreign-invested enterprises unless they qualify under
certain exceptions. Under the EIT Law, as further clarified by the Implementation Rules, the Transition Preferential Policy Circular
and other related regulations, enterprises that were established and already enjoyed preferential tax treatments before March 16,
2007 will continue to enjoy them in the following manners: (i) in the case of preferential tax rates, for a five-year period starting
from January 1, 2008, during which the tax rate will gradually increase to 25%; or (ii) in the case of preferential tax exemption
or reduction for a specified term, until the expiration of such term. However, if such an enterprise has not enjoyed the preferential
treatments yet because of its failure to make a profit, its term for preferential treatment will be deemed to start from 2008.
PRC Business Tax
Taxpayers providing taxable
services in China are required to pay a business tax at a normal tax rate of 5% of their revenues, unless otherwise provided. According
to the Announcement on the VAT Reform Pilot Program of the Transportation and Selected Modern Service Sectors issued by the State
Tax Bureau in July 2012, the transportation and some selected modern service sectors, including research and development and technical
services, information technology services, cultural creative services, logistics support services, tangible personal property leasing
services, and assurance and consulting service sectors, should pay value-added tax instead of business tax based on a predetermined
timetable (hereinafter referred to as the “VAT Reform”), effective September 1, 2012 for entities in Beijing and October
1, 2012 for entities in Jiangsu. As of September 23, 2013 none of our Consolidated Affiliated Entities has been requested to convert
into the VAT system.
Dividend Withholding Tax
Under the PRC tax laws effective
prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises are exempt from PRC withholding tax.
Pursuant to the EIT Law and the Implementation Rules, dividends generated after January 1, 2008 and distributed to us by our PRC
subsidiaries are under a 5% withholding tax subject to PRC laws and regulations, provided that we are determined by the relevant
PRC tax authorities to be a “non-resident enterprise” under the EIT Law.
PRC regulations
relating to the establishment of offshore SPVs by PRC residents
SAFE has promulgated several
regulations, including the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 75, effective on November
1, 2005, and the Notice of the SAFE on Printing and Distributing the Implementing Rules for Fund-Raising and Round-trip Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 19,effective on July 1,
2011. These regulations require PRC residents and PRC corporate entities to register with local branches of SAFE in connection
with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents
and may apply to any offshore acquisitions that we make in the future.
Under these foreign exchange
regulations, PRC residents who make, or have previously made prior to the implementation of these foreign exchange regulations,
direct or indirect investments in Special Purpose vehicles or SPVs will be required to register those investments. In addition,
any PRC resident who is a direct or indirect shareholder of a SPV, is required to update the previously filed registration with
the local branch of SAFE, with respect to that SPV, to reflect any material change. Moreover, the PRC subsidiaries of that SPV
are required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder
fails to make the required registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited
from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent,
and the SPV may also be prohibited from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with
the various foreign exchange registration requirements described above could result in liabilities for such PRC subsidiaries under
PRC laws for evasion of applicable foreign exchange restrictions. Furthermore, the persons-in-charge and other persons at such
PRC subsidiaries who are held directly liable for the violations may be subject to administrative sanctions.
These foreign exchange regulations
provide that PRC residents include both PRC citizens, meaning any individual who holds a PRC passport or resident identification
card, and individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to China. SAFE Circular
No. 19 further defines individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to the PRC.
ITEM 1A. RISK FACTORS.
You should carefully consider
the risks described below together with all of the other information included in this Form 10-K. The statements contained in or
incorporated herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or implied by forward-looking statements. See “Cautionary
Statement Regarding Forward-Looking Statements.” If any of the following risks actually occurs, our business, financial condition
or results of operations could be harmed. In that case, you may lose all or part of your investment.
Risks Relating to Our
Business
The recent global
macroeconomic events could cause disruptions to our customers and their demand for insurance services. Demand for our products
has been, and will continue to be, adversely affected by overall macroeconomic conditions.
The recent global macroeconomic
events could have a negative impact on businesses around the world. For example, on August 5, 2011, Standard & Poor’s
lowered its long term sovereign credit rating on the United States of America from AAA to AA+. In addition, the ongoing European
sovereign debt crisis that started in 2009 has also had a negative impact on the credit ratings of several European countries and
general market sentiment. Furthermore, from May 2013, emerging markets in Asia are facing a capital flight as funds flow back into
Europe and the United States. Emerging markets from Thailand to India plunged into the red amid a heavy sell-off, as investors
reassessed the implications of another shift in the global economy. These downgrades could have material adverse impacts on financial
markets and economic conditions throughout the world. In general, the recent global economic crisis has caused weak consumer confidence
and diminished consumer and business spending, which have had a negative impact on the general market demand for insurance services
around the world.
Volatility in the financial
markets and overall economic uncertainty increases the risk of substantial quarterly and annual fluctuations in our earnings. Given
the current economic environment, we remain cautious and we expect our customers to be cautious as well, which could affect our
future results. If the economic recovery slows down or dissipates, our business, financial condition, results of operations and
cash flows could be materially and adversely affected.
If we are unable
to obtain and maintain the licenses to operate our business, our business prospects and future results of operations would be adversely
affected.
We operate our businesses
with approvals and licenses granted by the government. If these approvals or licenses are revoked or suspended or are not renewed,
or if we are unable to obtain any additional licenses that we may need to operate or expand our business in the manner we desire,
then our financial condition and results of operations, as well as our prospects, will suffer.
On April 27, 2013, CIRC issued
the Decision on Revising the Agency Provisions and Decision on Revising the Brokerage Provisions, pursuant to which, CIRC has mandated
any insurance agency and insurance brokerage established subsequent to the Decisions to meet a minimum registered capital requirement
of RMB50 million ($8.1 million). On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional
Insurance Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance agencies and insurance
brokerages established prior to the issuance of the Decisions, with registered capital less than RMB50 million ($8.1 million),
can continuously operate their existing business within the provinces where they have the registered office or branch office, but
shall not set up any new branches in any province where they do not have the registered office or any branch office.
As of the date hereof, Henan
Anhou, a professional insurance agency with a PRC nationwide license, has a registered capital of RMB10 million ($1.6 million).
The registered office and branch offices of Anhou currently are all in Henan province. If we are unable to increase Henan Anhou’s
registered capital to RMB50 million ($8.1 million) to meet the requirement of CIRC, Henan Anhou can not set up new branches in
any province other than Henan province.
We face substantial
political risks associated with doing business in Taiwan, particularly due to domestic political events and the tense relationship
between Taiwan and the People’s Republic of China, which could adversely affect our financial condition and results of operations.
Law Broker’s executive
office and substantial assets are located in Taiwan and most of our revenues are derived from our operations in Taiwan currently.
Accordingly, our business, financial condition and results of operations and the market price of our common shares may be affected
by changes in Taiwan governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and
social developments in or affecting Taiwan which are outside of our control. Taiwan has a unique international political status.
Since 1949, Taiwan and the Chinese mainland have been separately governed. The PRC claims it is the sole government in China and
that Taiwan is part of China. Although significant economic and cultural relations have been established between Taiwan and the
PRC, such as the engagement of Economic Cooperation Framework Agreement (“ECFA”) in 2010 and Cross-strait Investment Protection and
Promotion Agreement in 2012, relations may become strained again. The PRC government has refused to renounce the use of military
force to gain control over Taiwan. Past developments in relations between the Taiwan and the PRC have on occasion depressed the
market prices of the securities of companies in Taiwan. Relations between the Taiwan and the PRC and other factors affecting military,
political or economic conditions in Taiwan could materially and adversely affect our financial condition and results of operations,
as well as the market price and the liquidity of our securities. In addition, the complexities of the relationship between the
Taiwan and PRC require companies involved in cross-strait business operations to carefully monitor its actions and manage its relationships
with both Taiwan and PRC governments. We cannot assure you that we will be able to successfully manage our relationships with the
Taiwan and PRC governments for our cross-strait business operations, which could have an adverse effect on our ability to expand
our business and conduct cross-strait business operations.
Any future outbreak
of contagious diseases may materially and adversely affect our business and operations, as well as our financial condition and
results of operations.
Any future outbreak of contagious
diseases, such as severe acute respiratory syndrome or avian influenza, may disrupt our ability to adequately staff our business
and may generally disrupt our operations. If any of our employees is suspected of having contracted any contagious disease, we
may under certain circumstances be required to quarantine such employees and the affected areas of our premises. As a result, we
may have to temporarily suspend part or all of our operations. Furthermore, any future outbreak may restrict the level of economic
activity in affected regions, which may adversely affect our business and prospects. As a result, we cannot assure you that any
future outbreak of contagious diseases would not have a material adverse effect on our financial condition and results of operations.
If we fail to
attract and retain productive sales professionals or agents, our business could suffer.
Our entire sales of life,
property and casualty insurance products are conducted through its individual sales professionals or agents, who are not our employees.
Some of these sales professionals or sales agents are significantly more productive than others in generating sales. If we are
unable to attract and retain the core group of highly productive sales professionals or sales agents, our business could be materially
and adversely affected. Competition for sales personnel from insurance companies and other insurance intermediaries may also force
us to increase the compensation of our sales professionals or sales agents, which would increase operating costs and reduce our
profitability.
Our business
and prospects could be materially and adversely affected if we are not able to manage our growth successfully.
Law Broker commenced its
insurance intermediary business in 1992. During the past two decades, Law Broker has expanded its distribution and service networks
across Taiwan, with 23 sales and service outlets (including the headquarters) and 1,972 employees and sales professionals. Henan
Anhou commenced its insurance intermediary business in 2003 and has expanded its operations substantially in recent years. Henan
Anhou’s distribution and service networks expanded from one company in one province to two insurance agencies and one brokerage
in 3 provinces and 37 service outlets as of September 23, 2013. Meanwhile, we broadened our service offerings from the distribution
of only life insurance products to cover a wide variety of property and casualty insurance and automobile insurance products. We
anticipate continued growth in the future through multiple means. Our expansion has placed, and will continue to place, substantial
demands on our managerial, operational, technological and other resources. To manage and support our continued growth, we must
continue to improve our operational, administrative, financial and technological systems, procedures and controls, and expand,
train and manage our growing employee and agent base. Furthermore, our management will be required to maintain and expand our relationships
with insurance companies, other insurance intermediaries, regulators and other third parties. We cannot assure you that our current
and planned personnel, systems, procedures and controls will be adequate to support our future operations. Any failure to effectively
and efficiently manage our expansion could materially and adversely affect our ability to capitalize on new business opportunities,
which in turn could have a material adverse effect on our results of operations.
We may be unsuccessful
in identifying and acquiring suitable acquisition candidates, which could adversely affect our growth.
We expect our future growth
to come from acquisitions of high-quality independent insurance agencies and brokerages as well as establishment of new insurance
agencies and brokerages. There is no assurance we can successfully identify suitable acquisition candidates, especially in those
areas where we do not yet have a presence. Even if we identify suitable candidates, we may not be able to complete an acquisition
on terms that are commercially acceptable to us. In addition, we compete with other entities to acquire high-quality independent
insurance agencies and brokerages. Many of our competitors may have substantially greater financial resources than we do and may
be able to outbid us for these acquisition targets. If we are unable to complete acquisitions, our growth strategy may be impeded
and our earnings or revenue growth may be negatively affected.
If we fail to
integrate acquired companies efficiently, or if the acquired companies do not perform to our expectations, our business and results
of operations may be adversely affected.
Even if we succeed in acquiring
other insurance agencies and brokerages, our ability to integrate an acquired entity and its operations is subject to a number
of factors. These factors include difficulties in the integration of acquired operations and retention of personnel, especially
the sales professionals and sales agents who are not employees of the acquired company, entry into unfamiliar markets, unanticipated
problems or legal liabilities, and tax and accounting issues. The need to address these factors may divert management’s attention
from other aspects of our business and materially and adversely affect our business prospects. In addition, costs associated with
integrating newly acquired companies could negatively affect our operating margins.
Furthermore, the acquired
companies may not perform to our expectations for various reasons, including legislative or regulatory changes that affect the
insurance products in which a company specializes, the loss of key clients after the acquisition closes, general economic factors
that impact a company in a direct way and the cultural incompatibility of an acquired company’s management team with us.
If an acquired company cannot be operated at the same profitability level as our existing operations, the acquisition would have
a negative impact on our operating margin. Our inability to successfully integrate an acquired entity or its failure to perform
to our expectations may materially and adversely affect our business, prospects, results of operations and financial condition.
Because the
commission and fee revenue we earn on the sale of insurance products is based on premiums and commission and fee rates set by insurance
companies, any decrease in these premiums or commission and fee rates may have an adverse effect on our results of operations.
We are engaged in the insurance
agency and brokerage business and derive revenues primarily from commissions and fees paid by the insurance companies whose policies
our customers purchase. The commission and fee rates are set by insurance companies and are based on the premiums that the insurance
companies charge. Commission and fee rates and premiums can change based on the prevailing economic, regulatory, taxation-related
and competitive factors that affect insurance companies. These factors, which are not within our control, include the ability of
insurance companies to place new business, underwriting and non-underwriting profits of insurance companies, consumer demand for
insurance products, the availability of comparable products from other insurance companies at a lower cost, the availability of
alternative insurance products such as government benefits and self-insurance plans, as well as the tax deductibility of commissions
and fees and the consumers themselves. In addition, premium rates for certain insurance products, such as the mandatory automobile
liability insurance that each automobile owner in Taiwan and the PRC is legally required to purchase, are tightly regulated by
Insurance Bureau of Financial Supervisory Commission, Republic of China, or the FSC in Taiwan and China Insurance Regulatory Commission,
or the CIRC in China.
Because we do not determine,
and cannot predict, the timing or extent of premium or commission and fee rate changes, we cannot predict the effect any of these
changes may have on our operations. Intense competition among insurance companies has led to a gradual decline in premium rate
levels of some property and casualty insurance products. Although such decline may stimulate demand for insurance products and
increase our total sales volume, it also reduces the commissions and fees we earn on each policy sold. Any decrease in premiums
or commission and fee rates may significantly affect our profitability. In addition, our budget for future acquisitions, capital
expenditures and other expenditures may be disrupted by unexpected decreases in revenues caused by decreases in premiums or commission
and fee rates, thereby adversely affecting our operations.
Competition in
our industry is intense and, if we are unable to compete effectively, we may lose customers and our financial results may be negatively
affected.
The insurance intermediary
industry in Taiwan and China is highly competitive, and we expect competition to persist and intensify. In insurance product distribution,
we face competition from insurance companies that use their in-house sales force and exclusive sales agents to distribute their
products, and from business entities that distribute insurance products on an ancillary basis, such as commercial banks, postal
offices and automobile dealerships, as well as from other professional insurance intermediaries. We sell insurance products through
our exclusive sales professionals and sales agents pursuant to agency contracts entered into with our subsidiaries or Consolidated
Affiliated Entities in Taiwan and China, as applicable. The term of these agency contracts with Law Broker generally is for three
years and will be re-signed upon expiration, while the term of these agency contracts with Henan Anhou generally is for one year
with automatic extension in case neither party objects at the end of the term. These sales professionals and sales agents are not
our employees and we cannot assure you that they will continue their services subsequent to the expiration of such agency contracts.
We compete for customers on the basis of product offerings, customer services and reputation. Many of our competitors have greater
financial and marketing resources than we do and may be able to offer products and services that we do not currently offer and
may not offer in the future. If we are unable to compete effectively against those competitors, we may lose customers and our financial
results may be negatively affected.
Quarterly and
annual variations in our commission and fee revenue may have unexpected impacts on our results of operations.
Our commission and fee revenue
is subject to both quarterly and annual fluctuations as a result of the seasonality of its business, the timing of policy renewals
and the net effect of new and lost business. Historically, Law Broker’s commission and fee revenue, particularly revenue
derived from distribution of life insurance products, for the second and fourth quarters of any given year have been higher than
the first and third quarters. Henan Anhou’s commission and fee revenue, particularly revenue derived from distribution of
life insurance products, for the fourth quarter of any given year has been the highest among all four quarters, while Henan Anhou’s
commission and fee revenue for the first quarter of any given year has been the lowest among all four quarters. The factors that
cause the quarterly and annual variations are not within our control. Specifically, consumer demand for insurance products can
influence the timing of renewals, new business and lost business, which generally includes policies that are not renewed, and cancellations.
As a result, you may not be able to rely on quarterly or annual comparisons of our operating results as an indication of our future
performance.
If our contracts
with insurance companies are terminated or changed, our business and operating results could be adversely affected.
We primarily act as agents
for insurance companies in distributing their products to retail customers. Our relationships with the insurance companies are
governed by agreements between Law Broker or Henan Anhou and the insurance companies. See “Corporate History and Structure
- Insurance Company Partners.” These contracts establish, among other things, the scope of authority, the pricing of the
insurance products we distributes and its fee rates. These contracts typically have a term of one year and will be automatically
extended for successive one-year term unless terminated earlier with at least 30 days or 60 days advance notice prior to its expiration.
For the year ended June
30, 2013, Law Broker’s top five insurance company partners, after aggregating the business conducted between Law Broker
and the various local branches of the insurance companies were Farglory Life Insurance Co., Ltd., Fubon Life Insurance Co., Ltd.,
, China Life Insurance Company, Kuo Hua Life Insurance Co., Ltd. and TransGlobe Life Insurance Company. Among them, Farglory Life
Insurance Co., Ltd. accounted for 34.2% of Law Broker’s total net revenues from commissions and fees in 2013.
For the year ended June 30,
2013, Henan Anhou’s top five insurance company partners, after aggregating the business conducted between Henan Anhou and
the various local branches of the insurance companies, were Sunshine Insurance Group Corporation Limited, Taikang Life Insurance
Co., Ltd., Cathay Property Insurance Co., Ltd., Sino Life Insurance Co., Ltd. and China Pacific Property Insurance Co., Ltd.. Among
them, Sunshine Insurance Group Corporation Limited accounted for 32.13% of Henan Anhou’s total net revenues from commissions
and fees in 2013.
The termination of our contracts
with insurance companies that in aggregate account for a significant portion of our business, or changes to material terms of these
contracts, could adversely affect our business and operating results.
Our future success
depends on the continuing efforts of our senior management team and other key personnel, and our business may be harmed if we lose
their services.
Our future success depends
heavily upon the continuing services of the members of our senior management team and other key personnel, in particular Mr. Lo
Chung Mei, the Chief Executive Officer, Ms. Chuang Yung Chi, the Chief Financial Officer, Mr. Hsu Wen Yuan, the Chief Marketing
Officer, Mr. Hsieh Tung Chi, the Chief Operating Officer, and Mr. Chiang Te-Yun, the Chief Technology Officer. If one or more of
our senior executives or other key personnel, are unable or unwilling to continue in their present positions, we may not be able
to replace them easily, or at all. As such, our business may be disrupted and our financial condition and results of operations
may be materially and adversely affected. Competition for senior management and key personnel is intense, the pool of qualified
candidates is very limited, and we may not be able to retain the services of our senior executives or key personnel, or attract
and retain high-quality senior executives or key personnel in the future. As is customary in the PRC and Taiwan, we do not have
insurance coverage for the loss of our senior management team or other key personnel.
In addition, if any member
of our senior management team or any of our other key personnel joins a competitor or forms a competing company, we may lose customers,
sensitive trade information and key professionals and staff members. Each of our executive officers and key employees has entered
into an employment agreement with our subsidiaries or Consolidated Affiliated Entities, respectively. If any disputes arise between
any of our senior executives or key personnel and us, we cannot assure you of the extent to which any of these agreements may be
enforced.
Sales professionals
or sales agent and employee misconduct is difficult to detect and deter and could harm our reputation or lead to regulatory sanctions
or litigation costs.
Sales professionals or sales
agent and employee misconduct could result in violations of law by us, regulatory sanctions, litigation or serious reputational
or financial harm. Misconduct could include:
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making misrepresentation when marketing or selling insurance products to customers;
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hindering insurance applicants from making full and accurate mandatory disclosures or inducing applicants into making misrepresentations;
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hiding or falsifying material information in relation to the insurance contracts;
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fabricating or altering insurance contracts without authorization from relevant parties, selling false policies, or providing
false documents on behalf of the applicants;
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falsifying insurance agency business or fraudulently returning insurance policies to obtain commissions;
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colluding with applicants, insured, or beneficiaries to obtain insurance benefits;
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engaging in false claims; or
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otherwise not complying with laws and regulations or our control policies or procedures.
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We cannot always deter sales
professionals or sales agent or employee misconduct, and the precautions we take to prevent and detect these activities may not
be effective in all cases. We cannot assure you, therefore, that sales professionals or sales agent or employee misconduct will
not lead to a material adverse effect on our business, results of operations or financial condition.
All of our personnel
engaging in insurance agency or brokering are required under relevant regulations to have a qualification certificate issued by
the relevant government authorities in Taiwan or PRC. If these qualification requirements are strictly enforced in the future,
our business may be materially and adversely affected.
All of Law Broker’s
personnel who engage in insurance agency and brokering are required under relevant Taiwan regulations to obtain a registration
certificate. To obtain the registration certificate, the sale professionals have to pass the insurance sales professionals qualification
test sponsored by the Life Insurance Association of the Republic of China or Property Insurance Association of the Republic of
China (collectively the “Associations”, each a “Association”). Once the applicants passed such test, the
Associations will notify Law Broker of those applicants who passed the test and Law Broker is obligated to issue the registration
certificate to them. The registration certificate is valid for five years and the holder shall renew the registration certificate
prior to its expiration date. See “Corporate History and Structure —Regulation.” As of June 30, 2013, all of
Law Broker’s sales professionals had received and held a valid registration certificate.
All of Henan Anhou’s
personnel who engage in insurance agency and brokering are required under relevant PRC regulations to obtain a qualification certificate
from the CIRC in order to conduct insurance agency or brokering. To obtain the qualification certificate, the sale professionals
have to pass the insurance agency or brokerage practitioner qualification test sponsored by the CIRC. Once the applicants passed
such test, the CIRC may, subject to certain other conditions set forth in Measures on the Supervision of Insurance Salespersons
and Measures on the Supervision of Insurance Brokerage Practitioners and Insurance Adjustment Practitioners, determine whether
to grant such qualification certificate to the applicants. According to related regulations published by CIRC, qualification certificates
obtained before July 1, 2013 have a validity period of three years, starting from the issuance date of such certificates. Holders
of those qualification certificates must apply for renewal in local Insurance Regulatory Bureau at least 30 days before the validity
period expires. Qualification certificates for insurance intermediaries practitioners (agency, brokerage and adjustment practitioners)
obtained after July 1, 2013 are not subject to any validity period. In addition, we understand that the CIRC requires every individual
agent carry the qualification certificate and other credentials showing specific information when conducting agency business. Under
the relevant PRC regulations, an insurance agency or brokerage that retains unqualified personnel to engage in insurance intermediary
activities may be imposed a fine up to RMB100,000 ($15,940). As of June 30, 2013, approximately 99% of Henan Anhou’s sales
professionals had received and held a valid qualification certificate. The 1% of Henan Anhou’s sales professionals who failed
to obtain such a qualification certificate is due to their failure to participate in or pass the qualification test. If more local
CIRC agencies were to strictly enforce these regulations in the future, and if a substantial number of our sales forces remain
unqualified, our business may be adversely affected. Moreover, we may be subject to fines and other administrative proceedings
for the failure of our insurance professionals to obtain the necessary CIRC qualification certificate. Any such fines or administrative
proceedings could materially and adversely affect our business, financial condition and results of operations.
If we fail to
maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial
results or prevent fraud.
As a public company, we
are subject to reporting obligations under U.S. securities laws. Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and
the related rules adopted by the Securities and Exchange Commission, every public company is required to include a management report
on the Company’s internal controls over financial reporting (“ICFR”) in its annual report, which contains management’s
assessment of the effectiveness of the company’s internal controls over financial reporting. This annual report does not
include a report of management's assessment regarding internal control over financial reporting or an attestation report of the
company's registered public accounting firm due to the Company’s status as an “emerging growth company” as defined
by the JOBS Act.
There is no assurance we
will be able to maintain effective ICFR in the future. If we fail to do so, we may not be able to produce reliable financial reports
and prevent fraud. Moreover, if we were not able to conclude we have effective ICFR, investors may lose confidence in the reliability
of our financial statements, which would negatively impact the trading price of our shares. Our reporting obligations as a public
company, including our efforts to comply with Section 404 of the Sarbanes-Oxley Act, will continue to place a significant strain
on our management, operational and financial resources and systems for the foreseeable future.
Any significant
failure in our information technology systems could have a material adverse effect on our business and profitability.
Our business is highly dependent
on the ability of our information technology systems to timely process a large number of transactions across different markets
and products at a time when transaction processes have become increasingly complex and the volume of such transactions is growing
rapidly. The proper functioning of our financial control, accounting, customer database, customer service and other data processing
systems, together with the communication systems of our Taiwan Subsidiaries and Consolidated Affiliated Entities and our main offices
in Taiwan and Henan, are critical to our business and to our ability to compete effectively. We cannot assure you that our business
activities would not be materially disrupted in the event of a partial or complete failure of any of these primary information
technology or communication systems, which could be caused by, among other things, software malfunction, computer virus attacks
or conversion errors due to system upgrading. In addition, a prolonged failure of our information technology system could damage
our reputation and materially and adversely affect our future prospects and profitability.
If we are unable
to respond in a timely and cost-effective manner to rapid technological change in the insurance intermediary industry, there may
be a resulting adverse effect on business and operating results.
The insurance industry is
increasingly influenced by rapid technological change, frequent new product and service introductions and evolving industry standards.
For example, the insurance intermediary industry has increased use of the Internet to communicate benefits and related information
to consumers and to facilitate information exchange and transactions. We believe that our future success will depend on our ability
to continue to anticipate technological changes and to offer additional product and service opportunities that meet evolving standards
on a timely and cost-effective basis. There is a risk that we may not successfully identify new product and service opportunities
or develop and introduce these opportunities in a timely and cost-effective manner. In addition, product and service opportunities
that our competitors develop or introduce may render our products and services uncompetitive. As a result, we can give no assurances
that technological changes that may affect our industry in the future will not have a material adverse effect on our business and
results of operations.
The Company’s
affiliates have significant control over matters requiring approval by shareholders.
The affiliates to the Company
will hold 100% of the Company’s outstanding preferred shares, 43.63% of the Company’s outstanding common shares, and
58.04% of the voting power of the Company as of September 30, 2013 (calculated in accordance with Rule 13d-3 promulgated under
the Securities Exchange Act of 1934, as amended).
As a result, the Company’s affiliates, in view of their ownership
percentage of our common stock and voting power, have significant control over matters requiring approval by our shareholders,
including the selection of our Board of Directors, approval or rejection of mergers, sales or licenses of all or substantially
all of our assets, or other business combination transactions. The interests of the Company’s affiliates may not always coincide
with the interests of our other shareholders and as such the Company may take action in advancement of its affiliates’ interests
to the detriment of our other shareholders, including you. Accordingly, you may not be able to influence any action we take or
consider taking, even if it requires a shareholder vote.
Risks Related to Our
Corporate Structure in the PRC
If the PRC government
finds that the agreements that establish the structure for operating our China business do not comply with applicable PRC laws
and regulations, we could be subject to severe penalties.
PRC laws and regulations
place certain restrictions on foreign ownership of companies that engage in insurance agencies and brokerages business, especially
those on qualifications as well as capital requirement of the investors. We conduct our operations in China principally through
contractual arrangements among our wholly-owned PRC subsidiary, CU WFOE and our operating company in the PRC, namely, Henan Anhou
and its shareholders, where Henan Anhou directly holds 100% equity interests in one PRC insurance agency, namely Sichuan Kangzhuang
and one insurance brokerage, namely Jiangsu Law. Henan Anhou, Sichuan Kangzhuang and Jiangsu Law hold the licenses and permits
necessary to conduct our insurance intermediary business and related businesses in China.
Our contractual arrangements with Henan Anhou, its
shareholders enable us to:
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exercise effective control over Henan Anhou and its subsidiaries;
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receive a substantial portion of the economic benefits of Henan Anhou and its subsidiaries in consideration for the services
provided by our wholly- owned subsidiary in China; and
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have an exclusive option to purchase all or part of the equity interests in Henan Anhou when and to the extent permitted by
PRC law.
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Because of these contractual
arrangements, we are the primary beneficiary of Henan Anhou and its subsidiaries and have consolidated them into our consolidated
financial statements. Although we believe that these agreements are in compliance with current PRC regulations, we cannot assure
you that the PRC government would agree that these contractual arrangements comply with PRC licensing, registration or other regulatory
requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations
governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion
in interpreting these laws and regulations. If the PRC government determines that our contractual arrangements do not comply with
applicable laws and regulations, it could revoke our business and operating licenses, require us to discontinue or restrict our
operations, restrict our right to collect revenues, block our website, require us to restructure our operations, impose additional
conditions or requirements with which we may not be able to comply, or take other regulatory or enforcement actions against us
that could be harmful to our business. The imposition of any of these penalties would result in a material and adverse effect on
our ability to conduct our business.
If the PRC government
finds that we, our PRC subsidiary and Consolidated Affiliated Entities do not comply with applicable PRC laws and regulations,
we could be subject to severe penalties.
If we, our Consolidated Affiliated
Entity, Henan Anhou or any of the existing and future subsidiaries of Henan Anhou are found to be in violation of any existing
or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory
authorities, including the CIRC, will have broad discretion in dealing with such violations, including:
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revoking the business and operating licenses of our PRC subsidiary and Consolidated Affiliated Entities;
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restricting or prohibiting any related-party transactions among our PRC subsidiary and Consolidated Affiliated Entities;
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imposing fines or other requirements with which we, our PRC subsidiary or our Consolidated Affiliated Entities may not be able
to comply;
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requiring us, our PRC subsidiary or our Consolidated Affiliated Entities to restructure the relevant ownership structure or
operations; or
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restricting or prohibiting us from providing additional funding for our business and operations in China.
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The imposition of any of
these penalties could result in a material and adverse effect on our ability to conduct our business in the PRC.
We rely on contractual
arrangements with Henan Anhou and its shareholders for our China operations, which may not be as effective in providing operational
control as direct ownership.
We have relied and expect
to continue to rely on contractual arrangements with our PRC Consolidated Affiliated Entity, Henan Anhou, and its shareholders
to operate our business in China. For a description of these contractual arrangements, see “Corporate History and Structure”
These contractual arrangements may not be as effective in providing us with control over Henan Anhou and its subsidiaries as direct
ownership. We have no direct or indirect equity interests in Henan Anhou or any of its subsidiaries.
Since PRC laws restrict foreign
equity ownership in companies engaged in insurance agencies and brokerages businesses in China, especially those on qualifications
as well as capital requirement of the investors, we rely on contractual arrangements with Henan Anhou to operate our business in
China. If we had direct ownership of Henan Anhou and its subsidiaries, we would be able to exercise our rights as a shareholder
to effect changes in the board of directors of Henan Anhou and its subsidiaries, which in turn could effect changes, subject to
any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, we rely on
Henan Anhou and its shareholders’ performance of their contractual obligations to exercise effective control. In addition,
our contractual arrangements generally have a term of ten-year with an automatic extension of another ten-year term unless our
PRC subsidiary, CU WFOE, determines otherwise. Though neither Henan Anhou nor its shareholders has any right under these agreements
to terminate such agreements prior to the expiration date, we may not be able to strictly enforce these agreements in case they
choose to do so, due to the uncertainty associated with PRC government’s determination on the validity of these contractual
arrangements or the lack of assets enforceable outside PRC. Affiliates of the Company are also directors and executive officers
of our Consolidated Affiliated Entities
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In addition, though Henan Anhou is under the effective control of CU WFOE through
these contractual arrangements, the shareholders and officers of Henan Anhou may not act in the best interests of our company or
may not perform their obligations under these agreements, including the obligation to renew these agreements when their initial
ten-year term expires. Furthermore, as all of Henan Anhou’s assets are located in China, if Henan Anhou or its shareholders
determine to terminate the VIE agreements, the unaffiliated investors will have little or no recourse against them. Such risks
exist throughout the period in which we intend to operate our business through the contractual arrangements with Henan Anhou. Therefore,
these contractual arrangements may not be as effective as direct ownership in providing us with control over these Consolidated
Affiliated Entities.
If Henan Anhou and its shareholders
fail to perform their obligations under these contractual arrangements, we may have to incur substantial costs and other resources
to enforce such arrangements and rely on legal remedies under PRC law, including seeking specific performance or injunctive relief
and claiming damages, which may not be effective. For example, if the shareholders and officers of Henan Anhou were to refuse to
transfer their equity interest in Henan Anhou to us or our designee when we exercise the call option pursuant to these contractual
arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal action to compel them to
fulfill their contractual obligations. However, due to the uncertainty associated with PRC government’s determination on
the validity of these contractual arrangements or the lack of assets enforceable against Henan Anhou outside PRC, we may not be
able to effectively enforce our right under these agreements.
Neither Henan Anhou nor Sichuan
Kangzhuang has made any profits to date. The PRC taxable income of Jiangsu Law is calculated as the total revenue of Jiangsu Law
times 10%. Jiangsu Law shall pay enterprise income tax calculated as 25% times its PRC taxable income. No service fees has been
paid to the PRC subsidiary pursuant to the Exclusive Cooperation Agreement and it has not made any profit to date, thus, it has
no accumulated profits available for the purposes of dividend distribution. Even though we expect the PRC subsidiary to make profit
in the year of 2014, we intend to use all of the revenues and profits to fund our business operations or expansion in China.
All of our contractual arrangements
with Henan Anhou and shareholders are governed by PRC law and provide for the resolution of disputes through arbitration in the
PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance
with PRC legal procedures. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United
States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In
the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our Consolidated
Affiliated Entities, and our ability to conduct our business in the PRC may be negatively affected.
Contractual arrangements
we have entered into with Henan Anhou may be subject to scrutiny by the PRC tax authorities. A finding that we owe additional taxes
could substantially reduce our consolidated net income and the value of your investment.
Under PRC laws and regulations,
arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. Since both
of CU WFOE and Henan Anhou are under our common control, either under direct ownership or through contractual arrangements, and
certain our officers and directors used to be and are currently the employees of Henan Anhou and its subsidiaries (for example,
Lo Chung Mei, our Chief Executive Officer, also act as the General Manager of Henan Anhou, Hsieh Tung Chi and Chiang Te Yun, our
Chief Operating Officer and Chief Technology Officer, also act as Chief Operating Officer and Chief Technology Officer of Jiangsu
Law respectively, and Hus Wen Yuan, our Chief Marketing Officer, also acts as the General Manager of Sichuan Kangzhuang), the VIE
Agreements are likely to be deemed as arrangements between related parties. In addition, CU WFOE has been granted substantial unilateral
right under the VIE Agreements. We could face material and adverse tax consequences if the PRC tax authorities determine that the
contractual arrangements between our PRC subsidiary and Henan Anhou are not on an arm’s-length basis and adjust the income
of Henan Anhou in the form of a transfer pricing adjustment, where the relevant PRC tax authorities may, in their discretion, disregard
the tax filing of Henan Anhou and impose a different tax amount payable by Henan Anhou. A transfer pricing adjustment could among
other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by Henan Anhou, which could in turn increase
their respective tax liabilities. Moreover, the PRC tax authorities may impose interest and other penalties on Henan Anhou for
underpayment of taxes. Though we have not encountered any challenge or transfer pricing adjustment by the PRC tax authorities so
far, we could not assure you that the PRC tax authorities will not do so in the future. Our consolidated net income may be materially
and adversely affected by the occurrence of any of the foregoing.
PRC regulation
of direct investment by offshore holding companies to PRC entities may delay or prevent us from making additional capital contributions
to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding
company conducting our operations in China through our PRC subsidiary and Consolidated Affiliated Entities. In order to provide
additional funding to our PRC subsidiary and Consolidated Affiliated Entities, we may make additional capital contributions to
our PRC subsidiary.
Any capital contributions
we make to our PRC subsidiary, must be approved by the PRC Ministry of Commerce or its local counterparts, which usually takes
approximately 30 days or longer, and registered with the SAFE or its local counterparts. Such applications and registrations could
be time consuming and their outcomes would be uncertain. The registered capital of CU WFOE is $300,000 and has been contributed.
We cannot assure you that
we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis,
if at all, with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations
or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could
adversely and materially affect our liquidity and our ability to fund and expand our business.
Risks Related to Doing
Business in Taiwan
Extensive regulation
of our industry may limit our flexibility to respond to market conditions and competition, and our business may suffer.
Subsequent to our acquisition
of AHFL on August 24, 2012, we operate our insurance agency and brokerage business in Taiwan through our operating entity Law Broker.
As an insurance agency and brokerage service provider in Taiwan, Law Broker is subject to extensive regulation. See “Item
1.Business—Regulation” for a discussion of the regulatory environment applicable to Law Broker. As revenue generated
by Law Broker constitutes a substantial part of our revenue, any changes in the regulatory environment applicable to Law Broker
may adversely affect our business, financial condition and results of operations.
Currently, Law Broker’s
principal regulator is the Financial Supervisory Committee of Republic of China, or the FSC, which was formed on July 1, 2004 in
accordance with the Financial Supervisory Organization Act, which was intended to grant regulatory authority over the Taiwan insurance
industry to the FSC.
Our operations
and financial results could be severely harmed by natural disasters.
Law Broker’s executive
office is located in Taiwan, which suffered a severe earthquake during fiscal year of 2000. We did not experience significant disruption
to our operations as a result of that earthquake. Taiwan is also exposed to typhoons and tsunamis. If a major earthquake, typhoon,
tsunami or other natural disaster were to affect our operations, which would seriously harm our business.
Stockholders
may have more difficulty protecting their interests under the laws of the Taiwan than they would under the laws of the United States.
Our corporate affairs are
governed by our articles of incorporation, the Company Law, and by the laws governing corporations incorporated in Taiwan. In addition,
our corporate affairs may remain governed by the Statute of Law Broker. The rights of stockholders and the responsibilities of
management and the members of the board of directors of Taiwan companies are different from those applicable to a corporation incorporated
in the United States. For example, controlling or major stockholders of Taiwan companies do not owe fiduciary duties to minority
stockholders. As a result, holders of our common shares may have more difficulty in protecting their interests in connection with
actions taken by our management or members of our board of directors than they would as public stockholders of a United States
corporation.
Fluctuation in
the value of the New Taiwanese Dollar may have a material adverse effect on your investment.
The value
of the New Taiwanese Dollar (“NTD” or “NT$”) against the US dollar (“USD”) and other currencies may
fluctuate and is affected by, among other things, changes in political and economic conditions. As of September 23, 2013, the
exchange rate of NT$ to the USD was 1NT$=0.03USD.
In Taiwan, our revenues
and costs are denominated in the NT$, and a significant portion of our financial assets are also denominated in NT$. We rely substantially
on dividends and other fees paid to us by our Taiwan Subsidiary. Any significant appreciation or depreciation of the NT$ against
the USD may affect our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our
shares in USD. For example, a further appreciation of the NT$ against the USD would make any new NT$-denominated investments or
expenditures more costly to us, to the extent that we need to convert USD into the NT$ for such purposes. An appreciation of the
NT$ against the USD would also result in foreign currency translation losses for financial reporting purposes when we translate
our USD denominated financial assets into the NT$, as the NT$ is our reporting currency in Taiwan. Conversely, a significant depreciation
of the NT$ against the USD may significantly reduce the USD equivalent of our reported earnings, and may adversely affect the price
of our shares.
Risks Related to Doing
Business in China
Our limited
operating history in China, especially our limited experience in distributing property and casualty insurance products may not
provide an adequate basis to judge our future prospects and results of operations.
We have a limited operating
history in China. Henan Anhou commenced our insurance intermediary business in 2003 by distributing life insurance products and
expanded our offerings to other types of property and casualty insurance products in 2009. Henan Anhou started distributing automobile
insurance business in 2010. Life insurance products distributed by Henan Anhou accounted for 68.6% and 73.2% of Henan Anhou’s
total net revenues in 2012 and 2013, respectively. Property and casualty insurance products distributed by Henan Anhou accounted
for 31.4% and 26.8 % of Henan Anhou’s total net revenues in 2012 and 2013, respectively. While life insurance and property
and casualty insurance distribution are two major areas of our future growth strategy in China, we cannot assure you that our efforts
to further develop these businesses will be successful. If Henan Anhou’s life insurance distribution and property and casualty
insurance distribution fail to grow, our future growth in China will be significantly affected. In addition, our limited operating
history in China, especially our limited experience in selling property and casualty insurance products, may not provide a meaningful
basis for you to evaluate our business, financial performance and prospects.
PRC regulations
relating to the establishment of offshore SPVs by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary
to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability
to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
SAFE has promulgated several
regulations, including the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 75, effective on November
1, 2005, and the Notice of the SAFE on Printing and Distributing the Implementing Rules for Fund-Raising and Round-trip Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Circular No. 19, effective on July 1,
2011. These regulations require PRC residents and PRC corporate entities to register with local branches of SAFE in connection
with their direct or indirect offshore investment activities. These regulations apply to our shareholders who are PRC residents
and may apply to any offshore acquisitions that we make in the future.
Under these foreign exchange
regulations, PRC residents who make, or have previously made prior to the implementation of these foreign exchange regulations,
direct or indirect investments in Special Purpose Vehicles or SPVs will be required to register those investments. In addition,
any PRC resident who is a direct or indirect shareholder of a SPV, is required to update the previously filed registration with
the local branch of SAFE, with respect to that SPV, to reflect any material change. Moreover, the PRC subsidiaries of that SPV
are required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder
fails to make the required registration or update the previously filed registration, the PRC subsidiaries of that SPV may be prohibited
from distributing its profits and the proceeds from any reduction in capital, share transfer or liquidation to their SPV parent,
and the SPV may also be prohibited from injecting additional capital into its PRC subsidiaries. Moreover, failure to comply with
the various foreign exchange registration requirements described above could result in liabilities for such PRC subsidiaries under
PRC laws for evasion of applicable foreign exchange restrictions, including (i) the requirement by SAFE to return the foreign exchange
remitted overseas within a period specified by SAFE, with a fine of up to 30% of the total amount of foreign exchange remitted
overseas and deemed to have been evasive and (ii) in circumstances involving serious violations, a fine of no less than 30% of
and up to the total amount of remitted foreign exchange deemed evasive. Furthermore, the persons-in-charge and other persons at
such PRC subsidiaries who are held directly liable for the violations may be subject to administrative sanctions.
These foreign exchange regulations
provide that PRC residents include both PRC citizens, meaning any individual who holds a PRC passport or resident identification
card, and individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to China. SAFE Circular
No. 19 further defines individuals who are non-PRC citizens but primarily reside in the PRC due to their economic ties to the PRC.
Li Fu Chang, Lo Chung Mei,
Hsieh Tung Chi and Chiang Te Yun, our shareholders, who do not directly hold any interests in the Consolidated Affiliated Entities,
are permanent residents of Taiwan, stay in Mainland China for over 183 days per annum. However, as a result of our inquiries with
the local branch of SAFE responsible for our PRC subsidiary’s foreign exchange registrations, we were informed that, given
the lack of any publicly-available implementing rules or official interpretations issued by the SAFE regarding the issue of whether
the registration and amendment filing requirements under SAFE Circular No. 75 and related rules should apply to non-PRC citizens,
Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi and Chiang Te Yun should not be deemed a PRC resident for these purposes, and any attempt
to submit an application to such local SAFE branch with respect to Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi and Chiang Te Yun’s
investment and shareholdings in our offshore SPV will not be officially accepted or examined.
However, we cannot
conclude the SAFE or the local branch responsible for our PRC subsidiary’s foreign exchange registrations will not later
alter its position on and interpretation of the applicability of these foreign exchange regulations to Mr. Li Fu Chang, Lo Chung
Mei, Hsieh Tung Chi and Chiang Te Yun. If the registration procedures set forth in these foreign exchange regulations become applicable
to Mr. Li Fu Chang, Lo Chung Mei, Hsieh Tung Chi and Chiang Te Yun, we will urge these individuals to, and believe they will,
file necessary registrations and amendments as required under SAFE Circular No. 75 and related rules. However, as SAFE regulations
and policies have been evolving rapidly in the past few years, we cannot assure that all of these individuals can successfully
make or update any applicable registration or obtain the necessary approval required by these foreign exchange regulations as
these individuals may not be able to fully satisfy the new requirements or interpretations that SAFE or its local branch may impose
or adopt from time to time. The failure or inability of such individuals to comply with the registration procedures set forth
in these regulations may subject us to fines or legal sanctions, restrictions on our cross-border investment activities or our
PRC subsidiary’s ability to distribute dividends to, or obtain foreign-exchange-dominated loans from, the Company, or prevent
us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to
our stockholders could be materially and adversely affected.
Furthermore, as these foreign
exchange regulations are still relatively new and there is uncertainty concerning the reconciliation of the new regulations with
the approval requirements under other existing PRC laws and regulations, such as tax laws, it is unclear how these regulations,
and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the
relevant government authorities. We cannot predict how these regulations will affect our business operations or future strategy.
For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities,
such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition
and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners
of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations
required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely
affect our business and prospects.
Our businesses
in China are highly regulated, and the administration, interpretation and enforcement of the laws and regulations currently applicable
to us involve uncertainties, which could materially and adversely affect our business and results of operations.
Henan Anhou operates in
a highly regulated industry. The CIRC has authority to supervise and regulate the insurance industry in China. In exercising its
authority, the CIRC has wide discretion, and the administration, interpretation and enforcement of the laws and regulations applicable
to us involve uncertainties that could materially and adversely affect our business and results of operations. For example, it
is not clear when the CIRC will start strictly enforcing the qualification requirements for sales professionals affiliated with
professional insurance intermediaries like our Consolidated Affiliated Entities. Although we have not had any material violations
to date, we cannot assure you that our operations will always be consistent with the interpretation and enforcement of the laws
and regulations by the CIRC from time to time.
The principal regulation
governing insurance agencies in China is the Provisions on the Supervision and Administration of Specialized Insurance Agencies
(the “Agency Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which replaced
the Provisions on the Administration of Insurance Agencies issued by the CIRC on December 1, 2004 and effective on January 1, 2005.
The Agency Provisions have not only set forth the market entrance standards for applicants to establish an insurance agency, but
also stipulate the qualification criteria of senior management for such insurance agency. The Agency Provisions have also provided
general rules on business operations as well as granted relatively broad supervision rights to the CIRC. The principal regulation
governing insurance brokerages in China is the Provisions on the Supervision and Administration of Insurance Brokerage Institutions
(the “Brokerage Provisions”) promulgated by the CIRC on September 25, 2009 and effective on October 1, 2009, which
replaced the Provisions on the Administration of Insurance Brokerages issued by the CIRC on December 15, 2004 and effective on
January 1, 2005. The Brokerage Provisions have not only set forth the market entrance standards for applicants to establish a brokerage
firm, but also stipulate the qualification criteria of senior management for such brokerage firm. The Brokerage Provisions have
also provided general rules on business operations as well as granted relatively broad supervision rights to the CIRC. On January
6, 2013, CIRC issued Measures on the Supervision of Insurance Salespersons and Measures on the Supervision of Insurance Brokerage
Practitioners and Insurance Adjustment Practitioners, which sets forth a higher academic requirement for candidates to take the
qualification examination for the insurance agency and brokerage practitioners organized by the CIRC. The enactment of any new
laws and regulations in replacement of the above-mentioned laws or the change of interpretations of any such current laws and regulations
may have a significant impact on the operation and financial results of the Company.
For an expanded discussion
of the material regulations affecting the Company, please review the discussion located under the “Regulation” heading
in the “Corporate History and Structure” section of this annual report.
Further development
of regulations in China may impose additional costs and restrictions on our activities.
China’s insurance regulatory
regime is undergoing significant changes. Some of these changes and the further development of regulations applicable to us may
result in additional restrictions on our activities or more intensive competition in this industry. For example, under the provisions
for administration of professional insurance agencies and brokerages promulgated on September 25, 2009, insurance agencies and
brokerage companies are required to increase their guaranty deposit, which generally cannot be withdrawn without the CIRC’s
approval, when they open any new branches. Furthermore, pursuant to the provisions, the minimum registered capital requirements
for insurance agencies and brokerages were increased substantially. On April 27, 2013, CIRC issued the Decision on Revising the
Agency Provisions and Decision on Revising the Brokerage Provisions, pursuant to which, CIRC has mandated any insurance agency
and insurance brokerage established subsequent to the Decisions to meet a minimum registered capital requirement of RMB50 million
($8.1 million). On May 16, 2013, CIRC issued Notice for Further Clarification on Related Issues of Access to Professional Insurance
Intermediary Market (the “2013 Notice”), pursuant to which, professional insurance agencies and insurance brokerages
established prior to the issuance of the Decisions, with registered capital less than RMB50 million($8.1 million), can continuously
operate their existing business within the provinces where they have the registered office or branch office, but shall not set
up any new branches in any province where they do not have the registered office or any branch office. See “Corporate History
and Structure - Regulation.” Such increase would reduce the amount of cash available for other business purposes. In addition,
the CIRC issued an Opinion of CIRC on Reforming and Improving the Management System of Insurance Salespersons in September 2010
(the “Reforming Opinion”), which requires the insurance companies and insurance intermediaries to build up a clear
legal relationship with the insurance salespersons, improve the fundamental protection rights of the insurance salespersons, and
encourage the insurance companies and insurance intermediaries to actively explore new models and marketing channels for insurance
sales system. On September 14, 2013, CIRC issued another opinion to reiterate and push forward the Reforming Opinion above.
Adverse changes
in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of
China, which could adversely affect our business.
We conduct our business
in China primarily through our PRC subsidiary and Consolidated Affiliated Entities. Accordingly, our results of operations, financial
condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s
economy differs from the economies of most developed countries in many respects, including with respect to the amount of government
involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy
has experienced significant growth in the past 30 years or so, growth has been uneven across different regions and among various
economic sectors of China and has been slowed down during the past few years. The PRC government has implemented various measures
to encourage economic development and guide the allocation of resources. While some of these measures benefit the overall PRC economy,
they may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected
by government control over capital investments or changes in tax regulations that are applicable to us.
Although the PRC government
has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of
state ownership of productive assets and the establishment of improved corporate governance in business enterprises, the PRC government
still owns a substantial portion of productive assets in China. In addition, the PRC government continues to play a significant
role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control
over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular industries or companies. Actions and policies of the
PRC government could materially affect our ability to operate our business.
Uncertainties
with respect to the PRC legal system could adversely affect us.
We conduct our business in
China primarily through our PRC subsidiary and Consolidated Affiliated Entities. The business conducted by our PRC subsidiary and
Consolidated Affiliated Entities in China are governed by PRC laws and regulations. Our PRC subsidiary is generally subject to
laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises.
The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential
value.
Although, since 1979, PRC
legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China,
China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all
aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the
limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations
involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which
are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation
of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result
in substantial costs and diversion of resources and management attention.
Governmental
control of currency conversion may affect the value of your investment.
The PRC government imposes
controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China.
Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments
and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the SAFE by complying
with certain procedural requirements. But approval from appropriate government authorities is required where RMB is to be converted
into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.
Under our current corporate structure in the PRC, the primary source of our income at the holding company level from our PRC operations
is dividend payments from our PRC subsidiary. Shortages in the availability of foreign currency may restrict the ability of our
PRC subsidiary and our Consolidated Affiliated Entities to remit sufficient foreign currency to pay dividends or other payments
to us, or otherwise satisfy their foreign currency denominated obligations. If the foreign exchange control system in China prevents
us from obtaining sufficient foreign currency to satisfy our currency needs, we may not be able to pay dividends in foreign currencies
to our shareholders.
We rely principally
on dividends and other distributions on equity paid by our subsidiary to fund any cash and financing requirements we may have,
and any limitation on the ability of our subsidiary to make payments to us could have a material adverse effect on our ability
to conduct our business.
We are a holding company,
and in PRC we rely principally on dividends from our PRC subsidiary in China and service, license and other fees paid to our PRC
subsidiary by our Consolidated Affiliated Entities for our cash requirements, including any debt we may incur. Current PRC regulations
permit our PRC subsidiary to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its after-tax profits
each year as reported in its PRC statutory financial statements, if any, to fund a statutory reserve until such reserve reaches
50% of its registered capital, and our PRC subsidiary that is considered foreign-invested enterprises is required to further set
aside a portion of its after-tax profits as reported in its PRC statutory financial statements to fund the employee welfare fund
at the discretion of the board. These reserves are not distributable as cash dividends. Furthermore, if our PRC subsidiary and
Consolidated Affiliated Entities in China incur debt on their own behalf in the future, the instruments governing the debt may
restrict their ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust
our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely
affect our PRC subsidiary’s ability to pay dividends and other distributions to us.
The PRC subsidiary has not
made any profits to date and as a result has no accumulated profits available for the purposes of dividend distribution. Even though
we expect the PRC subsidiary to become profitable in 2014, we intend to use any profits to fund our business operations or expansion
of our business.
Any limitation on the ability
of our subsidiary and Consolidated Affiliated Entities to distribute dividends or other payments to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise
fund and conduct our business.
Fluctuation in
the value of NTD
may have a material adverse effect on your investment.
The value of the NTD against
the USD and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions.
For the year ended June 30,
2013, our revenues and costs are denominated in the NTD, and a significant portion of our financial assets are also denominated
in NTD. (For the year ended June 30, 2012, our revenues and costs are denominated in the RMB, and a significant portion of our
financial assets are also denominated in RMB.) Any significant appreciation or depreciation of the NTD against the USD may affect
our cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our ordinary shares
in USD. For example, an appreciation of the NTD against the USD would make any new NTD-denominated investments or expenditures
more costly to us, to the extent that we need to convert USD into the NTD for such purposes. An appreciation of the NTD against
the USD would also result in foreign currency translation losses for financial reporting purposes when we translate our USD denominated
financial assets into the NTD, as the NTD is our reporting currency in Taiwan. Conversely, a significant depreciation of the NTD
against the USD may significantly reduce the USD equivalent of our reported earnings, and may adversely affect the price of our
shares.
Sensitivity analysis
The following table indicates
the instantaneous change in the Company's (loss) / profit after tax (and accumulated losses) that would arise if foreign exchange
rates at the reporting date had changed at that date, assuming all other risk variables remained constant.
For
the year ended June 30, 2013
|
|
|
For
the year ended Jun 30, 2012
|
|
Appreciation
in NTD
|
|
|
Decrease
in net income
|
|
|
Decrease
in retained earnings
|
|
|
Appreciation
in RMB
|
|
|
Decrease
in net loss
|
|
|
Decrease
in accumulated losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
%
|
|
$
|
122,168
|
|
|
$
|
33,495
|
|
|
|
3
|
%
|
|
$
|
9,990
|
|
|
$
|
54,402
|
|
The weakening of the NTD
against the above currencies by the same percentages would have had the equal but opposite effect on the above currencies to the
amounts shown above, on the basis that all other variables remain constant.
The sensitivity analysis assumes that the change in foreign
exchange rates had been applied to re-measure those financial instruments held by the Company which expose the Company to foreign
currency risk at the reporting date. The analysis excludes differences that would result from the translation of the financial
statements of foreign operations into the Company's presentation currency.
The PRC Labor Contract
Law and its implementing rules may adversely affect our business and results of operations.
On June 29, 2007, the Standing
Committee of the National People’s Congress of China promulgated the Labor Contract Law, which became effective on January
1, 2008. On September 18, 2008, the State Council promulgated the implementing rules for the Labor Contract Law, which became effective
upon adoption. This new labor law and its implementing rules have reinforced the protection for employees, who, under the existing
PRC Labor Law, already have certain rights, such as the right to have written labor contracts, the right to enter into labor contracts
with indefinite terms under specific circumstances, the right to receive overtime wages when working overtime, and the right to
terminate in the labor contracts. In addition, the Labor Contract Law and its implementing rules have made some amendments to the
existing PRC Labor Law and added some clauses that could increase cost of labor to employers. As the Labor Contract Law and its
implementing rules are relatively new, there remains significant uncertainty as to their interpretation and application by the
PRC government authorities. In the event that we decide to significantly reduce our workforce, the Labor Contract Law and its implementing
rules could adversely affect our ability to effect these changes cost-effectively or in the manner we desire, which could lead
to a negative impact on our business and results of operations in the PRC.
We may have difficulty
establishing adequate management, legal and financial controls in the People’s Republic of China.
The PRC historically has
been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer
and other control systems. We may have difficulty in hiring and retaining a sufficient number of qualified employees to work in
the PRC. Currently, we do not have any employees that are formally trained in US GAAP or in ICFR in the PRC. As a result of these
factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing
financial statements, books of account and corporate records and instituting business practices that meet Western standards.
It
may be difficult to affect service of process and enforcement of legal judgments upon us and our officers and directors because
they reside outside the United States.
To better operate our business
in PRC, some of our directors and officers reside in PRC, our service of process on such directors and officers may be difficult
to effect within the United States. Also, with respect to the assets for PRC operation located in PRC, any judgment obtained in
the United States against us may not be enforceable outside the United States.
The PRC legal system
contains uncertainties which could limit the legal protections available to us and you, or could lead to penalties on us.
The PRC legal system is
a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases have little
precedential value. In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic
matters in general. Our PRC subsidiary is subject to laws and regulations applicable to foreign investment in China. In addition,
our PRC subsidiary and Consolidated Affiliated Entities are incorporated in China and subject to all applicable PRC laws and regulations.
Because of the relatively short period for enacting such a comprehensive legal system, it is possible that the laws, regulations
and legal requirements are relatively recent, and their interpretation and enforcement involve uncertainties. These uncertainties
could limit the legal protections available to us and our stockholders, and may lead to penalties imposed on us because of the
different understanding between the relevant authority and us. In addition, we cannot predict the effect of future developments
in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement
thereof, or the preemption of local regulations by national laws.
We may have limited
legal recourse under the PRC laws if disputes arise under our contracts with parties in China.
The Chinese government has
enacted significant laws and regulations dealing with matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. However, their experience in implementing, interpreting and enforcing these laws and regulations
is limited, and our ability to enforce commercial claims or to resolve commercial disputes is unpredictable. The Company faces
the risk that the parties to contracts may seek ways to terminate the transactions. For example, management of our Consolidated
Affiliated Entities may hinder or prevent us from accessing important information regarding the financial and business operations
of the Consolidated Affiliated Entities or refuse to pay us contractual consideration due under the VIE Agreements. The resolution
of these matters may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated
to the legal merits of a particular matter or dispute may influence their determination. Any rights we may have to specific performance,
or to seek an injunction under the PRC laws, in either of these cases, are severely limited, and without a means of recourse by
virtue of the Chinese legal system, we may be unable to prevent these situations from occurring. The occurrence of any such events
could have a material adverse effect on our business, financial condition and results of operations. Although legislation in China
over the past 30 years has significantly improved the protection afforded to various forms of foreign investment and contractual
arrangements in China, these laws, regulations and legal requirements are relatively new and their interpretation and enforcement
involve uncertainties, which could limit the legal protection available to us, and our stockholders. The inability to enforce or
obtain a remedy under any of our existing or future agreements could result in a significant loss of business, business opportunities
or capital and could have a material adverse impact on our operations.
Certain affiliates
of ours are also directors and executive officers of our Consolidated Affiliated Entities. PRC laws provide that a director or
certain members of senior management owes a fiduciary duty to the company he/ she directs or manages. These individuals must therefore
act in good faith and in the best interests of the relevant PRC company pursuant PRC laws and must not use their respective positions
for personal gains. These laws do not require them to consider our best interests when making decisions as a director or member
of management of the relevant PRC company. For example, it may be possible for management of Henan Anhou to breach the VIE agreements
and while their actions may be in violation of US laws they could be legal in the PRC. Any judgment for violation of fiduciary
duty under US law may not be enforceable outside the United States. It may not be possible to effect service of process within
the United States or elsewhere outside China upon certain our directors or senior executive officers residing in China, irrespective
of matters arising under U.S. federal securities laws or applicable state securities laws. Any court judgment of United States
for violation of fiduciary duty under US law may not be enforceable in the PRC due to the lack of bilateral treaties between PRC
and the United States providing for the reciprocal recognition and enforcement of judgment of courts.
Risks Relating to Ownership
of Our Shares
You may not
be able to liquidate your investment since there is no assurance that a public market will develop for our common stock or that
our common stock will ever be approved for trading on a recognized exchange.
There is no established
public trading market for our securities. Though we have engaged a market maker to apply for a quotation on the OTCBB in the United
States and obtained the approval for trading, our shares are not and have not been listed on any recognized exchange. We cannot
assure you that a regular trading market will develop or that if developed, will be sustained. In the absence of a regular trading
market, you may be unable to liquidate its investment, which will result in the loss of your investment.
We have no plans
to declare any dividends to shareholders in the near future.
We currently intend to retain
our future earnings, if any, to support our operations and to finance expansion. The declaration, and amount of any future dividends
will be made at the discretion of the Board of Directors (“BOD”), and will depend upon, among other things, the results
of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the BOD considers
relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect
to the amount of any such dividend. If you require dividend income, you should not rely on an investment in the Company. Income
received from an investment in the Company will only come from a rise in the market price in the Company’s stock, which is
uncertain and unpredictable.